FAC1501

LEARNING UNIT 11

FINANCIAL STATEMENTS
OF A SOLE TRADER

Introductory Financial
Accounting
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OVERVIEW
1

Learning outcomes ....................................................................................................................... 333

Key concepts ................................................................................................................................ 333
Assessment criteria....................................................................................................................... 333
11.1 Year-end adjustments ........................................................................................................ 334
11.1.1 Introduction ........................................................................................................... 334
11.1.2 Prepayments and receivables and accruals of income and
expenses............................................................................................................... 334
11.1.2.1 Accrued expenses (liabilities)................................................................. 334
11.1.2.2 Prepaid expenses (assets) .................................................................... 336
11.1.2.3 Accrued income (assets) ....................................................................... 337
11.1.2.4 Income received in advance (liabilities) .................................................. 338
11.1.3 Consumable stores on hand (assets) .................................................................... 340
11.1.4 Credit losses and allowance for credit losses ........................................................ 341
11.1.4.1 Credit losses .......................................................................................... 341
11.1.4.2 Allowance for credit losses .................................................................... 343
11.1.5 Depreciation .......................................................................................................... 348
11.1.5.1 Methods of calculating depreciation ....................................................... 348
11.1.5.2 Accounting entries for depreciation ........................................................ 350
11.1.6 Summary of flow of accounting procedures when year-end
adjustments need to be made ............................................................................... 352
11.2 Financial statements .......................................................................................................... 361
11.2.1 Introduction ........................................................................................................... 361
11.2.2 Financial performance as measured by the statement of profit or loss and other
comprehensive income ......................................................................................... 362
11.2.3 Financial position as measured by the statement of financial
position.................................................................................................................. 364
11.2.4 Statement of changes in equity ............................................................................. 366
11.2.5 Year-end adjustments ............................................................................................ 372
Self-assessment ...........................................................................................................................384

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LEARNING OUTCOMES
After studying this learning unit, you should be able to

calculate and do adjustments at year-end with regard to accrued expenses, prepaid expenses,
accrued income and income received in advance
calculate and do adjustments with regard to consumable stores
calculate and do adjustments with regard to the depreciation of non-current assets
calculate and do adjustments with regard to credit losses and allowance for credit losses
prepare a profit or loss account after taking all possible adjustments into consideration
prepare a statement of profit or loss and other comprehensive income
prepare a statement of financial position
prepare a statement of changes in equity

KEY CONCEPTS
Adjustments
Accrued expenses
Pre-paid expenses
Accrued income
Income received in advance
Consumable stores
Depreciation
Credit losses
Allowance for credit losses
Statement of profit or loss and other comprehensive income
Statement of financial position
Statement of changes in equity

ASSESSMENT CRITERIA
You can correctly calculate and do adjustments at year-end regarding
accrued expenses, pre-paid expenses, accrued income and income received
in advance.
You can correctly calculate and do adjustments regarding consumable stores.
You can correctly calculate and do adjustments regarding the depreciation of
non-current assets.
You can correctly calculate and do adjustments regarding credit losses and
allowance for credit losses.
You can correctly prepare a statement of profit or loss and other comprehensive
income for a sole trader.
You can correctly prepare a statement of financial position and notes for a
sole trader.
You can correctly prepare a statement of changes in equity for a sole trader.

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11.1 YEAR-END ADJUSTMENTS

11.1.1 Introduction
At the end of every accounting period, the business entity prepares a trading account and a profit or
loss account to ascertain the profit or loss made during the accounting period. It is important to realise
that the profit or loss account indicates the performance of the entity for a particular financial year (see
learning unit 10).

11.1.2 Prepayments and receivables and accruals of income and expenses

It usually happens that at the end of the year, some expenses incurred by the entity will be outstanding
(i.e., due, but unpaid). The entity may also have paid for some expenses in advance. It will therefore
be necessary to adjust such expenses in order to determine the actual expenses incurred for the
accounting period under review.

Similarly, the entity may have rendered a specified service during the year for which it had received
no payment (income). It may also happen that the entity had been paid in advance for a service it is
yet to render. Adjustments will have to be made in such cases in order to establish the correct income
the entity earned during the accounting period under review.

11.1.2.1 Accrued expenses (liabilities)

These are expenses which have been incurred by an entity, but which have not yet been paid by the
end of the accounting period. Examples are salaries owing to staff, rent payable to the landlord and
insurance premiums outstanding. Accrued expenses are shown as current liabilities.

When adjusting accruals and prepayments, it is necessary to

 identify the specific account to be adjusted
 determine the outstanding amount or the prepaid amount
 record the adjustment (this is normally done in the general journal)

Accrued and prepaid expenses and accrued income and income received in advance are described
as current operating items. To simplify their adjustment, “intermediary” or “notional” accounts are used
to facilitate the recording process. For example, rent outstanding will be credited to an accrued
expense account and current income due will be debited to an accrued income account, and so on.
(See the following examples.)

EXAMPLE 11.1: ACCRUED EXPENSES (LIABILITIES)

2

The financial year of John Seepe, a panel beater, ends on 31 December each year. Seepe Panel
Beaters has a monthly rent expense of R250. The records of the entity showed that rent was paid for
eight months during the financial year ended 31 December 20.8.

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REQUIRED
3

(1) Record the necessary adjustment and the closing entry in the general journal of Seepe Panel
Beaters.
(2) Post the journal entry to the general ledger of Seepe Panel Beaters.

SOLUTION: EXAMPLE 11.1

4

SEEPE PANEL BEATERS

GENERAL JOURNAL – DECEMBER 20.8 GJ1
Day Details Fol Debit Credit
R R

31 Rental expenses N10 1 000

Accrued expenses (liabilities) B30 1 000
Adjustment for rent owing

Profit or loss account N20 3 000

Rental expenses N10 3 000
Closing transfer

SEEPE PANEL BEATERS

GENERAL LEGDER
Dr Rental expenses N10 Cr
20.8 20.8
Dec 31 Bank* CPJ 2 000 Dec 31 Profit or loss account GJ1 3 000
Accrued expenses GJ1 1 000
(liabilities)
3 000 3 000

* This is the total of all the payments regarding rent made during the financial year and is given in this example
for the sake of completeness. In the actual recording of these payments, it would have been recorded on a
monthly basis on the date the payment was made. The entries would have originally been recorded in the
cash payments journal before being posted to the appropriate ledger account. This line of illustration is followed
in all subsequent examples regarding adjustments.

Dr Accrued expenses (liabilities) B30 Cr

20.8 20.8
Dec 31 Balance c/d 1 000 Dec 31 Rental expenses GJ1 1 000
1 000 1 000
20.9
Jan 1 Balance b/d 1 000

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Dr Profit or loss account N20 Cr
20.8
Dec 31 Rental expenses GJ1 3 000

11.1.2.2 Prepaid expenses (assets)

The nature of certain expenses may compel an entity to pay for them in advance. Insurance premiums
are good examples of such expenses. Prepaid expenses are shown as current assets.

EXAMPLE 11.2: PREPAID EXPENSES (ASSETS)

5

Traxi Solutions paid R9 000 for insurance on 1 January 20.8. This payment was for insurance cover
for 18 months. The financial year of Traxi Solutions ends on 31 December each year.

REQUIRED
6

(1) Determine the amount that was prepaid for insurance.

(2) Record the necessary adjustment and the closing entry in the general journal of Traxi Solutions.
(3) Post the journal entries to the general ledger of Traxi Solutions.

SOLUTION: EXAMPLE 11.2

7

Monthly insurance cover = R9 000/18 = R500

Insurance expense = R500 x 12 = R6 000
Prepaid expense = R500 x 6 = R3 000

TRAXI SOLUTIONS
GENERAL JOURNAL – DECEMBER 20.8 GJ1
Day Details Fol Debit Credit
R R
31 Prepaid expenses (assets) B31 3 000
Insurance N11 3 000
Adjustment for prepaid insurance
Profit or loss account N20 6 000
Insurance N11 6 000
Closing transfer

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TRAXI SOLUTIONS
GENERAL LEDGER
Dr Insurance N11 Cr
20.8 20.8

Dec 31 Bank CPJ 9 000 Dec 31 Prepaid expenses GJ1 3 000

(assets)
Profit or loss account GJ1 6 000
9 000 9 000

Dr Prepaid expenses (assets) B31 Cr

20.8 20.8

Dec 31 Insurance GJ1 3 000 Dec 31 Balance c/d 3 000

3 000 3 000
20.9
Jan 1 Balance b/d 3 000

Dr Profit or loss account N20 Cr

20.8

Dec 31 Insurance GJ1 6 000

11.1.2.3 Accrued income (assets)

This is income earned by the entity in respect of services rendered but for which no payment has been
received. Accrued income is shown as current assets.

EXAMPLE 11.3: ACCRUED INCOME (ASSETS)

8

The commission earned by Bero Stores for selling newspapers and magazines was R12 500 for the
year ended 31 December 20.8. Bero Stores received R9 850 during the year.

REQUIRED
9

(1) Record the necessary adjustment and the closing entry in the general journal of Bero Stores.
(2) Post the journal entries to the general ledger of Bero Stores.

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SOLUTION: EXAMPLE 11.3

10

BERO STORES
GENERAL JOURNAL – DECEMBER 20.8 GJ1
Day Details Fol Debit Credit
R R
31 Accrued income (assets) B2 2 650
Commission income N14 2 650
Adjustment for commission earned but not yet
received (R12 500 – R9 850)
Commission income N14 12 500
Profit or loss account N20 12 500
Closing transfer

BERO STORES
GENERAL LEDGER
Dr Commission income N14 Cr
20.8 20.8

Dec 31 Profit or loss account GJ1 12 500 Dec 31 Bank CRJ 9 850
Accrued income GJ1 2 650
(assets)
12 500 12 500

Dr Accrued income (assets) B2 Cr

20.8 20.8

Dec 31 Commission income GJ1 2 650 Dec 31 Balance c/d 2 650

2 650 2 650
20.9
Jan 1 Balance b/d 2 650

Dr Profit or loss account N20 Cr

20.8

Dec 31 Commission income GJ1 12 500

11.1.2.4 Income received in advance (liabilities)

Income received in advance is not yet earned so it must be deducted from total income to arrive at
the correct income earned during the financial year. Income received in advance is shown as
current liabilities.

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EXAMPLE 11.4: INCOME RECEIVED IN ADVANCE (LIABILITIES)

11

ABC Cash Store sublets part of its premises for a monthly rental of R280. During the financial year
ended 31 December 20.8 the tenant made a total payment of R3 640.

REQUIRED
12

(1) Determine the amount that was received in advance for rental.
(2) Record the necessary adjustment and the closing entry in the general journal of ABC Cash Store.
(3) Post the journal entries to the general ledger of ABC Cash Store.

SOLUTION: EXAMPLE 11.4

13

Rent received for the year = R280 x 12 = R3 360

Rent received in advance = (R3 640 – R3 360) = R280

ABC CASH STORE

GENERAL JOURNAL – DECEMBER 20.8 GJ1
Day Details Fol Debit Credit
R R
31 Rental income N15 280
Income received in advance (liabilities) 280
B36
Adjustment for income received in advance
Rental income N15 3 360
Profit or loss account N20 3 360
Closing transfer

ABC CASH STORE

GENERAL LEDGER

Dr Rental income N15 Cr

20.8 20.8

Dec 31 Income received in Dec 31 Bank CRJ 3 640

advance (liabilities) GJ1 280
Profit or loss account GJ1 3 360
3 640 3 640

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Dr Income received in advance (liabilities) B36 Cr
20.8 20.8

Dec 31 Balance c/d 280 Dec 31 Rental income GJ1 280

280 280
20.9
Jan 1 Balance b/d 280

Dr Profit or loss account N20 Cr

20.8

Dec 31 Rental income GJ1 3 360

11.1.3 Consumable stores on hand (assets)

You might have wondered why items such as stationery are classified as expenses. Surely stationery
has value. The reason it is regarded as an expense and not an asset is because it is used up
(consumed) within the entity within one year.

If an entity was to sell stationery, it would be regarded as inventory. Since it would not be used
up within the entity, it would thus not be regarded as an expense, but as inventory (an asset).
Remember though that if you were to see a stationery account in a trial balance, it would always be
classified as an expense. This represents the stationery used during the current period.

EXAMPLE 11.5: CONSUMABLE STORES ON HAND (ASSETS)

14

XXX Traders bought stationery valued at R5 000 during the financial year ended 31 December 20.8.
This was recorded in the stationery account as an expense of R5 000. After doing a physical inventory
count at year-end, it was found that stationery valued at R1 000 was still unused. This means that the
full R5 000 of stationery they have bought during the financial year have not been used up. If XXX
Traders was to close the entity at this date, would it be able to sell the stationery on the shelves
(R1 000)? The answer to this question is surely YES!

For this reason, an adjustment to the stationery account is necessary. The unused stationery to the
value of R1 000 is regarded as a current asset.

REQUIRED
15

(1) Record the necessary adjustment and the closing entry in the general journal of XXX Traders.
(2) Post the journal entries to the general ledger of XXX Traders.

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SOLUTION: EXAMPLE 11.5

16

XXX TRADERS
GENERAL JOURNAL – DECEMBER 20.8 GJ1
Day Details Fol Debit Credit
R R
31 Consumable stores on hand (assets) B16 1 000
Stationery N37 1 000
Adjustment for stationery on hand
Profit or loss account N20 4 000
Stationery Closing N37 4 000
transfer

XXX TRADERS
GENERAL LEDGER

Dr Stationery N37 Cr
20.8 20.8

Dec 31 Bank CPJ 5 000 Dec 31 Consumable stores

on hand (assets) GJ1 1 000
Profit or loss account GJ1 4 000
5 000 5 000

Dr Consumable stores on hand B16 Cr

20.8 20.8

Dec 31 Stationery GJ1 1 000 Dec 31 Balance c/d 1 000

1 000 1 000
20.9
Jan 1 Balance b/d 1 000

Dr Profit or loss account N20 Cr

20.8

Dec 31 Stationery GJ1 4 000

11.1.4 Credit losses and allowance for credit losses

11.1.4.1 Credit losses

Any entity which grants credit to its customers runs the risk of having some of those customers not
paying their debts. If it is expected that the amount due will not be paid by a customer, then this amount
must be removed from the trade receivables account. The amount written off is disclosed as an
expense in the profit or loss account.

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Accounting entries for credit losses

When a debt is written off, the customer’s individual account in the trade receivables ledger (and then
also the trade receivables control account in the general ledger) is credited.

The amount is debited to a credit losses account (an expense account) which is closed off to the profit
or loss account.

EXAMPLE 11.6: CREDIT LOSSES

17

On 1 January 20.8, Rek Transport had the following debtors on its list of trade receivables:

Kargent R250
Tango R185

On 31 August 20.8, it was decided to write the debts off as irrecoverable, since it was expected that
these amounts will not be paid. The financial year ends on 31 December 20.8.

REQUIRED
18

(1) Record the necessary adjustment and the closing entry in the general journal of Rek Transport.
(2) Post the journal entries to the general ledger of Rek Transport.

SOLUTION: EXAMPLE 11.6

19

REK TRANSPORT
GENERAL JOURNAL – AUGUST 20.8 GJ1
Day Details Fol Debit Credit
R R
31 Credit losses N38 435
Trade receivables control account B9 435
* Kargent (subsidiary ledger) 250
* Tango (subsidiary ledger) 185
Credit losses recognised

GENERAL JOURNAL – DECEMBER 20.8 GJ1

Day Details Fol Debit Credit
R R
31 Profit or loss account N20 435
Credit losses N38 435
Closing transfer

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* NOTE:
The recognition of credit losses is done in the general ledger by debiting credit losses and crediting
the trade receivables control account. It is also important to update the individual accounts of the
debtors with the transaction where credit losses are recognised. This is done in the subsidiary
ledger, where the individual debtors’ accounts will be credited with credit losses.

REK TRANSPORT
GENERAL LEDGER
Dr Credit losses N38 Cr
20.8 20.8

Aug 31 Trade receivables Dec 31 Profit or loss

control account GJ1 435 account GJ1 435
435 435

Dr Trade receivables control B9 Cr

20.8

Aug 31 Credit losses GJ1 435

Dr Profit or loss account N20 Cr

20.8

Dec 31 Credit losses GJ1 435

11.1.4.2 Allowance for credit losses

In order to show the correct amount of total trade receivables (debtors) on the statement of financial
position, it is prudent for the entity to estimate how much of the debts owed to it will be paid.
The reason for this is that in practice trade receivables (debtors) often default on their payments. In line
with the accounting concept of prudence, entities should make allowance for debts they expect will not
be paid and adjust the accounts accordingly.

The entity should assess whether any events have occurred that may result in non-payment of
outstanding amounts. If such events have occurred, the recoverable trade receivables (debtors)
balance should be estimated and an allowance for the credit losses account should be created to reduce
the carrying amount of the trade receivables control account (debtors) to its recoverable amount.

Since the recoverable trade receivables (debtors) balance fluctuates annually, the allowance for the
credit losses account will also fluctuate annually.

It is important to understand that the allowance for the credit losses account is normally used when
non-payments are expected but it is difficult to identify the specific debtors who will default on their
payments.

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Accounting entries
When an allowance for credit losses is created or increased, the credit losses account (expense) is
debited and an allowance for the credit losses account (negative asset) is credited. In the statement
of financial position, the allowance for credit losses is disclosed by deducting it from the trade
receivables control balance. It is shown as part of trade and other receivables.

NOTE:
Because it is an allowance for credit losses that is made, there will be no entry to any individual
trade receivables (debtor’s) account.

EXAMPLE 11.7: ALLOWANCE FOR CREDIT LOSSES

20

Swanty Stores commenced business on 1 January 20.6. The entity serves both cash and credit
customers. It was determined that the allowance for the credit losses account should amount to R2 325
at 31 December 20.6. Trade receivables control as at 31 December 20.6 amounts to R15 500.

REQUIRED
21

(1) Record the necessary adjustment and the closing entry in the general journal of Swanty Stores.
(2) Post the journal entries to the general ledger of Swanty Stores.

SOLUTION: EXAMPLE 11.7

22

SWANTY STORES
GENERAL JOURNAL – DECEMBER 20.6 GJ1
Day Details Fol Debit Credit
R R
31 Credit losses N18 2 325
Allowance for credit losses B38 2 325
Create an allowance for credit losses at year-end
Profit or loss account N20 2 325
Credit losses N18 2 325
Closing transfer

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SWANTY STORES
GENERAL LEDGER

Dr Allowance for credit losses B38 Cr

20.6 20.6

Dec 31 Balance c/d 2 325 Dec 31 Credit losses GJ1 2 325

2 325 2 325
20.7
Jan 1 Balance b/d 2 325

Dr Credit losses N18 Cr

20.6 20.6

Dec 31 Allowance for credit Dec 31 Profit or loss

losses GJ1 2 325 account GJ1 2 325

2 325 2 325

Dr Profit or loss account N20 Cr

20.8

Dec 31 Credit losses GJ1 2 325

EXAMPLE 11.8: INCREASING THE ALLOWANCE FOR CREDIT LOSSES

23

ACCOUNT
It is now one year later and Swanty Stores is at the end of the next financial year, 31 December 20.7.
The balance on the trade receivables control account is R20 000. Swanty Stores determined that the
allowance for the credit losses account should amount to R3 000 at 31 December 20.7.

REQUIRED
24

(1) Record the necessary adjustment and the closing entry in the general journal of Swanty Stores.
(2) Post the journal entries to the general ledger of Swanty Stores.

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SOLUTION: EXAMPLE 11.8

25

Calculation
R

Allowance for credit losses account 20.7 3 000

Allowance for credit losses account 20.6 (2 325)
So the allowance for the credit losses account must increase with   675

SWANTY STORES
GENERAL JOURNAL – DECEMBER 20.7 GJ1
Day Details Fol Debit Credit
R R
31 Credit losses N18 675
Allowance for credit losses B38 675
Adjusting the allowance for credit losses
Profit or loss account N20 675
Credit losses N18 675
Closing transfer

SWANTY STORES
GENERAL LEDGER
Dr Allowance for credit losses B38 Cr
20.7 20.7
Dec 31 Balance c/d 3 000 Jan 1 Balance b/d 2 325
Dec 31 Credit losses GJ1 675

3 000 3 000
20.8
Jan 1 Balance b/d 3 000

Dr Credit losses N18 Cr

20.7 20.7

Dec 31 Allowance for credit Dec 31 Profit or loss account GJ1 675
losses GJ1 675
675 675

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Dr Profit or loss account N20 Cr
20.8

Dec 31 Credit losses GJ1 675

EXAMPLE 11.9: DECREASING THE ALLOWANCE FOR CREDIT LOSSES

26

Kamdo Services had the following balances on 31 December 20.8:

R
Allowance for credit losses (1 January 20.8) 4 210
Trade receivables control 38 160

Kamdo Services determined that the allowance for the credit losses account should amount to
R3 816 at 31 December 20.8.

REQUIRED
27

(1) Record the necessary adjustment and the closing entry in the general journal of Kamdo Services.
(2) Post the journal entries to the general ledger of Kamdo Services.

SOLUTION: EXAMPLE 11.9

28

Calculation
R
Allowance for credit losses account 20.8 3 816
Allowance for credit losses account 20.7 (4 210)
So the allowance for the credit losses account must decrease by     (394)

KAMDO SERVICES
GENERAL JOURNAL – DECEMBER 20.8 GJ1
Day Details Fol Debit Credit
R R
31 Allowance for credit losses B38 394
Credit losses N18 394
Adjusting the allowance for credit losses
Credit losses N18 394
Profit or loss account N20 394
Closing transfer

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KAMDO SERVICES
GENERAL LEDGER
Dr Allowance for credit losses B38 Cr
20.8 20.8

Dec 31 Credit losses GJ1 394 Jan 1 Balance b/d 4 210

Balance c/d 3 816
4 210 4 210
20.9
Jan 1 Balance b/d 3 816

Dr Credit losses N18 Cr

20.8 20.8

Dec 31 Profit or loss account GJ1 394 Dec 31 Allowance for credit
losses GJ1 394
394 394

Dr Profit or loss account N20 Cr

20.8

Dec 31 Credit losses GJ1 394

11.1.5 Depreciation
When an entity buys an asset which is intended to be used in the entity for more than one financial
year, that asset is described as a non-current asset. Through their continuous use, these non-current
assets lose value through wear and tear. This loss of value is known as depreciation. Depreciation is
calculated for each accounting period using an agreed method of depreciation. The original cost of
the asset is adjusted based on the depreciation calculated. The adjusted value of the asset is shown
in the books as the carrying amount (book value).

Depreciation is an expense which allows for the matching of the original cost of the non-current asset
against income generated by the asset. If the asset was used for only a part of the accounting period,
the depreciation is calculated on the number of months for which the asset was used.

11.1.5.1 Methods of calculating depreciation

An entity can use several methods of depreciation to determine the amount of depreciation to be
written off on a specific non-current asset. Some of the commonly used methods are the straight-line
(fixed instalment) method and the reducing-balance method.

 The straight-line method

According to this method, depreciation is calculated on the cost of the asset using a pre-determined
depreciation rate. The depreciation rate could be given as a certain percentage, for example, 15% per
annum. If a non-current asset was bought for R4 000 and its depreciation rate was given as 10% per
annum, the annual depreciation will be:

R4 000 x 10% = R400.

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Where the economic (useful) life of the asset can be estimated with certainty, this can be used to
determine the depreciation rate.

Assume that an asset was bought for R5 000 and it was expected to have an economic life of five
years, the annual depreciation will be:

R5 000/5 years = R1 000.

If the asset is expected to have some value after its economic life, this value is known as residual
value. To calculate the depreciation, the residual value must first be deducted from the cost of the
asset before the depreciation rate is applied.

EXAMPLE 11.10: CALCULATION OF ANNUAL DEPRECIATION

29

Situ Stores bought office equipment for R10 000 on 1 January 20.8. It was estimated that this asset
will have a residual value of R2 000 after its economic life of 10 years.

REQUIRED
30

Calculate the annual depreciation of the office equipment.

SOLUTION: EXAMPLE 11.10

31

Calculation
Annual depreciation = (Cost price – residual value)/economic life
= (R10 000 – R2 000)/10 years
= R800 per annum

 The reducing-balance method

Based on this method, the annual depreciation is calculated on the carrying amount of the asset. The
carrying amount is obtained by deducting the accumulated depreciation (total depreciation to date)
on the asset from the original cost of the asset. The depreciation rate is then applied to the carrying
amount to calculate the depreciation.

EXAMPLE 11.11: CALCULATION OF DEPRECIATION USING THE

32

REDUCING-BALANCE METHOD
ABK Metal Works bought a machine for R60 000 on 1 March 20.7. It was decided to depreciate the
asset by 15% per annum using the reducing-balance method. The financial year of the entity ends on
31 December.

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REQUIRED
33

Calculate the annual depreciation of the machine for the financial years ended 31 December 20.7,
20.8 and 20.9.

SOLUTION: EXAMPLE 11.11

34

Calculation
Annual depreciation (20.7) = Carrying amount x depreciation rate
= (Cost price – accumulated depreciation) x rate
= (R60 000 – R0) x 15% x 10/12
= R7 500

NOTE:
The machine was bought on 1 March 20.7, which means for the first financial year it was used for
only 10 months and as such, the depreciation needs to be apportioned for only the 10 months that
it was used.

Annual depreciation (20.8) = Carrying amount x depreciation rate

= (Cost price – accumulated depreciation) x rate
= (R60 000 – R7 500) x 15%
= R7 875
Annual depreciation (20.9) = Carrying amount x depreciation rate
= (Cost price – accumulated depreciation) x rate
= (R60 000 – R15 375*) x 15%
= R6 693,75

*Accumulated depreciation: R7 500 (20.7) + R7 875 (20.8) = R15 375

11.1.5.2 Accounting entries for depreciation

 Depreciation
Depreciation is an expense account which is closed off to the profit or loss account at the end of
the year.

 Accumulated depreciation
This account holds all the depreciation written off on a particular asset until the asset is completely
written off, sold or scrapped. You have learnt that income and liability accounts have credit balances.
Since the accumulated depreciation account represents the credit side of an asset account, it must
also have a credit balance. Accumulated depreciation is regarded as a negative asset.

The annual depreciation calculated is shown as an expense in the profit or loss account and the
carrying amount (cost price less accumulated depreciation) is reported as a non-current asset.

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EXAMPLE 11.12: RECORDING OF DEPRECIATION AND ACCUMULATED

35

DEPRECIATION
Milkin Products bought a plant for R120 000 on 1 April 20.7. They decided to depreciate the plant at
10% per annum using the reducing-balance method.

REQUIRED
36

Record the above information in the general ledger of Milkin Products for the year ended
31 December 20.8.

SOLUTION: EXAMPLE 11.12

37

Calculation
Annual depreciation (for the financial year that ended 31 December 20.7)
= (R120 000 – R0) x 10% x 9/12
= R9 000

Annual depreciation (for the financial year that ended 31 December 20.8)
= (R120 000 – R9 000) x 10%
= R11 100

(General journal not shown.)

MILKIN PRODUCTS
GENERAL LEDGER
Dr Depreciation N20 Cr
20.8 20.8

Dec 31 Accumulated Dec 31 Profit or loss account GJ1 11 100

depreciation GJ1 11 100

11 100 11 100

Dr Accumulated depreciation B19 Cr

20.8 20.8

Dec 31 Balance c/d 20 100 Jan 1 Balance b/d 9 000

Dec 31 Depreciation GJ1 11 100

20 100 20 100
20.9
Jan 1 Balance b/d 20 100

Dr Profit or loss account N20 Cr

20.8

Dec 31 Depreciation GJ1 11 100

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11.1.6 Summary of flow of accounting procedures when year-end adjustments need
to be made
 Prepare source documents.
 Prepare journals from source documents.
 Post journals to ledger accounts.
 Prepare a pre-adjustment trial balance.
 Record adjustments in general journal and post to ledger accounts.
 Prepare a post-adjustment trial balance.
 Record closing entries in general journal and post to ledger accounts.
 Prepare post-closing trial balance.

COMPREHENSIVE EXAMPLE ONE

38

On 28 February 20.1 the following trial balance was extracted from the general ledger of Pompeii
Traders, a general merchant that is not registered as a VAT vendor.
POMPEII TRADERS
PRE-ADJUSTMENT TRIAL BALANCE AS AT 31 DECEMBER 20.1
Debit Credit
R R
Capital (1 January 20.1) 250 000
Drawings 70 860
Mortgage 120 000
Long-term loan 30 000
Trade payables control 25 000
Bank 11 000
Land and buildings (at cost price) 526 140
Equipment (at cost price) 70 000
Vehicles (at cost price) 80 000
Accumulated depreciation: equipment (1 January 20.1) 21 000
Accumulated depreciation: vehicles (1 January 20.1) 39 040
Allowance for credit losses 600
Inventory 7 500
Trade receivables control 18 000
Petty cash 350
Sales 595 000
Cost of sales 195 990
Advertising 7 400
Bank charges 2 300
Telephone expenses 9 800
Water and electricity 12 100
Salaries 80 400
Insurance 4 000
Delivery expenses 3 900
Credit losses 500
Interest on bank overdraft 600
Packing materials 6 300
Rental income 4 000
Settlement discount received 500
1 096 140 1 096 140

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Additional information:
Year-end adjustments:

(a) An outstanding debt of R300 is irrecoverable and must be written off.

(b) The allowance for credit losses must be adjusted to R708.
(c) Depreciation must be provided as follows:
equipment: 10% per annum according to the straight-line method
vehicles: 20% per annum according to the diminishing balance method
(d) The terms of the mortgage loan provide for interest on the loan to be calculated at a rate of 15% per
annum on the outstanding amount of the loan at the end of the financial year. Interest is payable in the
first week of January of the following year. The loan was originally granted to the entity by Capital Bank
Limited on 2 January 20.0.
(e) A van Wyk granted an unsecured loan to the entity on 1 September 20.1. According to the terms
of the loan agreement, interest at 9% per annum will be charged and is payable in January of
every year. The total amount of the loan will be repaid in full on 30 June 20.5.
(f) Advertising expenses include an amount of R400 which was prepaid for January 20.2.
(g) The amount paid for water and electricity excludes an amount of R2 300 still payable for December 20.1.
(h) A commission of R1 250, for selling newspapers at cash registers, is still payable for the whole year.
(i) An inventory count of packing materials on 31 December 20.1 showed that there was still R700
worth of materials on hand.
(j) An insurance premium of R3 600 was paid on 1 February 20.1 for the following 12 months.
(k) The entity rented out an office in their building to a lawyer for R2 000 per month. The lawyer took
occupation on 1 December and paid an amount of R4 000, being the rent for December 20.1 and
January 20.2.

REQUIRED
39

(1) Prepare the following in respect of Pompeii Traders:

– general journal with regard to adjustments at 31 December 20.1
– general journal with regard to closing entries at 31 December 20.1

(2) Post the general journal entries to the relevant ledger accounts. Close/balance these accounts
at year-end.

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SOLUTION: COMPREHENSIVE EXAMPLE ONE

40

POMPEII TRADERS
GENERAL JOURNAL – 31 DECEMBER 20.1
Adjustments GJ6
Day Details Fol Debit Credit
R R
31 Credit losses N11 300,00
Trade receivables control B6 300,00
Bad debts written off
Credit losses N11 108,00
Allowance for credit losses B14 108,00
Increase in allowance for credit losses
Depreciation N16 15 192,00
Accumulated depreciation: equipment B12 7 000,00
Accumulated depreciation: vehicles B13 8 192,00
Adjustment for depreciation
Interest on mortgage N14 18 000,00
Accrued expenses (liabilities) B7 18 000,00
Adjustment for interest payable
Interest on long-term loan N15 900,00
Accrued expenses (liabilities) B7 900,00
Adjustment for interest payable
Prepaid expenses (assets) B8 400,00
Advertising N3 400,00
Adjustment for advertising paid in advance
Water and electricity N7 2 300,00
Accrued expenses (liabilities) B7 2 300,00
Adjustment for water and electricity payable
Accrued income (assets) B10 1 250,00
Commission income N17 1 250,00
Adjustment for commission income not yet
received
Consumable stores on hand (assets) B11 700,00
Packing materials N13 700,00
Adjustment for packing materials on hand
Prepaid expenses (assets) B8 300,00
Insurance N9 300,00
Adjustment for prepaid insurance
Rental income N19 2 000,00
Income received in advance (liabilities) B9 2 000,00
Adjustment for income received in advance

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Closing transfers
Day Details Fol Debit Credit
R R
31 Settlement discount received N18 500,00
Cost of sales N2 500,00
Closing transfer
Trading account N20 195 490,00
Cost of sales N2 195 490,00
Closing transfer
Sales N1 595 000,00
Trading account N20 595 000,00
Closing transfer
Trading account N20 399 510,00
Profit or loss account N21 399 510,00
Transfer of gross profit
Profit or loss account N21 162 700,00
Advertising N3 7 000,00
Bank charges N4 2 300,00
Telephone expenses N5 9 800,00
N7 14 400,00
Water and electricity
N8 80 400,00
Salaries
N9 3 700,00
Insurance N10 3 900,00
Delivery expenses N11 908,00
Credit losses N12 600,00
Interest on bank overdraft N13 5 600,00
Packing materials N14 18 000,00
Interest on mortgage N15 900,00
Interest on long-term loan N16 15 192,00
Depreciation
Closing transfers
Commission income N17 1 250,00
Rental income N19 2 000,00
Profit or loss account N21 3 250,00
Closing transfers
Profit or loss account N21 240 060,00
Capital B1 240 060,00
Closing transfer
Capital B1 70 860,00
Drawings B2 70 860,00
Closing transfer

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POMPEII TRADERS
GENERAL LEDGER
Dr Capital B1 Cr
20.1 20.1
Dec 31 Drawings GJ6 70 860 00 Dec 31 Balance b/d 250 000 00
Balance c/d 419 200 00 Profit or loss
account GJ6 240 060 00
490 060 00 490 060 00
20.2
Jan 1 Balance b/d 419 200 00

Dr Drawings B2 Cr
20.1 20.1
Dec 31 Balance b/d 70 860 00 Dec 31 Capital GJ6 70 860 00

Dr Trade receivables control B6 Cr

20.1 20.1
Dec 31 Balance b/d 18 000 00 Dec 31 Credit losses GJ6 300 00
Balance c/d 17 700 00

18 000 00 18 000 00
20.2
Jan 1 Balance b/d 17 700 00

Dr Accrued expenses (liabilities) B7 Cr

20.1
Dec 31 Interest on mortgage GJ6 18 000 00
Interest on long-term
loan GJ6 900 00
Water and
electricity GJ6 2 300 00

21 200 00

Dr Prepaid expenses (assets) B8 Cr

20.1
Dec 31 Advertising GJ6 400 00
Insurance GJ6 300 00

700 00

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Dr Income received in advance (liabilities) B9 Cr
20.1
Dec 31 Rental income GJ6 2 000 00

Dr Accrued income (assets) B10 Cr

20.1
Dec 31 Commission income GJ6 1 250 00

Dr Consumable stores on hand (assets) B11 Cr

20.1
Dec 31 Packing materials GJ6 700 00

Dr Accumulated depreciation: equipment B12 Cr

20.1
Jan 1 Balance b/d 21 000 00
Dec 31 Depreciation GJ6 7 000 00
28 000 00

Dr Accumulated depreciation: vehicles B13 Cr

20.1
Jan 1 Balance b/d 39 040 00
Dec 31 Depreciation GJ6 8 192 00
47 232 00

Dr Allowance for credit losses B14 Cr

20.1
Jan 1 Balance b/d 600 00
Dec 31 Credit losses GJ6 108 00
708 00

Dr Sales N1 Cr
20.1 20.1
Dec 31 Trading account GJ6 595 000 00 Dec 31 Total b/d 595 000 00

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Dr Cost of sales N2 Cr
20.1 20.1
Dec 31 Total b/d 195 990 00 Dec 31 Settlement discount
received GJ6 500 00
Trading account GJ6 195 490 00
195 990 00 195 990 00

Dr Advertising N3 Cr
20.1 20.1
Dec 31 Total b/d 7 400 00 Dec 31 Prepaid expenses GJ6 400 00
(assets) 7 000
Profit or loss account GJ6 00
7 400 00 7 400 00

Dr Bank charges N4 Cr
20.1 20.1
Dec 31 Total b/d 2 300 00 Dec 31 Profit or loss account GJ6 2 300 00

Dr Telephone expenses N5 Cr
20.1 20.1
Dec 31 Total b/d 9 800 00 Dec 31 Profit or loss account GJ6 9 800 00

Dr Water and electricity N7 Cr

20.1 20.1
Dec 31 Total b/d 12 100 00 Dec 31 Profit or loss account GJ6 14 400 00
Accrued expenses GJ6 2 300 00
(liabilities) 14 400 00 14 400 00

Dr Salaries N8 Cr
20.1 20.1
Dec 31 Total b/d 80 400 00 Dec 31 Profit or loss account GJ6 80 400 00

Dr Insurance N9 Cr
20.1 20.1
Dec 31 Total b/d 4 000 00 Dec 31 Prepaid expenses GJ6 300 00
(assets) GJ6 3 700 00
4 000 00 Profit or loss account 4 000 00

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Dr Delivery expenses N10 Cr
20.1 20.1
Dec 31 Total b/d 3 900 00 Dec 31 Profit or loss account GJ6 3 900 00

Dr Credit losses N11 Cr

20.1 20.1
Dec 31 Total b/d 500 00 Dec 31 Profit or loss account GJ6 908 00
Trade receivables GJ6 300 00
control
Allowance for credit
losses GJ6 108 00
908 00 908 00

Dr Interest on bank overdraft N12 Cr

20.1 20.1
Dec 31 Total b/d 600 00 Dec 31 Profit or loss account GJ6 600 00

Dr Packing materials N13 Cr

20.1 20.1
Dec 31 Total b/d 6 300 00 Dec 31 Consumable stores
on hand (inventory) GJ6 700 00
Profit or loss account GJ6 5 600 00
6 300 00 6 300 00

Dr Interest on mortgage N14 Cr

20.1 20.1
Dec 31 Accrued expenses GJ6 18 000 00 Dec 31 Profit or loss account GJ6 18 000 00
(liabilities)

Dr Interest on long-term loan N15 Cr

20.1 20.1
Dec 31 Accrued expenses GJ6 900 00 Dec 31 Profit or loss account GJ6 900 00
(liabilities)

Dr Depreciation N16 Cr
20.1 20.1
Dec 31 Accumulated Dec 31 Profit or loss account GJ6 15 192 00
depreciation:
equipment GJ6 7 000 00
Accumulated
depreciation:
vehicles GJ6 8 192 00

15 192 00 15 192 00

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Dr Commission income N17 Cr
20.1 20.1
Dec 31 Profit or loss account GJ6 1 250 00 Dec 31 Accrued income GJ6 1 250 00
(assets)

Dr Settlement discount received N18 Cr

20.1 20.1
Dec 31 Cost of sales GJ6 500 00 Dec 31 Total b/d 500 00

Dr Rental income N19 Cr

20.1 20.1
Dec 31 Income received in Dec 31 Total b/d 4 000 00
advance (liabilities) GJ6 2 000 00
Profit or loss account GJ6 2 000 00
4 000 00 4 000 00

Dr Trading account N20 Cr

20.1 20.1
Dec 31 Cost of sales GJ6 195 490 00 Dec 31 Sales GJ6 595 000 00
Profit or loss account GJ6 399 510 00
595 000 00 595 000 00

Dr Profit or loss account N21 Cr

20.1 20.1
Dec 31 Advertising GJ6 7 000 00 Dec 31 Trading account GJ6 399 510 00
Bank charges GJ6 2 300 00 Commission income GJ6 1 250 00
Telephone expenses GJ6 9 800 00 Rental income GJ6 2 000 00
Water and electricity GJ6 14 400 00
Salaries GJ6 80 400 00
Insurance GJ6 3 700 00
Delivery expenses GJ6 3 900 00
Credit losses GJ6 908 00
Interest on bank
overdraft GJ6 600 00
Packing materials GJ6 5 600 00
Interest on mortgage GJ6 18 000 00
Interest on long-term
loan GJ6 900 00
Depreciation GJ6 15 192 00
Capital (profit for the
year) GJ6 240 060 00

402 760 00 402 760 00

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Calculations

R
1 Advertising
R(7 400 – 400) 7 000
2 Water and electricity
R(12 100 + 2 300) 14 400
3 Credit losses and allowance for credit losses
Trade receivables control R(18 000 – 300) 17 700
Allowance for credit losses 708
Previous year allowance (600)
Increase in allowance for credit losses 108
Total credit losses R(500 + 300 + 108) 908
4 Depreciation on equipment (straight-line method):
R70 000 x 10% 7 000
Depreciation on vehicles (diminishing-balance method):
R(80 000 – 39 040) x 20% 8 192
Total depreciation 15 192
5 Finance costs
Interest on long-term loan
R30 000 x 4/12 x 9/100 900
Interest on mortgage
R120 000 x 15% 18 000
Interest on bank overdraft 600
Total finance costs 19 500
6 Insurance
Amount paid for period 1/2/20.1 to 31/1/20.2 3 600
Amount applicable to this financial year R3 600 x 11/12 3 300
Plus amount paid for Jan 20.1 in 20.0 400
Insurance expense for 20.1 3 700
Prepaid expenses (assets) 300

11.2 FINANCIAL STATEMENTS

11.2.1 Introduction
We have seen that journals are used on a daily basis to record the details of each transaction. The
general ledger is used as a summary of the journals and is updated on a monthly basis. A trial balance
is used primarily as an index (summary) of the accounts dealt with in the general ledger.

The source documents → journals → ledger → trial balance cycle should continue unabated for a
period of 12 months (if the financial period is 12 months long).

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At the end of the financial year, some additional accounting procedures must be followed. After
executing the usual documentation procedures → journals → ledger → trial balance – for the final
month of the financial period, two important extra procedures must be followed:
 Determine the financial performance of the entity for the past financial year.
 Determine the financial position of the entity at the financial year-end.

11.2.2 Financial performance as measured by the statement of profit or loss and

other comprehensive income
What is financial performance? Consider the situation where an investor deposits R100 000 into a
fixed deposit investment for one year at an interest rate of 12% per annum. The 12% interest rate
represents the return that the investor is expecting on the investment. If the interest rate remains the
same, the investment should grow to R112 000 by the end of the 12-month period.

This scenario can be compared with one where the sole owner of an entity makes a capital contribution
of R100 000 into the entity on a particular date (for example 1 July 20.1). At the end of the first financial
period of 12 months (that is 30 June 20.2), the owner would like to determine the return on his/her
initial investment for the year. How is this return calculated?

Return on capital invested = net profit (profit for the year)

Interest measures the performance of a savings investment, and profit measures the performance of
an entity’s capital investment. In fact, if the owner makes a R10 000 profit on 30 June 20.2 in the
example given above, he/she can measure the return against the return on a savings investment. A
R10 000 net profit (profit for the year) equates to a 10% return on the initial investment of R100 000
(R10 000 / R100 000 x 100 = 10%). This return is less than the return on the savings investment, which
in our example amounts to R12 000 (12%). One could thus interpret the net profit (profit for the year)
as being a very conservative return, since the owner could have yielded a return of 12% had he/she
invested the money in a fixed deposit – without doing any work during the year!

 The structure of the statement of profit or loss and other comprehensive income
The statement of profit or loss and other comprehensive income is a statement format of the trading
and profit or loss accounts which should be familiar to you by now. The statement of profit or loss and
other comprehensive income is divided into a gross profit section (similar to the trading account) and
a net profit section (similar to the profit or loss account).

Dr Trading account (F1) Cr

Year- Cost of sales GJ XXX Year- Sales (less sales
end Profit or loss account end returns) GJ XXX
date (gross profit) GJ XXX date
XXX XXX

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Dr Profit or loss account (F2) Cr
Year- Wages and salaries GJ XXX Year- Trading account
end Insurance GJ XXX end (gross profit) GJ XXX
date Interest expenses GJ XXX date Rental income GJ XXX
Rental expenses GJ XXX Interest income GJ XXX
Telephone expenses GJ XXX Commission
Water and electricity GJ XXX income GJ XXX
Advertising GJ XXX etc …
Repairs and
maintenance GJ XXX
Stationery GJ XXX
Packing materials GJ XXX
Consumables GJ XXX
etc …
Capital (profit for the
year) GJ XXX
XXX XXX

The trading account will be used as a tool to close off the following nominal accounts at the end of the
financial period:
 sales
 sales returns (closed off against sales)
 cost of sales

The profit or loss account will be used as a tool to have all the remaining nominal accounts
closed off at the end of the financial period.

All nominal accounts should thus have an effective balance of 0 (nil) on the first day of the
next financial year.

OR:

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XXX TRADERS
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED …
R R Trading
Revenue XXX account
Cost of sales (XXX) section
Gross profit XXX
Other income XXX
Rent income XXX
Interest income XXX
Commission income XXX
Profit on sale of non-current asset XXX
XXX
Distribution, administrative and other expenses (XXX)
Wages and salaries XXX
Insurance XXX
Traffic fines XXX
Rental expenses XXX Profit or loss
Telephone expenses XXX account
Water and electricity XXX section
Advertising XXX
Repairs and maintenance XXX
Stationery XXX
Packing material XXX
Loss on sale of non-current asset XXX
Finance costs (XXX)
Interest on long-term loan XXX
Interest on mortgage XXX
Interest on bank overdraft XXX
Profit for the year XXX
Other comprehensive income for the year —
Total comprehensive income for the year XXX

You will be required to know the structure of the statement of profit or loss and
other comprehensive income as set out above.

11.2.3 Financial position as measured by the statement of financial position

The financial position of an entity can be determined by preparing a statement of financial
position at any point in time (usually at the end of the financial year).

A statement of financial position is used to answer a very important question:

WHAT IF … ?

The statement of financial position should effectively answer the question: What if we closed the doors
of our entity today (the statement of financial position date), sold all the assets, and paid back all our
liabilities? The result of such a closure should indicate the owner’s real equity in the entity. Remember:
equity = assets – liabilities; or:

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 FAC1501/1

ASSETS = EQUITY + LIABILITIES

The statement of financial position is in fact nothing but a detailed version of the accounting equation,
which shows the financial position of an entity.

None of the statement of financial position accounts (except for drawings) will be closed off at
the end of the financial year. All the capital, asset and liability balances will be carried forward
to the next financial period.

You will be required to know the structure of the statement of financial position as set out below.

The structure of the statement of financial position

XXX TRADERS
STATEMENT OF FINANCIAL POSITION AS AT …
R R
ASSETS
Non-current assets XXX
Property, plant and equipment XXX
Fixed deposit XXX

Current assets XXX

Inventories XXX
Trade and other receivables XXX
Callable fixed deposit XXX
Prepayments XXX
Cash and cash equivalents XXX
VAT receivable XXX
XXX
TOTAL ASSETS
EQUITY AND LIABILITIES
Equity XXX
Capital
XXX
Non-current liabilities XXX
Long-term borrowings
XXX
Current liabilities XXX
Trade and other payables
Income received in advance XXX
Short-term borrowings XXX
Current portion of long-term borrowings XXX
Bank overdraft XXX
VAT payable XXX
XXX
TOTAL EQUITY AND LIABILITIES XXX

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11.2.4 Statement of changes in equity
The aim of the statement of changes in equity is to reconcile the balance of the equity at the beginning
of the financial year with the equity at the end of the financial year.

The structure of the statement of changes in equity

XXX TRADERS
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED …
Capital
R
Balance at … (date at beginning of financial year) XXX
Capital contribution during the year XXX
Total comprehensive income for the year XXX
Drawings (XXX)
Balance at … (date at end of financial year) XXX

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COMPREHENSIVE EXAMPLE TWO

41

Mimosa Dealers reached the end of their first financial year on 30 September 20.3. The following trial
balance was extracted from the accounting records on that date:
Fol Debit Credit
R R
Financial position section
Capital (1 October 20.2) B1 250 000
Drawings B2 22 400
Equipment B3 48 000
Investment: fixed deposit (12%) B4 100 000
Trading inventory B5 110 000
Trade receivables control B6 44 880
Trade payables control B7 30 210
Long-term loan: ABC Bank (14%) B8 120 000
Bank B9 127 150
Nominal accounts section
Sales N1 382 500
Cost of sales N2 190 000
Sales returns N3 21 500
Rental expenses N4 36 000
Interest on fixed deposit N5 12 000
Interest on long-term loan N6 16 800
Wages and salaries N7 43 000
Insurance N8 11 000
Stationery N9 1 700
Packing materials N10 2 050
Settlement discount granted N11 840
Settlement discount received N12 360
Credit losses N13 800
Telephone expenses N14 5 320
Water and electricity N15 12 500
Repairs N16 1 130
795 070 795 070

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REQUIRED
42

(1) Prepare the statement of profit or loss and other comprehensive income of Mimosa Dealers for
the year ended 30 September 20.3.
(2) Prepare the statement of financial position of Mimosa Dealers as at 30 September 20.3.
(3) Prepare the statement of changes in equity for the year ended 30 September 20.3.
(4) If it is assumed that the R250 000 capital was invested on 1 October 20.2, calculate the percentage
(%) return for the first year on the capital invested.
(5) If this entity is using a constant mark-up on cost for all trading inventory sold,
determine the percentage (%) mark-up.
(6) If Mimosa Dealers moved into the building from which they trade on 1 October 20.2,
calculate the monthly rent payment if all payments have been made up to date.

SOLUTION: COMPREHENSIVE EXAMPLE TWO

43

(1)
MIMOSA DEALERS
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 30 SEPTEMBER 20.3
R R
Revenue (382 500 – 21 500 – 840) 360 160
Cost of sales (190 000 – 360) (189 640)
Gross profit 170 520
Other income 12 000
Interest on fixed deposit 12 000
182 520
Distribution, administrative and other expenses (113 500)
Rental expenses 36 000
Wages and salaries 43 000
Insurance 11 000
Stationery 1 700
Packing materials 2 050
Credit losses 800
Telephone expenses 5 320
Water and electricity 12 500
Repairs 1 130
Finance costs (16 800)
Interest on long-term loan 16 800
Profit for the year 52 220
Other comprehensive income for the year —
Total comprehensive income for the year 52 220

NOTE:
The settlement discount granted must be deducted from revenue and the settlement discount
received must be deducted from cost of sales.

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(2)
MIMOSA DEALERS
STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20.3
R R
ASSETS
Non-current assets 148 000
Property, plant and equipment 48 000
Fixed deposit 100 000

Current assets 282 030

Inventories 110 000
Trade and other receivables 44 880
Cash and cash equivalents 127 150
430 030
TOTAL ASSETS
EQUITY AND LIABILITIES
Equity 279 820
Capital
279 820
Non-current liabilities 120 000
Long-term borrowings
120 000
Current liabilities 30 210
Trade and other payables
30 210
TOTAL EQUITY AND LIABILITIES 430 030

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(3)
MIMOSA DEALERS
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
30 SEPTEMBER 20.3
Capital
R
Balance at 1 October 20.2 250 000
Total comprehensive income for the year 52 220
Drawings (22 400)
Balance at 30 September 20.3 279 820

(4) R52 220 / R250 000 x 100 = 20,89%

(5) Mark-up % on cost = gross profit / cost of sales x 100
Thus: mark-up % = R170 520 / R189 640 x 100 = 89,92%
(6) R36 000 / 12 = R3 000 per month

ACTIVITY 1
44

Lucky Traders reached the end of their first financial year at 30 April 20.4. The following trial balance
was extracted from the accounting records on that date:

Fol Debit Credit

R R
Financial position section
Capital (1 May 20.3) B1 300 000
Drawings B2 40 000
Vehicles B3 120 000
Investment: fixed deposit (13%) B4 80 000
Trading inventory B5 46 000
Trade receivables control B6 20 000
Trade payables control B7 35 000
Long-term loan: Goodie Bank (15%) B8 140 000
Bank B9 199 270
Petty cash B10 1 000
Nominal accounts section
Sales N1 415 000
Cost of sales N2 250 000
Sales returns N3 15 000
Wages and salaries N4 71 400
Interest on fixed deposit N5 5 200
Interest on loan N6 21 000
Telephone expenses N7 12 300
Settlement discount granted N8 1 500
Credit losses N9 5 800
Insurance N10 1 200
Settlement discount received N11 330
Credit losses recovered N12 360
Advertising N13 4 800
Traffic fines N14 850
Rates and taxes N15 3 770
Repairs and maintenance N16 2 000
895 890 895 890

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REQUIRED
45

(1) Prepare the statement of profit or loss and other comprehensive income of Lucky Traders for the
year ended 30 April 20.4.
(2) Prepare the statement of financial position of Lucky Traders as at 30 April 20.4.
(3) Prepare the statement of changes in equity for the year ended 30 April 20.4.
(4) If it is assumed that the insurance policy was taken out on 1 January 20.4, and that all payments
have been made up to date, what is the monthly insurance premium?
(5) Determine the date on which the fixed deposit was invested. All interest due has been received.
(6) Lucky Traders sells all goods at a constant mark-up. Determine the mark-up % on cost.

This solution should be based on the same format as used in the illustrative example. It would be wise
to try and do this question on your own. If your statement of financial position balances, you should be
on the right track.

11.2.5 Year-end adjustments

This section was discussed in detail in this learning unit of the study guide. But let us now consider
how this fit into the accounting cycle.

We have seen how the performance of an entity can be determined for a financial period. This is done
by means of a statement of profit or loss and other comprehensive income or trading and profit or loss
accounts.

The financial position of an entity can also be determined by drafting a statement of financial position.
The question now arises whether these statements are indeed accurate in measuring financial
performance and position.

This is where year-end adjustments come in very handy.

The purpose of performing year-end adjustments is to make the financial results more realistic. The
various year-end adjustments which are an extremely important section of the syllabus will now be
discussed. We deal with each individual adjustment in detail. The process of drafting financial
statements is slightly more comprehensive and complicated, because all the adjustments need to be
incorporated into one set of financial statements.

For the sake of revision, the most important year-end adjustments are listed:
 depreciation
 accrued expenses (liabilities)
 accrued income (assets)
 prepaid expenses (assets)
 income received in advance (liabilities)
 consumable stores on hand (assets)
 trading inventory deficits
 credit losses
 allowance for credit losses

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COMPREHENSIVE EXAMPLE THREE

46

The following information relates to Joyner & Sons as at 31 October 20.4, the last day of the financial
year of the entity:
JOYNER & SONS
PRE-ADJUSTMENT TRIAL BALANCE AS AT 31 OCTOBER 20.4
Fol Debit Credit
R R
Financial position section
Capital (1 November 20.3) B1 447 540
Drawings B2 10 000
Land and buildings B3 350 000
Vehicles B4 133 000
Equipment B5 36 800
Accumulated depreciation: vehicles B6 43 000
Accumulated depreciation: equipment B7 12 800
Fixed deposit: AA Bank (12% pa) B8 65 000
Trade receivables control B9 31 250
Trade payables control B10 24 270
Inventory B11 63 500
Bank B12 21 210
Petty cash B13 2 000
Cash float B14 3 500
Long-term loan: BB Bank (14% pa) B15 30 000
Nominal accounts section
Sales N1 310 700
Cost of sales N2 125 100
Sales returns N3 10 700
Rental income N4 29 700
Interest on fixed deposit N5 7 950
Interest on long-term loan N6 4 000
Bank charges N7 160
Stationery N8 1 200
Packing materials N9 2 620
Insurance N10 5 600
Wages and salaries N11 20 100
Water and electricity N12 8 450
Telephone expenses N13 5 890
Repairs and maintenance N14 3 000
Settlement discount granted N15 450
Settlement discount received N16 1 310
Advertising N17 1 940
Credit losses N18 1 800
907 270 907 270

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Adjustments at 31 October 20.4:
(a) A physical inventory count taken revealed the following:
 inventory on hand, R61 800
 stationery on hand, R400
 packing materials on hand, R620
(b) The fixed deposit and long-term loan were both negotiated during 20.1.
(c) The salary of an employee, D Bono, for October 20.4 is still due, R4 900.
(d) Prepaid insurance amounts to R500.
(e) The rent due by the tenant amounts to R2 700 per month. The tenant has been renting since
1 November 20.3.
(f) The outstanding balance for trade receivable (a debtor), B Charlie, must be written off. The
amount is R1 250.
(g) Joyner & Sons determined that the allowance for the credit losses account should amount to
R1 200 on 31 October 20.4.
(h) Depreciation must be provided for as follows:
 on vehicles @ 20% per annum according to the straight-line method
 on equipment @ 331/ 3% per annum on the reducing-balance method

REQUIRED
47

(1) Prepare the statement of profit or loss and other comprehensive income for Joyner & Sons for the
year ended 31 October 20.4.
(2) Prepare the statement of financial position of Joyner & Sons as at 31 October 20.4.
(3) Prepare the statement of changes in equity for Joyner & Sons for the year ended 31 October 20.4.
(4) Prepare the notes for the year ended 31 October 20.4.

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 FAC1501/1

SOLUTION: COMPREHENSIVE EXAMPLE THREE

48

(1)
JOYNER & SONS
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 OCTOBER 20.4
R R
Revenue (310 700 – 10 700 – 450) 299 550
Cost of sales (125 100 – 1 310) (123 790)
Gross profit 175 760
Other income 40 200
Rental income (29 700 + 2 700) 32 400
Interest on fixed deposit (7 950 – 150) 7 800
215 960
Distribution, administrative and other expenses (92 890)
Bank charges 160
Stationery (1 200 – 400) 800
Packing materials (2 620 – 620) 2 000
Insurance (5 600 – 500) 5 100
Wages and salaries (20 100 + 4 900) 25 000
Water and electricity 8 450
Telephone expenses 5 890
Repairs and maintenance 3 000
Advertising 1 940
Credit losses (1 800 + 1 250 + 1 200) 4 250
Trading inventory deficits 1 700
Depreciation (26 600 + 8 000) 34 600
Finance costs (4 200)
Interest on long-term loan (4 000 + 200) 4 200
Profit for the year 118 870
Other comprehensive income for the year —
Total comprehensive income for the year R118 870

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(2)
JOYNER & SONS
STATEMENT OF FINANCIAL POSITION AS AT 31 OCTOBER 20.4
Notes R R
ASSETS
Non-current assets 494 400
Property, plant and equipment 1 429 400
Fixed deposit 2 65 000

Current assets 121 530

Inventories 3 62 820
Trade and other receivables 4 31 500
Prepayments 5 500
Cash and cash equivalents 6 26 710

TOTAL ASSETS 615 930

EQUITY AND LIABILITIES

Equity 556 410
Capital
556 410

Non-current liabilities 30 000

Long-term borrowings 7 30 000

Current liabilities 29 520

Trade and other payables 8 29 370
Income received in advance 9 150

TOTAL EQUITY AND LIABILITIES 615 930

(3)
JOYNER & SONS
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 OCTOBER 20.4
Capital
R
Balance at 1 November 20.3 447 540
Total comprehensive income for the year 118 870
Drawings (10 000)
Balance at 31 October 20.4 556 410

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(4)
JOYNER & SONS
NOTES FOR THE YEAR ENDED 31 OCTOBER 20.4
1 Property, plant and equipment
Land and Equipment Vehicles Total
building
R
R R R
464 000)
Carrying amount at 1 November 20.3 350 000 24 000) 90 000
Cost price 350 000 36 800) 133 000 519 800)
Accumulated depreciation – (12 800) (43 000) (55 800)

Additions – – – –
– – – –
Disposals
– (8 000) (26 600) (34 600)
Depreciation for the year
350 000 16 000) 63 400 429 400)
Carrying amount at 31 October 20.4 350 000 36 800) 133 000 519 800)
Cost price – (20 800) (69 600) (90 400)
2 Accumulated depreciation
Financial assets
Non-current financial assets 65 000
3 Loans and receivables: fixed deposit at AA
Bank at 12% pa 61 800
Inventories
400)
Trading inventory (63 500 – 1 700)
620) 1 020 62 820)
Consumable stores on hand:
4
– stationery 30 000)
– packing material (1 200) 28 800
Trade and other receivables 2 700 31 500
5 Trade receivables control (31 250 – 1 250)
Less: Allowance for credit losses 500
6 Accrued income (assets): – rental income
21 210
Prepayments 2 000
Prepaid expenses (assets): – insurance 3 500 26 710
7 Cash and cash equivalents
30 000
Bank
8
Petty cash
24 270
Cash float
Long-term borrowings 200)
Long-term loan: BB Bank (14% pa) 4 900) 5 100 29 370
9
Trade and other payables
Trade payables control 150 150
Accrued expenses (liabilities):
– interest on loan
– wages and salaries

Income received in advance (liabilities):

– interest on fixed deposit

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 FAC1501/1

ACTIVITY 2
49

The following information was obtained from the records of Swinton Dealers on the last day of the
financial year of the entity:

SWINTON DEALERS
PRE-ADJUSTMENT TRIAL BALANCE AS AT 31 MARCH 20.4
Debit Credit
R R
Financial position section
Capital 186 980
Drawings 23 000
Office equipment at cost price 24 000
Accumulated depreciation: office equipment 8 400
Bank 102 700
Fixed deposit @ 12% pa 80 000
Petty cash 2 000
Inventory (1/04/20.3) 45 900
Trade receivables control 21 300
Trade payables control 12 100
Prepaid insurance 2 880
Rent received in advance 16 000
Allowance for credit losses 1 200
Stationery on hand 2 300
Nominal accounts section
Sales 213 000
Purchases 85 600
Freight charges on purchases 4 700
Freight charges on sales 3 000
Purchases returns 5 000
Sales returns 1 050
Customs duties 1 900
Import tariffs 3 900
Advertisements 800
Wages and salaries 34 800
Interest on fixed deposit 8 800
Settlement discount granted 400
Rental income 3 200
Administrative expenses 2 200
Repairs and maintenance 3 600
Water and electricity 8 650
454 680 454 680

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Additional information
(a) The entity took out a fire insurance policy on 1 January 20.4 and paid a premium of R2 880 to
cover the entity until 31 December 20.4.
(b) On 31 March 20.4 the following was still on hand:
 trading inventory, R23 000
 stationery, R1 500
(c) An employee’s salary of R4 500 was still outstanding on 31 March 20.4.
(d) The tenant moved into the building on 30 November 20.3 and paid his rent for 12 months. No
deposit was required.
(e) Office equipment is depreciated at 20% per annum on a straight-line basis. Take into account that
a new computer was bought on 1 August 20.3 for R12 000.
(f) The fixed deposit was invested a few years ago. Interest on the investment is credited to the
current bank account.
(g) Swinton Dealers determined that the allowance for the credit losses account should amount to
R1 065 at 31 March 20.4.

REQUIRED
50

(1) Prepare the statement of profit or loss and other comprehensive income for Swinton Dealers for
the year ended 31 March 20.4.
(2) Prepare the statement of financial position of Swinton Dealers as at 31 March 20.4.
(3) Prepare the statement of changes in equity of Swinton Dealers for the year ended 31 March 20.4.
(4) Prepare the notes for the year ended 31 March 20.4.

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 FAC1501/1

SOLUTION: ACTIVITY 2
51

(1)
SWINTON DEALERS
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 MARCH 20.4
R R
Revenue (213 000 – 1 050 – 400) 211 550
Cost of sales (*1) (114 000)
Gross profit 97 550
Other income 16 135
Interest on fixed deposit (8 800 + 800) 9 600
Rental income (3 200 + 3 200) 6 400
Credit losses (1 200 – 1 065) 135
113 685
Distribution, administrative and other expenses (63 070)
Freight charges on sales 3 000
Advertisements 800
Wages and salaries (34 800 + 4 500) 39 300
Administrative expenses 2 200
Repairs and maintenance 3 600
Water and electricity 8 650
Insurance 720
Stationery 800
Depreciation (2 400 + 1 600) 4 000
Profit for the year 50 615
Other comprehensive income for the year —
Total comprehensive income for the year 50 615

* 1 Calculation of cost of sales

R
Opening inventory 45 900
Purchases (85 600 – 5 000) 80 600
Freight charges on purchases 4 700
Customs duties 1 900
Import tariffs 3 900
137 000
Closing inventory (23 000)
114 000

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 FAC1501/1
Notes on adjustments
(a) The fire insurance premium equals R2 880/12 = R240 per month. By 31 March 20.4 only three
months’ insurance have been “used”. Thus R240 x 3 = R720 must end up in the statement of profit
or loss and other comprehensive income as an expense, and R240 x 9 = R2 160 must end up in
the statement of financial position as an asset.
(b) • The opening trade inventory is R45 900. The closing trade inventory is R23 000. Both these
amounts are used to calculate cost of sales in the statement of profit or loss and other
comprehensive income. The closing inventory of R23 000 will be shown in the statement of
financial position as a current asset.
• Stationery worth R2 300 was evidently bought during the financial year, and by the end of the
year R800 had been used, since stationery of R1 500 was on hand at the inventory count. The
portion that was used (R800) is an expense and the part that is left on the shelves is an asset.
(c) Salary accrued. Debit salaries, credit accrued expenses (current liabilities) with R4 500.
(d) The initial double-entry made must have been a debit against bank and a credit against income
(rent) received in advance. There have in the meantime, however, been some reversals made
against the rent received in an advance account. This is evident from the fact that an income
account for rental income exists as well. The total rent for the year must have been R16 000
+ R3 200 = R19 200. This amounts to R1 600 per month for the tenant. By 31 March 20.4, the
tenant had only occupied the premises for four months (since he moved in). This means that
Swinton Dealers had only earned four months of rent at R1 600 per month. The income for rent
(as shown in the statement of profit or loss and other comprehensive income) will thus be R6 400.
Eight months of rent have been received in advance (R12 800) and will be disclosed in the
statement of financial position as a current liability.
(e) R12 000 x 20% = R2 400
R12 000 x 20% x 8/12 = R1 600
Total depreciation for the year = R4 000
(f) R80 000 x 12% = R9 600
R9 600 interest has been earned by the entity, but only R8 800 has been received. This leaves
R800 receivable interest (current asset in the statement of financial position).
(g) Allowance for credit losses account at 31 March 20.4 = R1 065.
Allowance for credit losses account at 31 March 20.3 = R1 200.
A decrease in the allowance for credit losses is needed (income) and the new allowance for
credit losses of R1 065 will be disclosed as a deduction from debtors in the statement of financial
position.

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(2)
SWINTON DEALERS
STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20.4
Notes R R
ASSETS
Non-current assets 91 600
Property, plant and equipment 1 11 600
Fixed deposit 2 80 000

Current assets 152 395

Inventories 3 24 500
Trade and other receivables 4 21 035
Prepayments 5 2 160
Cash and cash equivalents 6 104 700
243 995
TOTAL ASSETS
EQUITY AND LIABILITIES
Equity 214 595
Capital
214 595
Current liabilities 29 400
Trade and other payables
Income received in advance 16 600
7
8 12 800
TOTAL EQUITY AND LIABILITIES 243 995

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(3)
SWINTON DEALERS
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 MARCH 20.4
Capital
R
Balance at 1 April 20.3 186 980
Total comprehensive income for the year 50 615
Drawings (23 000)
Balance at 31 March 20.4 214 595

SWINTON DEALERS
NOTES FOR THE YEAR ENDED 31 MARCH 20.4
1 Property, plant and equipment
Equipment Total
R
R R
Carrying amount at 1 April 20.3 3 600 3 600
Cost price 12 000 12 000
Accumulated depreciation (8 400) (8 400)
12 000 12 000
Additions
– –
Disposals
(4 000) (4 000)
Depreciation for the year
11 600 11 600
Carrying amount at 31 March 20.4 24 000 24 000
Cost price (12 400) (12 400)
Accumulated depreciation
2
Financial assets
Non-current financial assets 80 000
Loans and receivables: fixed deposit at 12%
3
pa

24 500
Inventories 23 000
Trading inventory 1 500
Consumable stores on hand: – stationery
4
Trade and other receivables 21 300
Trade receivables control (1 065) 20 235
Less: Allowance for credit losses 800 21 035
Accrued income (assets): – interest income

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5 Prepayments
Prepaid expenses (assets): – insurance 2 160

6 Cash and cash equivalents

Bank 102 700
Petty cash 2 000 104 700

7 Trade and other payables

Trade payables control 12 100
Accrued expenses (liabilities): – salaries 4 500 16 600

8 Income received in advance (liabilities):

– rental income 12 800 12 800

SELF-ASSESSMENT
52

After you have worked through this learning unit, are you
35

able to
 correctly calculate and do adjustments at year-end with
regard to accrued expenses, prepaid expenses, accrued
income and income received in advance? ☺  
 correctly calculate and do adjustments with regard to
consumable stores? ☺  
 correctly calculate and do adjustments with regard to
the depreciation of non-current assets? ☺  
 correctly calculate and do adjustments with regard to credit
losses and allowance for credit losses? ☺  
 correctly prepare a statement of profit or loss and other
comprehensive income for a sole trader? ☺  
 correctly prepare a statement of financial position and notes
for a sole trader? ☺  
 correctly prepare a statement of changes in equity for a
sole trader? ☺  

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.

If you have marked all ☺, you may congratulate yourself for having achieved all the outcomes of
this course.

384