Accounting

ACC101
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 ASSIGNMENT

SEMESTER 2023 02
MODULE ACCOUNTING101
MODULE CODE ACC101
DUE DATE 22 SEPTEMBER 2023

Page 1 of Assignment
 ASSIGNMENT – 2023 SECOND SEMESTER
ACCOUNTING
ACC101

0B ELECTRONIC SUBMISSION INSTRUCTIONS

1B Introduction
This assignment is compulsory and must be submitted through CANVAS, inside the
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LIST OF REFERENCES:
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Watch the tutorial video of the submission process by clicking on the link shown
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Click to Watch

Page 2 of Assignment
 ASSIGNMENT – 2023 SECOND SEMESTER
ACCOUNTING
ACC101

Completing Your Assignment

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Page 3 of Assignment
 ASSIGNMENT – 2023 SECOND SEMESTER
ACCOUNTING
ACC101

USE THE ANSWER BOOK PROVIDED

Question 1 [10]
VAT STATEMENTS
Consider the following list of statements. Each statement is either true or false. You must
read each statement carefully and then select the option that you believe is correct as your
answer. In your answer book, write down only the question number and either “True” or
“False” next to the number. Example: 1.11 True

1.1 VAT is payable to SARS.

1.2 VAT input is the value added tax that is charged to customers.
1.3 Any business with sales of more than R250 000 must register for VAT.
1.4 Certain basic foods are zero-registered to assist the poor.
1.5 Most businesses price their stock inclusive of VAT.
1.6 VAT is payable when VAT input exceeds VAT output.
1.7 The VAT 101 Return must be submitted no later than the 30th day of the month when
due.
1.8 VAT is payable in the pursuit of hobbies.
1.9 Educational services are not subject to VAT.
1.10 VAT is levied on the sale of maize.

Question 2 [5]
Analyse the following items and services with respect to VAT by making a cross (X) in the
appropriate column:

GOODS/SERVICES 15% VAT 0% VAT VAT EXEMPT

1 New printer
2 Petrol
3 Fresh vegetables
4 Public school fees
5 Manager’s salary

Page 4 of Assignment
 ASSIGNMENT – 2023 SECOND SEMESTER
ACCOUNTING
ACC101

Question 3 [28]

Journalise the following transactions for ALL-IN-1 TRADING for 28 February 2023, give a
reason for the entry and total the Debtors and Creditors Control columns.
1. H Shady’s balance in the Debtors Ledger was R3 200. As it was long overdue, it was
decided to write it off.

2. Stationery purchased for R1 200 was incorrectly recorded as stock. Correct the error.

3. Accepted a cash register with a value of R7 500 from a debtor, I Owe you. His account of
R8 250 had been previously written off.

4. An allowance of R500 was allowed to a creditor, Sinner General Dealers. The Entry was
incorrectly posted to Sinner (Pty) Ltd.

5. A credit note for R1 235 issued to T Pau, a debtor, for damaged goods returned, was
recorded in the Debtors ledger.

6. Transfer a debit balance of R1 150 from the account of Mom Traders in the Creditors
ledger to his account in Debtors ledger.

Question 4 [57]
The following information was taken from the records of Planet Cycles. The financial year
ended 28 February 2023.
List of balances for the shop on 28 February 2023 (amongst others) are:

Capital 1 400 000

Drawings 101 500
Land and buildings 1 000 350
Vehicles 700 000
Equipment 435 400
Accumulated depreciation on vehicles 280 000
Accumulated depreciation on equipment 193 500
Fixed deposit : Cape Bank (8% p.a.) 105 000
Trading stock 236 045
Debtors control 132 700
Creditors control 77 370
Bank 96 355
Cash float 1 500
Loan : Unity Commercial Bank (9,5% p.a.) 320 000
Rent 83 200

Page 5 of Assignment
 ASSIGNMENT – 2023 SECOND SEMESTER
ACCOUNTING
ACC101

Adjustments and additional information: All calculations and workings must be shown.
1. The net profit (after taking all the adjustments into account) was R500 500.

2. Unused consumable stores amounted to R2 390.

3. The business makes allowance for a provision for bad debts equal to 5% of the
Debtors Control balance.

4. An insurance policy for R4 860 was entered into on 1 May 2022. The annual premium
was paid in full.

5. The telephone account of R2 850 was only settled on 5 March 2023.

6. A commission fee of R5 350 was still receivable on 28 February 2023.

7. Depreciation on vehicles at 20% p.a. on carrying value and equipment at 15% p.a. on
cost.

8. A new vehicle was purchased on 1 June 2022 for R145 000.

9. Interest on loan is capitalised. A fixed amount of R8 600 per month, inclusive of

interest, was paid from the time the loan was received.

10. R30 000 of the fixed deposit matures on 31 July each year.

11. The rent for March 2023 was received and deposited on 27 February 2023.

Required:
Complete the following notes to the Financial Statements:
4.1 Trade and other receivables. (7)
4.2 Trade and other payables. (5)
4.3 Fixed assets. (17)
4.4 Complete the Statement of Financial Position (Balance Sheet) on 28 February 2023.
Notes are not required. (28)

ASSIGNMENT TOTAL: [100]

Page 6 of Assignment
 Table of Contents

Heading Page number

WELCOME 1

Topic 1 The World of Accounting 6

1.1 Introduction 6
1.2 Definition of Accounting 6
1.3 Origin, Earlier and Later Development of Accounting 7
1.4 The Aim of Accounting 18
1.5 Financial Results 18
1.6 The Domains of Accounting 19
1.7 Accounting – Why Is It Important? 19

Topic 2 The Conceptual Framework 21

2.1 Introduction 21
2.2 Nature and Conceptual Framework 21
2.3 Objectives of Financial Statements 22
2.4 Users of Accounting Information 22
2.5 Elements of Financial Statements 23
2.6 The Recognition of Elements 26
2.7 Qualitative Characteristics of Financial Statements 26
2.8 Assumptions Underpinning the Preparation of Financial Statements 26
2.9 The Relationships Between Financial Statements 27

Topic 3 The Accounting Equation 29

3.1 Introduction 29
3.2 Theoretical Concepts 30
3.3 The Duality Concept (Double Entry) 34
3.4 The Account 35
3.5 Classification of Accounts 35
3.6 Format of an Account as Well as “Debits” and “Credits” 36
3.7 The Effect of Different Transactions on the Accounting Equation 38

Topic 4 The Accounting Cycle: Transactions, Source Documents and Journals 43

4.1 Introduction 43
4.2 Transaction and Other Accounting Events 45

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4.3 Capturing Transactions on Source Documents 46
4.4 Recording in Subsidiary Journals 50
4.5 Value-Added Tax (VAT) 53

Topic 5 Accounting Cycle: Ledgers and Trial Balance 59

5.1 Introduction 59
5.2 The General Ledger 61
5.3 The Balancing of an Account 62
5.4 Accounting Procedure for Recording VAT 64
5.5 The Treatment of Incomplete Records 65
5.6 The Trial Balance 65

Topic 6 The Accounting Cycle: Adjustments 68

6.1 Introduction 68
6.2 What Are Adjustments? 69
6.3 The Necessity of Adjustments, Income Adjustments and Expense
Adjustments 71

Topic 7 Closing Process and Financial Statement 74

7.1 Introduction 74
7.2 Finalisation of the Accounting Cycle 75
7.3 Financial Statements 77

REFERENCES 81

© STADIO (Pty) Ltd Accounting ACC101

 List of Figures

Figure Page number

Figure 1.1 Financial Results 19

Figure 2.1 Users of Financial Information 23
Figure 3.1 Duality Concept 34
Figure 4.1 The Accounting Cycle 45
Figure 4.2 Types of Source Documents 47
Figure 4.3 The Transaction Processing Cycle 52
Figure 6.1 Cycle of Adjustments 70
Figure 7.1 The Closing Process 75
Figure 7.2 Illustration of the Closing Process 76
Figure 7.3 Profit and Loss Account 76

List of Tables

Table Page number

Table 3.1 Examples of Expenses 32

Table 3.2 T-Account 37
Table 3.3 The Golden Table 37
Table 4.1 Types of Transactions 46
Table 4.2 Various Journals 50
Table 4.3 Requirements of Details on a Tax Invoice 55

© STADIO (Pty) Ltd Accounting ACC101

 Welcome

Welcome to Accounting (ACC101)

We trust that you will find this subject to be a very valuable part of your
preparation to achieve a qualification. We furthermore trust that you will find the
learning very useful in terms of understanding much better how accounting
applies in business and how it can add value to your work environment.

Note

Any reference to masculine gender may also imply the feminine. Singular may
also refer to plural and vice versa.

Prescribed Reading

The prescribed textbook for Accounting (ACC101) is:

• Myburgh, J.E., Fouché, J.P. and Cloete, M. 2021. Accounting: An
introduction. 14th Edition. LexisNexis.

Print version: [ISBN: 978-1-776-17454-6]

E-Book version: [ISBN: 978-1-779-17455-3]

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 Additional Sources of Information

It is important that you also consult other sources of information when studying
accounting. It often happens that you come across another source that addresses
a topic of learning in a way that is easier for you to understand than the manner
in which the same topic is discussed in the prescribed textbook.

The sources listed here are not a complete list. You can also use keywords to
search for additional sources on the Internet

Internet Sources
Internet sources refer to websites containing relevant information about the
topics discussed in a topic and textbook chapter. You must copy the reference
and past it into the browser line of your computer to get access to the particular
website.

Video Sources
Video clips present the topics covered in this topic and relevant textbook chapter.

You must copy the reference and past it into the browser line of your computer
to get access to the particular video clip.

Topic 1 - Fundamentals of Accounting

Internet sources
http://simplestudies.com/introduction-to-accounting.html
http://www.lapasserelle.com/online_courses/accounting/
?gclid=CO7c1New0LACFW1ItAodbjPYYQ
Video Sources
http://youtu.be/w2ggoBo92xk
http://youtu.be/4c0fB0IwIqs
http://youtu.be/7YPVIg7pmkc
http://youtu.be/lM_bWgJXDVk (petty cash)

Debits and Credits

Internet Sources
http://www.hbone.com/basicacc.htm
http://accounting-financial-tax.com/2008/07/basic-accounting-debit-and-
credit-double-entry-system/
Video Sources
http://youtu.be/lyKlnzIOu50

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 http://youtu.be/s0qnS665z3Q
http://youtu.be/D7UCjeiXrMI
http://youtu.be/p27KVd4gJEE

Topic 2 - Accounting Concepts

Internet Sources
http://www.keynotesupport.com/accounting-assets-liabilities-equity-
revenue-expenses.shtml
http://code.gnucash.org/docs/guide/accts-concepts1.html
http://www.accountingbase.com/IntroALE2.html
http://www.buzzle.com/articles/basic-accounting-concepts-and-
principles.html
http://freedownload.is/pdf/financial-accounting-concepts-principles-and-
procedures
http://misscpa.com/basic-accounting-principles-and-concepts/

Topic 3 - Accounting Equation

Internet Sources
http://www.quickmba.com/accounting/fin/equation/
http://www.cliffsnotes.com/study_guide/The-Accounting-
Equation.topicArticleId-21081,articleId-21003.html
Video Sources
http://www.wisc-online.com/objects/ViewObject.aspx?ID=ACC904
http://youtu.be/yoN_feo9uHo

Topic 4 - How to make a Journal Entry

Internet Sources
http://www.cliffsnotes.com/study_guide/Subsidiary-
Ledgers.topicArticleId-21081,articleId-21049.html
http://www.college-cram.com/study/accounting/special-
journals/subsidiary-ledgers/
Video Sources
http://youtu.be/g9efJduUVws
http://youtu.be/6xR2ijuDiHI

Subsidiary Ledgers
Internet Sources
http://chantell-accounting.blogspot.com/2007/11/chapter-12-posting-to-
general-and.html

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Video Sources
http://www.technofunc.com/index.php/functional-skills/item/example-of-
subsidiary-ledgers

Topic 5 - Posting to General Ledger

Internet Sources
http://www.accounting-basics-for-students.com/posting-journals.html
http://www.quickmba.com/accounting/fin/journal-entries/
http://www.dummies.com/how-to/content/bookkeeping-posting-journal-
information-to-the-app.html
Video Sources
http://youtu.be/g7DO2FADaOw
http://youtu.be/u6jl-UZ4G64
http://youtu.be/uhEoM5n_f3I

The General Ledger

Internet Sources
http://www.cliffsnotes.com/study_guide/The-General-
Ledger.topicArticleId-21081,articleId-21012.html
http://www.netmba.com/accounting/fin/process/ledger/
http://www.wisegeek.com/what-is-a-general-ledger.htm

Trial Balance
Internet Sources
http://www.futureaccountant.com/accounting-process/study-notes/trial-
balance.php
http://www.moneyinstructor.com/lesson/trialbalance.asp
http://www.cliffsnotes.com/study_guide/The-Trial-Balance.topicArticleId-
21081,articleId-21014.html
Video Sources
http://youtu.be/nVTQ7cc4GLw
http://youtu.be/YFaovqZKp_k
http://accountingaide.com/examples/trialbal.htm

Topic 6 - Adjustments
Internet Sources
http://www.futureaccountant.com/final-accounts-financial-
accounting/study-notes/what-are-adjustments-final-accounts-
accounting.php
http://www.cliffsnotes.com/study_guide/The-Adjustment-Process-
Illustrated.topicArticleId-21081,articleId-21022.html

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 http://www.accountingcoach.com/online-accounting-course/08Xpg01.html
http://accountingaide.com/examples/adjusting-entries.htm
Video Sources
http://youtu.be/NpzFFhYZ5qM
http://youtu.be/J5dAVIJ5BL0
http://youtu.be/LObZBMZ8vlw

Topic 7 - Financial Statements

Internet Sources
http://www.quickmba.com/accounting/fin/statements/
http://southafrica.smetoolkit.org/sa/en/content/en/92/Preparing-
Financial-Statements-Basic-Concepts
http://www.accountingcoach.com/online-accounting-course/04Xpg01.html
http://www.sec.gov/investor/pubs/begfinstmtguide.htm
Video Sources
http://youtu.be/Bpcn7QYOTx0
http://youtu.be/Z7C4cz2HkeY
http://youtu.be/DuKEcxVplnY
http://youtu.be/QYA0GiSQ524

Note

It is important that you complete the self-assessment questions as you study

each topic. This will further contribute to your understanding of the contents of
each chapter and help you to gain the required knowledge to complete the
assignment and pass the examination successfully. If you have difficulty in
completing the self-assessment questions then it remains your responsibility to
contact the lecturer to provide you with guidance. Since continuous assessment
through self-evaluation forms a critical part of your studies, you should not
neglect it, but give some considerable attention to it.

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 Topic 1
The World of Accounting

Prescribed Reading

• Read this topic together with studying pages 2 to 12; Myburgh et al. (2021:
Chapter 1).

1.1 Introduction

After completing this topic, you should be able to:

• Discuss the development of accounting as a field of study.
• Describe the role and importance of accounting as a major discipline in
commerce, industry and the public arena.

The first chapter of the prescribed textbook, Myburgh et al. (2021), provides a
very useful explanation of why accounting needs to be studied. Not all users of
financial information want to be trained as accountants but if you want to pursue
a career in business, you should have a basic understanding of accounting.

1.2 Definition of Accounting

Accounting can be defined as the recording of the monetary values of financial

transactions of individuals and businesses and reporting the results with the aim
of supplying financial information by submitting reports as a basis to make
decisions.

OR

Accounting deals with the logical, systematic, accurate selection, the

compilation, analysis and interpretation of financial statements and managerial
reports. It focuses on measuring performance, processing and communicating
financial information of economic sectors. The discipline of accounting ensures
that the principles of ethical behaviour, transparency and accountability are
adhered to.

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1.3 Origin, Earlier and Later Development of Accounting

In the textbook you will read how accounting came about. You will also read
about the double entry system that forms the basis of the accounting system
and the financial position of an entity in terms of the accounting equation.

1.3.1 The influence of the development of different forms of entities

Different forms of business entities also developed over time but for this course,
you are only going to concentrate on the sole proprietor.

It is however important to realise that the new Companies Act, Act 71 of 2008,
has brought about a number of changes in terms of the different forms of entities
recognised for accounting purposes. It is very important that you pay attention
to these different types of entities and know their distinguishing characteristics.

The following lists the different types of entities established by the Act together
with a summary of some of their more important characteristics:

CLOSE CORPORATIONS (CCs)

Definition:
A Close Corporation is a business owned and managed by one person or a
small group of people, all of whom are called members. Members are
responsible for the day-to-day management of the affairs of the business.
There is no separation between ownership and control of a CC.

Incorporation:
A Close Corporation could only be registered prior to the implementation
date of the new Companies Act, being 1 May 2011.

Annual financial statements:

Financial statements must be prepared within six months of the financial
year-end. The annual financial statements must be signed by a minimum
of 51% of members.

Annual return:
The annual return must be submitted to the Companies and\ Intellectual
Property Commission (formerly CIPRO) within 30 business days after the
anniversary of the date of incorporation. If a CC fails to submit an annual

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 return it will be deregistered by the CIPC and all of its registered assets
shall vest in the control of the state in terms of the rule of bona vacantia.

Does the annual return have to include a copy of the annual financial statements?
Not mandatory.

Is an audit required?
Because members of a CC can be either individuals or trusts, the CC is now
considered to operate in the public interest and its annual financial
statements are required to be scrutinised in line with its public interest score
(PIS).

A CC would require an audit if:

o it holds assets for another party in excess of R5 million; or
o the public interest score is 350 or more; or
o the public interest score is 100 or more and the annual financial
statements are internally compiled.

Is a company secretary required?

Not mandatory.

Is an audit committee required?

Not mandatory.

Is an annual general meeting required?

Not mandatory.

Is a social & ethics committee required?

Not mandatory.

Membership:
Only natural persons or a trust inter vivos may be a member of a CC, with
a maximum of 10 members. Should a trust inter vivos be a member of a
CC, the number of beneficiaries of that trust would count toward the
maximum number of members. An example would be if the trust has six
beneficiaries, they would then count as six 6 members of the CC.

The nature of membership:

Each member holds an interest in the CC. Each member has a single interest
expressed as a percentage of 100%. Two or more people cannot be joint
holders of the same members’ interest.

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 An example would be that a husband and wife could not own the shares
collectively in their name as one member. A member will stand in a fiduciary
relationship with the CC and a member will be liable to the CC when, in
carrying on the business, (s)he fails to act with a reasonable degree of care
and skill as can be expected from a person of their knowledge and
experience.

The member is not personally liable for the debts of the CC unless (s)he
stands surety for any debts of the business and breaches their fiduciary
duties.

Association agreements:
If a CC has more than one member, the multiple members can at any time,
enter into a written association agreement, which will regulate the internal
relations between the members as well as the members and the CC. The
agreement must be signed by all members and kept at the registered office
so that any member of the CC can view it at any time. New members of the
CC are bound by any existing association agreement between the members.

How are members’ meetings treated?

Any member may call a member’s meeting by first giving notice of that
meeting and providing the purpose of the meeting. Seventy five percent of
members present at that meeting shall constitute a quorum and only
members who attend the meeting, may vote.

STATE-OWNED COMPANIES (SOC LTD.)

Definition:
A company that is owned by the South African government and listed in the
Public Finance Management Act, or owned by a municipality and is of a
similar kind to a government owned company.

Incorporation:
It may be incorporated by one or more persons or an organ of state.

Annual financial statements:

Financial statements must be prepared within six months of the financial
year-end and must comply with the PFMA.

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Annual return:
Annual return must be filed within 30 business days after the anniversary
of the date of incorporation.

Does the annual return have to include a copy of the annual financial statements?
Yes.

Is an audit required?
Yes.

Is a company secretary required?

Yes.

Is an audit committee required?

Yes.

Is an annual general meeting required?

Only if stated in MOI.

Is a social & ethics committee required?

Yes.

Pre-emptive rights to subscription of shares:

Not applicable.

Nominee shareholders:
A nominee shareholder is required to disclose the beneficial holder of the
securities in the company except where a conflict with other legislation
overrides the requirement.

Notice required for shareholder meetings:

15 business days unless overridden by specific legislation.

Minimum number of members required:

One.

Minimum number of directors required:

As required by specific legislation.

Offering of securities to the public:

Chapter 4 of the Act is applicable except where a conflict with other
legislation overrides this requirement.

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Takeover regulations:
Applicable.

PUBLIC COMPANIES (LTD.)

Definition:
This is a company that operates for profit. It is not owned by the
government and is allowed to offer its shares to the public. All listed
companies must be public companies but not all public companies are listed
on a stock exchange.

Incorporation:
It may be incorporated by one or more persons.

Annual financial statements:

Financial statements must be prepared within six months of the financial
year-end and in time to give notice of the AGM.

Annual return:
Annual return must be filed within 30 business days after the anniversary
of the date of incorporation.

Does the annual return have to include a copy of the annual financial statements?
Yes.

Is an audit required?
Yes.

Is a company secretary required?

Yes.

Is an audit committee required?

Yes.

Is an annual general meeting required?

Yes.

Is a social & ethics committee required?

Yes if:
o the company is listed; or
o its public interest score exceeded 500 in any two of the previous five
years.

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Pre-emptive rights to subscription of shares:
Not applicable.

Nominee shareholders:
A nominee shareholder is required to disclose the beneficial holder of the
securities in the company.

Notice required for shareholder meetings:

Fifteen business days.

Minimum number of members required:

One.

Minimum number of directors required:

Three.

Offering of securities to the public:

Chapter 4 of the Act is applicable.

Takeover regulations:
Applicable.

PRIVATE COMPANIES - (PTY) LTD.

Definition:
A private company trades for profit. It may not offer its shares to the public
and the transferability of its securities is restricted

Incorporation:
One or more persons may incorporate it.

Annual financial statements:

Financial statements must be prepared within six months of the financial
year.

Annual return:
Annual return must be filed within 30 business days after the anniversary
of the date of incorporation

Does the annual return have to include a copy of the annual financial statements?
Yes, if the company is required to be audited.

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Is an audit required?
Yes if:
o the company holds assets for another party in excess of R5 million; or
o the public interest score is 350 or more*; or
o the public interest score is 100 or more and the annual financial
statements are internally compiled; or
o it is required by the MOI or by a shareholders’ or director’s resolution
or in terms of an agreement. If an audit is not required, the company
must have its annual financial statements independently reviewed
except when its public interest score is less than 100 and all
shareholders are also directors. In such a case it is exempt from audit
and review.

Is a company secretary required?

Not mandatory.

Is an audit committee required?

Not mandatory.

Is an annual general meeting required?

Only if stated in the Memorandum of Incorporation (MOI).

Is a social & ethics committee required?

Yes if its public interest score exceeded 500 in any two of the previous five
years.

Pre-emptive rights to subscription of shares:

If a private company proposes to issue shares, then each shareholder of
that company has a right, before any other person who is not a shareholder,
to be offered a percentage of the shares to be issued equal to their current
voting power.

Nominee shareholders:
Information must be disclosed to the company on written request by the
company.

Notice required for shareholder meetings:

Ten business days.

Minimum number of members required:

One.

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Minimum number of directors required:
One.

Offering of securities to the public:

MOI restricts transferability of shares to the public

Takeover regulations:
Applicable to certain companies in this category.

PERSONAL LIABILITY COMPANY (INC.)

Definition:
This is a private company operating for profit. Its MOI must state that it is
a personal liability company.

Incorporation:
One or more persons may incorporate it.

Annual financial statements:

Financial statements must be prepared within six months of the financial
year-end.

Annual return:
Annual return must be filed within 30 business days after the anniversary
of the date of incorporation.

Does the annual return have to include a copy of the annual financial statements?
Yes, if the company is required to be audited.

Is an audit required?
Yes if:
o the company holds assets for another party in excess of R5 million; or
o the public interest score is 350 or more; or
o the public interest score is 100 or more and the annual financial
statements are internally compiled; or
o it is required by the MOI or by a shareholders or directors resolution
or in terms of an agreement. If an audit is not required, the company
must have its annual financial statements independently reviewed
except when its public interest score is less than 100 and all
shareholders are also directors. In such a case, it is exempt from audit
and review.

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Is a company secretary required?
Not mandatory.

Is an audit committee required?

Not mandatory.

Is an annual general meeting required?

Only if stated in MOI.

Is a social & ethics committee required?

Yes if its public interest score exceeded 500 in any two of the previous five
years.

Pre-emptive rights to subscription of shares:

If a personal liability company proposes to issue shares, then each
shareholder of that company has a right, before any other person who is
not a shareholder, to be offered a percentage of the shares to be issued
equal to their current voting power.

Nominee shareholders:
Information must be disclosed to the company on written request by the
company.

Notice required for shareholder meetings:

Ten business days.

Minimum number of members required:

One.

Minimum number of directors required.

One.

Offering of securities to the public:

MOI restricts transferability of shares to the public.

Takeover regulations:
Applicable to certain companies in this category.

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NON-PROFIT COMPANIES (NPC)

Definition:
A not for profit business (previously known as a Section 21(b) company). It
must have a public benefit as its object or an object relating to cultural,
social, communal or group interest. Income and property may not be
distributed to its members, directors, incorporators and officers.

Incorporation:
Three or more persons acting together, an organ of state or by a legal
entity, may incorporate it.

Annual financial statements:

Financial statements must be prepared within six months of the financial
year-end.

Annual return:
Annual return must be filed within 30 business days after the anniversary
of the date of incorporation.

Does the annual return have to include a copy of the annual financial statements?
Yes, if the company is required to be audited.

Is an audit required?
Yes if:
o the company holds assets for another party in excess of R5 million; or
o if it was incorporated by the state, an international entity, foreign state
entity or foreign company; or
o it was incorporated to perform a statutory, regulatory or public
function. If an audit is not required, the company must have its annual
financial statements independently reviewed.

Is a company secretary required?

Not mandatory.

Is an audit committee required?

Not mandatory.

Is an annual general meeting required?

Only if stated in MOI.

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Is a social & ethics committee required?
Yes if its public interest score exceeded 500 in any two of the previous five
years.

Pre-emptive rights to subscription of shares:

Not applicable.

Nominee shareholders:
Not applicable.

Notice required for shareholder meetings:

Fifteen business days.

Minimum number of members required:

Does not have members but three or more persons are required to
incorporate a NPC.

Minimum number of directors required.

Three.

Offering of securities to the public:

Not applicable.

Takeover regulations:
Not applicable.

THE PUBLIC INTEREST SCORE (PIS)

The public interest score (PIS) measures the degree of the public interest in that
company. The score is used in determining:
• The accounting framework required.
• Whether an audit or independent review is required.

Every company must calculate its public interest score for each financial year.
This is determined as the sum of:
• a number of points equal to the average number of employees during the
financial year; and
• one point for every R1million in third party liability at year end; and
• one point for every R1million in turnover; and
• one point for every individual who directly or indirectly has a beneficial
interest in any of the company’s securities.

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 Source: Adapted from Grant Thornton – The new companies act in a nutshell,
http://www.gt.co.za/files/gtsa_nca2011_nutshell.pdf

1.3.2 Development of the two professions of accountancy and auditing.

Paragraph 1.2.3.3 in the prescribed textbook explains this heading and the
professional bodies in South Africa.

1.4 The Aim of Accounting

The aim of accounting is to supply financial information in the form of reports

and statements. This shows us how a business has performed. The past
performance of a business allows management to make decisions about its
future.

To achieve this aim we need to keep an accurate record of everything that

happens in a business. We use an accounting system to record each transaction
in a source document and in records that are more permanent.

Activity 1.1

Study paragraph 1.3 on page 7 of your prescribed textbook to ensure that you
understand the relevant aspects of the aim of accounting.

1.5 Financial Results

In accounting, terms the financial results of an entity’s economic activities are

measured in terms of the financial position at a particular time and in terms of
the financial performance for a specific period.

Activity 1.2

You have to study Section1.4 pages 9 – 11

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 I = Income Statement of Comprehensive Income
E = Expenditure (Financial Performance)

A = Assets
Statement of Financial Position
E = Equity
(Financial Position)
L = Liabilities

Figure 1.1 Financial Results

The financial performance reflects whether the entity made a profit in a specific
period or not, and is reported in the Statement of Comprehensive Income. The
financial position reflects the assets in which the funds have been invested as
well as the amount and sources of funds made available. This is reported in the
Statement of Financial Position.

1.6 The Domains of Accounting

Activity 1.2

Study paragraph 1.5 on page 11 of your prescribed textbook in order to ensure

you are able to distinguish between types of accounting as well as who are in
need of it.

Accounting can be divided in mainly two components, namely;

• Financial accounting; and
• Management accounting.

For the purpose of this course, you are only going to study Financial Accounting.

1.7 Accounting – Why Is It Important?

Paragraph 1.6 of your prescribed textbook explains why studying of accounting

is important.

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 Summary

After studying this unit you should have an understanding of the context in which
accounting takes place, especially as far as what accounting is about.

Ensure that you understand these fundamental concepts. You will need it as the
foundation in order to continue.

Self-Assessment Questions

1. What are the guidelines for the measurement to ensure uniformity of

standards for accounting known as?
2. Define the term “accounting” in your own words.
3. Name the two professional bodies that accountants must belong to.
4. Briefly describe the differences between the financial position and financial
performance of an accounting entity. Also, refer to the statements used
to disclose the above concepts.
5. Briefly explain the domain of accounting you are studying.

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 Topic 2
The Conceptual Framework

Prescribed Reading

Use this topic to support your learning when studying Chapter 2 of the
prescribed textbook.

2.1 Introduction

After completing this topic, you should be able to:

• Explain the objectives of financial statements.
• Identify and discuss the different elements of financial statements.
• Identify the different criteria used to recognise of the different elements of
financial statements.
• Explain the different ways in which the elements of financial statements can
be measured.
• Describe the qualitative characteristics of financial statements.
• Explain the different assumptions that underpin the preparation of financial
statements.
• Identify and explain the different limiting factors that apply to the
accounting elements.
• Demonstrate and understanding of the relationships that exist between the
different elements.

In this chapter of your textbook and study guide, you will see how the theoretical
terms and basis of accounting is brought into perspective through a conceptual
framework.

2.2 Nature and Conceptual Framework

Without rules, guidelines and standards the uniformity of financial statements

would not be clear and there would be no order in accounting. Information might
not be reliable or understandable to users of financial information.

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Accounting has a theoretical basis that forms the foundation for accounting
practice, also known as generally accepted accounting practice (GAAP). The
"what" accounting does and the “how it’s done”, are determined by the theory.

According to Myburgh et al. (2021), the theory and practice of accounting are
contained in a set of postulates, principles, methods and procedures,
conventions, standards, and policy factors – collectively known as accounting
concepts.

Pages 17 and 18 [2.1] explain these concepts.

2.3 Objectives of Financial Statements

Recording transactions is not enough - you have to analyse and interpret the
data. There is a need for information. The main aim of accounting is to meet this
need. To run a business successfully, the owner needs easy access to all
information relating to the business.

We can find out about the financial history of any business by studying the
financial reports that the firm makes available. These reports assist the owner in
planning activities and managing the business more efficiently. The business
owner records transactions (bookkeeping) to be able to calculate the financial
position and the financial performance of the business at all times.

2.4 Users of Accounting Information

Activity 2.1

Study paragraph 2.3 on pages 19 of you prescribed textbook.

There are two main types of users of financial information, namely external and
internal users. External users are those users that are from outside the entity
and who are not directly involved in the management and operations of the
entity. They are in need of formal financial information such as financial
statements. The following are examples of such internal and external users:

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 Figure 2.1 Users of Financial Information

Management makes use of internal information for the day-to-day management

and operations of the entity. The following are examples of internal users:
• Management
• Employees.

Ensure you are able to explain who the different types of users are, as well as
why they are interested in financial information.

2.5 Elements of Financial Statements

Activity 2.2

Study paragraph 2.6 on page 20.

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There is a fixed relationship between the equity and the assets of any business.
This relationship is given by the accounting equation. The accounting equation is
generally expressed as follows:

Assets = Equity + Liabilities

This equation can also be expressed as follows:

Equity = Assets – Liabilities.

Liabilities = Assets – Equity.

Where:
E = The funds that are provided by the owners or shareholders of the business.
A = The assets which the business owns (buildings, machinery, equipment,
vehicles, furniture). The assets are either partly or fully paid for by the
money provided from equity.
L = Liabilities. Liabilities represent the money that the business owes to external
parties (excluding owners/shareholders) who lent money to the business.

Throughout this section of the work, we will show you how a given transaction
affects the accounting equation by adding these pictures to the text:

E = A – L

Equity Assets Liabilities

Whenever a transaction takes place, it will affect all the steps in the accounting
process and finally the Statement of Financial Position of the firm. Throughout
section of the work, the effect of transactions on the Statement of Financial
Position will be indicated with the picture:

Where:

+ Means asset increased (Also known as a debit entry.)

– Means asset decreased (Also known as a credit entry)
0 Means no effect

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 + Means equity increased. (Also known as a credit entry)
– Means asset decreased (Also known as a debit entry)
0 Means no effect

+ Means liability increased (Also known as a credit entry)

– Means asset decreased (Also known as a debit entry)
0 Means no effect

Other Concepts and Definitions

Income

The amount of money received over a period of time either as payment for work,
goods, or services, or as profit on capital

A = E + L

+ + 0

Expenses

An amount of money spent in order to buy or do something in the day – to – day

running of the business

A = E + L

– – 0

Profit

All the income received minus all the expenses paid for in a specific period of
time

A = E + L

+ + 0

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2.6 The Recognition of Elements

It is extremely important to clearly understand when a transaction that affects

any of the different elements of financial statements is considered a valid
transaction that needs to be recorded in the accounting records of a business.
“Recognition” therefore means how to decide when a business transaction must
be included in the accounting records of a business and when not.

Activity 2.3

Study the contents of paragraph 2.7, pages 28 – 32 of the prescribed textbook

very carefully.

2.7 Qualitative Characteristics of Financial Statements

It is therefore very important that you study these characteristics carefully so

that you can assess financial statements in terms of these characteristics to
determine whether they comply. You also need to ensure that you can apply
these characteristics in the event that you have to prepare financial statements.

Activity 2.4

Study the contents Section 2.9, Pages 34-36 of the prescribed textbook very
carefully.

2.8 Assumptions Underpinning the Preparation of Financial

Statements

Two important assumptions underpin the preparation of financial statements.

They are the:
• Going concern assumption.
• Accrual basis assumption

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 Activity 2.5

Study the contents of Section 2.4 and 2.5, page 19 of the prescribed textbook
very carefully.

2.9 The Relationships Between Financial Statements

This section contains very important information and you must study the
contents of this section very carefully. The learning covered in this section
explains firstly the four types of financial statements that business organisations
prepare and use.

It then continues to explain the importance of the “financial period” of a business

and how these statements are prepared with respect to particular financial
periods. Make sure that you understand what is meant by “financial period”
within the context of preparation of financial statements and when within a
particular financial period a particular financial statement is prepared.

This section also discusses the difference between “financial position” and
“financial performance” using relevant examples.

It is expected of you to be able to distinguish between the financial statements

that reflect the financial position and the financial performance of an entity.

Activity 2.6

Study the contents of Section 2.11, pages 38-47 of the prescribed textbook very
carefully.

Work through examples 2.10 – 2.16 to ensure that you have a thorough
understanding of how financial position and financial performance are presented
and analysed.

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 Summary

After studying the section of work found on pages 17 to 47 of your prescribed

textbook, you must ensure that you have mastered the framework in which
accounting takes place. The knowledge obtained from this chapter of the
textbook and from this topic is fundamental to your understanding of the
contents of next chapters.

Self-Assessment Questions

1. Explain briefly, what is meant by a:

o Standard.
o Procedure.
o Policy.
o Method.
2. Name and explain any four (4) users of financial information.
3. What are the aims or objectives of doing business?

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 Topic 3
The Accounting Equation

Prescribed Reading

Use this topic to support your learning when studying Chapter 3 of the
prescribed textbook.

3.1 Introduction

After completing this topic, you should be able to:

• Discuss the concepts of assets, liabilities, equity and financial results.
• Explain and demonstrate the duality concept.
• Apply the accounting equation to a variety of accounting transactions.
• Explain the role and purpose of an “account” within an accounting system.
• Distinguish the different categories of accounts used within an accounting
system.
• Demonstrate and understanding of the generally accepted format of an
account and apply such formats in the accounting process.
• Differentiate between a debit and credit procedure and apply both these
procedures to a variety of accounting transactions.

In this topic, the principles of accounting are discussed. You will therefore be
able to certain extend to recognise financial transactions, and to measure and
record transactions.

It is very important that you realise that you must develop a high degree of
competence in terms of the contents of this chapter. Competence means you
must have thoroughly mastered the learning contained in this chapter as well as
developed the skill to practically apply the knowledge in real or simulated
situations with accuracy.

You also need to display the correct attitude in terms of processing the
accounting data according to set accounting conventions and formats.

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3.2 Theoretical Concepts

In order for you to understand what you read, you need to know the meaning of
the following concepts:

Asset
An asset is a resource from which future economic benefits are expected to flow
to the entity and which is controlled by the entity because of past events.

Liability
A liability is a present obligation of the entity arising from a past event, the
settlement of which is expected to result in an outflow of resources from the
entity.

Equity
Equity is the residual interest in the assets of an entity after deducting all the
liabilities.

Financial statements consist of:

A Statement of Financial Position with the following elements:
• Assets;
• Equity; and
• Liabilities.
A Statement of Comprehensive Income with the following elements:
• Income; and
• Expenses.

3.2.1 Effects of Transactions on the Accounting Equation

Cash Transactions

The accounting process consists of sequential steps.

A transaction is the activity between two parties during which the one party
renders a service or sells goods for which the other party then pays.

Cash transactions take place when the activity e.g. buying bread and the money
paid for the bread are exchanged at the same time between two parties.

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Cash Receipts

A cash receipt is any transaction during which a business receives cash in the
form of bank notes and coins, a cheque, debit or credit card payments or deposits
appearing on our Bank Statement either as a direct cash deposit or a deposit
made by Electronic Funds Transfer (EFT).

Capital A = E + L

The owner invests money in the business. This

+ + 0
money does not belong to the business. It is a loan
from the owner to the business. Always remember
to look at transactions from the business’ point of view. This is why the
accountant sees a capital contribution as a cash receipt.

Current Income

As part of its normal business operations a business renders a product or service

to a customer and the customer pays for it. A transaction during which we render
a product or service will be allocated to Current Income.

Sundry Income A = E + L

Income that is generated from sources other than

+ + 0
normal business operations. This would include
any income that is not generated by the sale of
products and services.

Examples are rent income, commission and interest on current account.

Cash Sales A = E + L

The transfer of something such as trading stock or

± + 0
any other assets, to the ownership or use of
somebody else, in exchange for an agreed amount
of money.

(Asset ± and E + with the profit)

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Cash Payments

A cash payment is a transaction during which YOU as the accountant will pay a
person or business, by means of a business cheque or electronic fund transfer
(EFT) or a payment made from Petty cash

Drawings A = E + L

The owner wants money to use for personal use.

– – 0
The owner takes something that belongs to the
business. It can be cash or trading stock. This type
of transaction is referred to as “DRAWINGS.”

(Remember that we view transactions from the point of view of the business·
NOT from that of the owner.)

Expenses A = E + L

An amount of money spent in order to buy or pay

– – 0
for something in the day-to-day running of the
business. DO NOT for example confuse paying rent
for a building with the purchase of a building. Paying rent is an expense while
purchasing a building is the purchase of an asset and is known as “expenditure.
(Refer Section 2.4.5, page 25 of prescribed textbook for distinction between
expense and expenditure)

Table 3.1 Examples of Expenses

Type of Expense Explanation

Rent expense Money the business pays the person from whom
the premises are rented.
Advertising Money spent on telling customers about the
business and its products.
Insurance Fixed amounts paid to insurance companies to
protect the business against risks.
Salaries Money paid to monthly paid workers.
Wages Money paid to daily or weekly paid workers.
Telephone Rent of instruments and cost of calls made.
Rates and taxes Money paid to the municipality for services
received.
Stationery Money paid for items such as pens, invoice books
and paper.
Packing material Money paid for material in which items sold by the
business are packed.

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 Donation Cash or the value of any item given by the
business to charity.
Water and electricity Money paid to the municipality for the use of water
and electricity.
Repairs/maintenance Money paid for the repair of items of the business.

Petty Cash A = E + L

At times, we have to pay small amounts for items

– – 0
like milk, cleaning materials, postage, daily wages
etc. It does not make sense to write out a cheque
for a very small amount. For this reason, a small amount of cash is kept as petty
cash and small payments are then made.

A = E + L

To start a petty cash or to replenish existing petty

– 0 0
cash, it is necessary to issue a cheque. This
transaction is therefore a cash payment into petty
cash!

Cash float A = E + L

The cash in the point of sale drawer from which

± 0 0
customers will be given change is referred to as
the”cash float.” Again, it is necessary to cash a
cheque for the cash float and this transaction becomes a cash payment.

3.2.2 Credit Transactions

A credit transaction is a transaction during which YOU as the accountant, will pay
a person or business for services or goods received, at a later date OR receive
payment from a person or business for goods or services rendered, at a later
date.

Credit sales
A = E + L

± + 0

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Payments received from debtors (Trade receivables)
A = E + L

± 0 0

Credit purchases of assets

A = E + L

+ 0 +

Payments made to creditors

A = E + L

– 0 –

3.3 The Duality Concept (Double Entry)

Accounting is based on the duality concept that determines that the accounting
equation is always applicable.

Activity 3.1

Study paragraph 3.3 on page 53 – 55 in more detail.

Assets = Equity + Liabilities

What was done with the funds? = Who provided the funds?
(Which amounts were employed • (Which amounts were
for the acquisition of assets) Contributed by the owners;
and
• Borrowed from creditors)
Figure 3.1 Duality Concept
Source: Myburgh, et al. 2011:53

This concept means that the financial position has two aspects:
• Employment of funds for the acquisitioning of assets, which is equal to;
• The sources from which the funds are made available(equity and
liabilities/debt)

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3.4 The Account

Assets, liabilities and owner’s equity can increase or decrease, depending on the
transaction. The main aim of accounting is to provide managers with information
to make decisions. To achieve this we need a systematic method of recording all
the different business transactions in accounts.

An account usually consists of one or more pages in a book called the General
Ledger.

The accounts in the General Ledger are in the form of a capital “T” and we call
them T-accounts. We write the name of the account at the top in the middle. We
call the left-hand side of the account the debit side and the right-hand side the
credit side

(Refer to Section 3.6, page 57 of the prescribed textbook.)

3.5 Classification of Accounts

Activity 3.2

Read Paragraph 3.5 on page 56 of the prescribed textbook.

According to Myburgh et al., (2021:56) an accounting system will contain at least

the following groups of accounts:
• Assets
• Liabilities
• Equity
o Initial investment/capital;
o Income accounts; and
o Expense accounts.

The following sentence might help you remember in what order the accounts are
classified in the General Ledger:

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You can also use the following to help you with the classification of accounts in
the general ledger. One part contains all the balance sheet accounts (Assets,
Liabilities and Capital) and the other section contains all the nominal accounts
(Income and Expenses)

Because Cows Dance And Ladies Nights Is Expensive

Balance Sheet Section Nominal Account Section

Capital Income (all)

Drawings Expenses
Assets
Liabilities

3.6 Format of an Account as Well as “Debits” and “Credits”

Activity 3.3

Study paragraph 3.6, 3.7 and 3.8, pages 57 to 62 of your prescribed textbook.

In its simplest format, an account consists of four sections

• The title of the account (which includes an account number);
• The left side of the account;
• The right side of the account; and
• The balance of the account.

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The conventional account is presented in the form of a T: The name is written
above the horizontal bar and the transactions to either the left or right of the
vertical line, depending on whether they involve increases or decreases of the
particular account.

The left hand side of an account is called the debit side and the right hand side
the credit side.

The following is the standard format of a general ledger account (T-account):

Table 3.2 T-Account

Dr Name of Account Cr
Date Details Folio Debit Date Details Folio Credit
amount amount
(Source: Myburgh et al. 2021:57)

An entry on the debit side of an account is known as a debit entry and an entry
on the credit side as a credit entry.

The process of debiting an account entails making an entry on the debit side and
the process of crediting an account, entails an entry being made on the credit
side. In English, the abbreviation Dr is used for debit and Cr for credit.

An account has the following functions:

• It keeps record of each transaction in the relevant account;
• It distinguishes between increases and decreases in each account;
• It stores the transaction information for future reference; and
• It shows the balance of each account.

Table 3.3 The Golden Table

Assets Liabilities
Asset accounts usually have a debit Liability accounts usually have credit
balance unless for example the bank balances.
account is in overdraft then this • DR entry decreases the accounts (–)
account will have a credit balance and • CR entry increases the accounts (+)
is then considered a Liability.
• DR entry increases the account (+)
• CR entry decreases the account (–)
Profit or Loss Equity
All INCOME accounts usually have Equity accounts such as CAPITAL
credit balances. accounts usually have credit balances.
• DR entry decreases the accounts (–) • DR entry decreases the accounts (–)
• CR entry increases the accounts (+) • CR entry increases the accounts (+)

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 INCOME accounts increase the Equity
The DRAWINGS account usually have a
All EXPENSE accounts usually have debit balance
debit totals. • DR entry increases the account (+)
DR entry increases the account (+) • CR entry decreases the account (−)
CR entry decreases the account (–)
EXPENSE accounts decrease the Equity
(Source: Myburgh et al. 2021:62)

3.7 The Effect of Different Transactions on the Accounting Equation

Each of the following transactions demonstrates how different parts of the

accounting equation are affected.

Johnny Walker starts his own auto body repair works. It is a sole ownership and
it is not registered to pay VAT. Johnny worked as a panel beater for Joe’s auto
body repairs for eight years before he resigned. During the eight years working
for Joe, Johnny saved half of his salary to build up enough capital to start his
own business. Johnny has R250 000 in a savings account. Although his business
is a sole ownership, Johnny wishes to keep his personal affairs and those of his
business separate. He therefore wants to keep a separate set of accounts for the
business.

Transaction 1:
Johnny opens a bank account in the name of his business, Johnny’s Auto, and
deposits R200 000 into this account as start-up capital.

Assets = Equity + Liabilities

Capital Income Expences
+R200 000 = +R200 000 +

This transaction affects both the bank account (an asset) and the owner’s capital
account (which indicates the money that belongs to the owners of the business).
Both accounts INCREASE (+), because money comes into the business.

Transaction 2:
Johnny buys a welding machine and some other tools from Tool Suppliers CC on
credit for R25 000

Assets = Equity + Liabilities

Capital Income Expences
+R25 000 = + +R25 000

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This transaction does NOT affect the bank account because no money was paid
to Tool Supplies when the equipment was bought. Johnny owes Tool Supplies the
money. Tool Supplies has become a CREDITOR of Johnny’s Auto and money owed
to creditors represent a Liability.

Johnny will use the equipment to repair vehicles and therefore the equipment is
classified as an asset of the business. The transaction affects both the asset and
liability categories of the equation. Both categories INCREASE (+), because the
asset comes into the business and the money owed by the business increases.

Transaction 3:
Johnny buys stationery for R800 from Office Supplies (Pty) Ltd for cash.

Assets = Equity + Liabilities

Capital Income Expences
–R800 = –R800 +

This transaction affects the bank account because money is paid to Stationery
Supplies when the stationery is bought. Stationery will be used up during the
activities of the business and it represents and expense.

The transaction affects both the asset and expense categories of the equation.
Both categories DECREASE (–), because money flows out of the business when
expenses are incurred.

Transaction 4:
Johnny buys a laptop for R3 500 for cash.

Assets = Equity + Liabilities

Capital Income Expences
–R3 500
+R3 500

This transaction affects the bank account because money is paid out to buy the
laptop. Johnny will use the laptop to manage the activities of the business. The
laptop is therefore an asset of the business.

The transaction affects TWO assets. The bank account (asset) DECREASES (–),
because money flows out of the business and the business assets account
INCREASES (+) because money was changed for an asset.

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 Note

Only one side of the equation is affected by this transaction.

Transaction 5:
Johnny repairs a customer’s car for R8 000. The customer pays cash for the
repairs

Assets = Equity + Liabilities

Capital Income Expences
+R8 000 +R8 000

This transaction affects the bank account because money is paid by the
customer. Because the purpose of Johnny’s business is to repair vehicles, the
payment made by the customer is classified as income for the business. The bank
account (asset) INCREASES (+), because money flows into the business and the
Income category INCREASES (+) it represents money coming into the business.

Transaction 6:
Johnny takes R1 000 from the business’s bank account to buy his wife a gift for
her birthday.

Assets = Equity + Liabilities

Capital Income Expences
–R1 000 –R1 000

This transaction affects the bank account because Johnny takes money out of it
for his personal use. The bank account (asset) DECREASES (+), because money
flows out of the business and Johnny’s capital account DECREASES (–) because
he takes some of the money, which he put into the business at the start, out of
the business for personal use. When an owner of a sole ownership business takes
money from the business for personal use, it is known as “DRAWINGS”.

Summary

After studying this chapter you should have some understanding of the
framework in which accounting takes place, especially as far as the following
aspects are concerned:
• The accounting equation;

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• The T-account principle; and
• The debiting and crediting concepts.

Self-Assessment Questions

1. Complete the following sentences by filling in the missing word(s)

i. Sums of money received by a business and deposited in the current
bank account of the business are called ___.
ii. Cheques drawn on the current bank account of a business are called
___.
iii. The money supplied by the owner is called______
iv. The place in the records of a business where the monetary values of
transactions are collected and recorded is called a ___.
v. A T-account in the ledger has two sides. The left side is called the ___
and the right side is called the ___.
vi. Asset accounts increase with a ___.
vii. Accounts that increase equity increase with a ___.
viii. Liability accounts decrease with a ___.
ix. We debit expense accounts because expenses ___ owner’s equity.
2. Complete the table by calculating the missing amounts (a – f)

Assets Liabilities Owners’ Equity

= =
R R R
7 200 = 2 800 = (a)
7 200 = (b) = 4 400
(c) = 2 800 = 4 400
20 000 = 5 600 = (d)
18 000 = (e) = 6 600
(f) = 4 280 = 8 240

3. Classify each of the following as elements of the accounting equation using

the following abbreviations:
A = Assets; L = Liabilities; C = Capital (Owner’s equity)
i. Cash.
ii. Trade payables.
iii. Owner’s investment.
iv. Trade receivables.
v. Inventory.
vi. Land.
vii. Equipment.

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4. Paul Shapiro opened a business on 1 January 20.... The business is known
as Piro Traders. The following transactions took place during January 20...:
a) Piro opened a bank account and deposited R27 000 cash.
b) He then borrowed an additional R13 000 from the bank on behalf of
the business and deposited the amount into the bank account.
c) Piro rented an office in the city centre. The rent amounts to R750 per
month, payable in advance at the beginning of each month and the
amount for January was paid by cheque. A deposit of R600 on the
rental contract was paid in cash.
d) Piro purchased office furniture for R2 900 from Furniture Quip on credit
and took possession thereof.
e) He purchased stationery for R120 and paid by cheque.
f) Piro purchased a delivery bicycle costing R1 700 for cash.
g) At the end of the month no sales were recorded, but the following
payments were made by cheque:
− Interest on the loan at 12% per annum payable at the end of
each month.
− R2 850 to Furniture Quip, in full settlement of their account.
− Water and electricity, R190.
Required:
i. Indicate in tabular form how the above transactions influence the
accounting equation.
ii. Test whether your answer applies to the double entry principle.
5. You are also required to do the revision exercises from your prescribed
textbook on pages 62 – 64.

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 Topic 4
The Accounting Cycle: Transactions, Source
Documents and Journals

Prescribed Reading

Use this topic to support your learning when studying Chapter 4 of the prescribed
textbook.

4.1 Introduction

After completing this topic, you should be able to:

• Identify appropriate source documents to use to process accounting
transactions.
• Distinguish the different source documents used for different transactions.
• Apply and ensure that source documents comply with Value-added Tax
(VAT) requirements where applicable.
• Demonstrate an understanding of relevant journals and subsidiary journals
used in the accounting process.
• Post transactions from relevant source documents to the appropriate
journals and subsidiary journals accurately and correctly and balance such
journals.
• Explain the role and purpose of Value-added tax (VAT).
• Perform correct and accurate VAT calculations
• Demonstrate an understanding of the procedures that apply to collection
and payment of VAT.
• Distinguish different types of discounts that apply in the business
environment.
• Correctly and accurately, process accounting transactions affected by
different types of discounts.
• Correctly and accurately, process VAT collections and payments affected by
discounts.

This chapter introduces you to the first steps in the accounting process.

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It starts with the recognition, selection and verification of source documents that
are required for purposes of correctly and accurately recording relevant business
transactions in the accounting records of a business entity.

It is extremely important that you ensure that you understand what “source
documents” mean and that you can identify the different source documents that
can be used to record relevant transactions. Visit a business entity that you are
familiar with and ask them to show you actual examples of source documents
used to record accounting transactions. Being familiar with and able to recognise
such resource documents will improve your understanding of these documents
and their importance to the accounting process significantly.

This chapter also introduces you to three other very important elements of the
accounting process namely:
• Value-added tax (VAT).
• The journals (first books of entry) to which information are posted from the
source documents.
• The different types of discounts used in business and how they affect
transactions.

It is extremely important that you not only have a very thorough understanding
of each of these elements but that you are able to correctly and accurately:
• Calculate VAT payable and collectable.
• Post transactions from source documents to the correct journals.
• Process transactions affected by discounts or VAT and by both.

It is very important that you realise that you must develop a high degree of
competence in terms of the contents of this chapter. Competence means you
must have thoroughly mastered the learning contained in this chapter as well as
developed the skill to practically apply the knowledge in real or simulated
situations with accuracy.

You also need to show the correct way in which to process the accounting data
according to set accounting conventions and formats.

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 Figure 4.1 The Accounting Cycle
(Source: Myburgh, et al. 2021: 68)

4.2 Transaction and Other Accounting Events

According to Myburgh et al. (2021:69), transactions are those accounting events

where a third party is involved. This means that the business is
buying/selling/exchanging a product or a service with another entity.

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This “other entity” can be a customer, another business entity, or a public entity
(municipality, government department).

The following are examples of the most common/general transactions taking

place in most entities:

Table 4.1 Types of Transactions

1 Credit purchases
2 Cash purchases
3 Credit sales
4 Cash sales
5 Amounts received:
5.1 From debtors (trade receivables)
5.2 For cash sales
5.3 Sale of assets
5.4 Other income
6 Amounts paid:
6.1 Cheque payments
6.2 Cash
6.3 Electronic funds transfers (EFT)
7 Bank deposits
8 Sales returns
9 Purchases returns
10 Interest charged on trade receivables
11 Interest paid on creditors
12 Other sundry transactions
(Source: Myburgh, et al. 2021:69)

4.3 Capturing Transactions on Source Documents

Source Documents

A source document is the document on which transaction data is recorded when

transac-tions take place. A source document is therefore the written proof
showing that a transaction did actually take place. Therefore, there must be a
source document for every transaction.

Without source documents the owner of a business will not be able to remember,
at the end of the day, which transactions took place that day. He will also not be
able to remember how much income was earned or what payments were made.
It is therefore necessary to use source documents and to use them correctly to
record transactions in a structured manner.

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A source document must contain the following data in order to fully record a
transaction:
• The serial number of the source document;
• The name of the source document;
• The amount of the transaction;
• The date of the transaction, and
• The identity of the parties involved in the transaction.

The nature of the transaction must be identifiable to record the correct amount
in the correct account.

The source document should be in duplicate so that there is a copy for each of
the parties involved in the transaction. The business issuing the document keeps
the duplicate, to record transactions in the accounting records of the business
from the source documents. It is therefore, important that the information on
the source documents is correct and complete. An error on the source document
could result in incorrect recording in the accounting records, which could lead to
a misrepresentation of the business’ results.

There must be a separate source document for each type of transaction. Use
similar source documents for similar transactions. Number source documents
numerically to facilitate cross-referencing and minimise irregularities.

Note

Study pages 70 – 82 paragraph 4.3 in the prescribed textbook.

Figure 4.2 Types of Source Documents

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Examples of Source Documents:

Receipt for Payment made Cash Slip/Till Slip

Cheque with a cheque counterfoil

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 Glossary

Petty cash voucher Is an internal source document used when payments of

small amount are made.
Credit note Is a document given to the person when he/she returns
goods bought for whatever reason.
Debit note Is given when charging interest on an account.

4.4 Recording in Subsidiary Journals

Myburgh et al. Paragraph 4.4 (2021:82) indicates that the following basic steps
are applied in a normal transaction:
• The transaction data is recorded on a source document;
• The transaction data is analysed in terms of the double-entry principle to
determine the impact on the relevant accounts;
• The transaction data is recorded in a journal (book of first entry). Also
known as journalising; and
• The information in the journal entry is transferred to the appropriate
accounts. Also known as posting from journals to ledger accounts.

Various Journals

The various journals wherein the transactions are summarised are shown in
Table 4.2.

Table 4.2 Various Journals

1 Credit purchases Original invoice of Purchases / Creditors

supplier (Creditor) / journal
Duplicate order
2 Cash purchases Cheque counterfoil or Cash payments journal /
petty cash voucher Cash book
3 Credit sales Original invoice to Sales / Debtors journal
purchaser (Debtor)
4 Cash sales Cash invoice and cash Cash receipts journal /
register Cash book
5 Amounts
received:
5.1 From debtors Receipts (Duplicates) Cash receipts journal /
Cash book
5.2 For cash sales Cash sales invoices or Cash receipts journal /
cash register slips Cash book
(Duplicates)

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 5.3 Sales of assets Receipts or sales Cash receipts journal /
Invoice (Duplicates) Cash book
5.4 Other income Interest received – Cash receipts journal /
Bank statements Cash book
6 Amounts paid:
6.1 Cheque Cheque counterfoils Cash payments journal /
payments Cash book
6.2 Small amounts of Petty cash vouchers Petty cash journal
Cash paid
7 Bank deposits Deposit slips Cash receipts journal /
Cash book
8 Sales returns Credit notes Sales returns journal /
(Duplicates) Debtors allowances journal
9 Purchases Credit notes of Purchases returns /
returns supplier Creditors allowances
journal
10 Interest charged Debit note (or invoice) General journal / Sales /
on debtors Debtors journal
11 Interest charged Debit note (or invoice General journal /
by creditors of supplier) Purchases / Creditors
journal
12 Other sundry Journal with attached General journal
transactions documents of proof

The General Journal is a book of first entry where we record a variety of

transactions that do not fit in any of the other subsidiary journals.

A journal entry (an entry in the General Journal) shows which account to debit
and which to credit.

The journal narration is a short explanation of the entry that we write after each
transaction. We need this journal narration because of the variety of transactions
that we record in the General journal and for control and audit purposes.

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 Figure 4.3 The Transaction Processing Cycle

Note

Study paragraph 4.4 – 4.5 pages 82 – 100 in your prescribed textbook in this
regard.

It is very important that you familiarise yourself with the layout and format of
the different types of journals. In this regard, refer to examples of the layouts
and formats on pages 84, 87, 89, 91, 92, 93, 94, 95 and 98 of the prescribed
textbook.

Also, work through the various examples given.

Calculating the Sales Price (SP) and Cost Price (CP) of a product.

The following formulas are used to calculate the cost price and the selling price
of a product if the mark up percentage of 50%.

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Calculating the Cost Price (CP) if the selling price = R200

Calculating Selling Price (SP) if the cost price = R133.33

4.5 Value-Added Tax (VAT)

Whether registering your business as a Close Corporation, sole proprietorship or

private company, there are various tax requirements you have to meet and one
of these could be value-added tax (VAT). If your annual turnover is likely to be
in excess of R1 million per year, by law you must register for value-added tax.
Small retailers with a turnover of more than R300 000 per annum must also
register.

Background to Tax Invoices

Introduction

Value-added tax (VAT) in South Africa is an invoice-type of tax on the value

added to goods and services consumed in South Africa and is levied at the
standard rate of 15% (inclusive basis), but certain goods and services are subject
to a zero-rate or are exempted from VAT. VAT is also levied on the importation
of goods as well as on the supply of imported services into South Africa by any
person.

The tax is calculated by allowing the vendor to deduct the VAT incurred on most
business expenses (input tax) from the tax collected (output tax). The balance
is paid to SARS or refunded to the registered vendor.

Input tax may, however, only be claimed where proper tax invoices or bills of
entry are held by the vendor making the claim. See Interpretation Note: No 49.

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Tax invoices are, therefore, how the whole VAT system operates, as it is used to
create a document trial for audit purposes.

The Difference between an Invoice and a Tax Invoice

An invoice is a document notifying the purchaser of an obligation to make

payment in respect of a transaction (not necessarily a taxable supply for tax
purposes). The issuing of an invoice for a transaction, if it is a taxable supply,
will normally mean that there would be an obligation to declare output tax.

Conversely, the fact that you may have an invoice from the supplier does not
mean that you will be entitled to claim input tax thereon.

On the other hand, a tax invoice is a document, which is specifically provided for
in the Value-Added Tax Act, 1991 (“the VAT Act”) to enable the vendor to claim
input tax. It will therefore always relate to a taxable supply.

The VAT Act prescribes that a tax invoice must contain certain details about the
taxable supply as well as the parties to the transaction.

In practice, most vendors combine the function of the two documents to avoid
administrative duplications. However, vendors who prefer this method should
ensure that their invoices comply with the requirements of a tax invoice,
otherwise their customers will not be allowed to claim the VAT charged as input
tax.

Requirements for Valid Tax Invoices

The following important points should be noted regarding tax invoices:

• A tax invoice must be issued to the recipient within 21 days of the date of
that supply, whether requested to do so or not.
• Where the consideration in money for a supply is R50 or less, a tax invoice
is not required. However, a document such as a till slip or sales docket will
still be required to verify the input tax claimed.
• Where the consideration for a taxable supply exceeds R50 but does not
exceed R3 000, an abridged tax invoice may be issued.
• A full tax invoice must be issued on transactions where the consideration
for the supply exceeds R3 000 whether the recipient has requested this or
not.
• A tax invoice must be in South African currency, except for a zero-rated
supply (e.g. goods exported). A full tax invoice must be issued for a zero-
rated supply, even if the consideration is less than R3 000.

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• A tax invoice is not issued by a debtor (vendor) under an instalment credit
agreement if the goods are repossessed. The person exercising the right of
repossession i.e. the bank or other financier will do this.
• A document will not constitute a valid tax invoice for a standard rated supply
if it does not state the actual amount of VAT charged or contain a statement
that VAT at the standard rate of 15% is included.
• In order for a tax invoice to be valid in terms of the VAT Act, it must have
certain details reflected on the document as set out in section 20(4) and (5)
in the table on page 46.

Table 4.3 Requirements of Details on a Tax Invoice

Full Tax Invoice Abridged Tax Invoice

(Consideration of R3 000 or more) (Consideration less than R3 000)
Section 20(4) of the VAT Act Section 20(5) of the VAT Act
The words “TAX INVOICE” in a The words “TAX INVOICE” in a
prominent place. prominent place.
Name, address and VAT registration Name, address and VAT registration
number of the supplier. number of the supplier.
Name, address and where the Serial number and date of issue.
recipient is a vendor, the recipient’s Accurate description of goods and/or
VAT registration number. Services.
Serial number and date of issue. Price & VAT (according to any of the
Accurate description of goods and/or three approved methods discussed
services – indicating where applicable below).
that the goods are second-hand
goods.
Quantity or volume of goods or
services supplied.
Price & VAT (according to any of the
three approved methods discussed
below).

The consideration and the VAT charged must be reflected on the tax invoice in
one of the following approved formats:

Method 1: All individual amounts reflected

Price (excl. VAT) R500
VAT @ 15% R75
Total including VAT R575

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Method 2: Total consideration and the rate of VAT charged
The total consideration R575
VAT included @ 15%

Method 3: Total consideration and the VAT charged

The total consideration R570
VAT included R75

Source: http://www.sars.gov.za/home.asp?pid=4721, accessed 15 June 2021.

Example of a Tax Invoice

To make sure that you understand what a correct VAT Invoice looks like, access
the following website by copying the following into your web browser.

http://www.sars.gov.za/home.asp?pid=4721 and then click on the line

“Examples of valid Tax Invoices”.

Summary

After studying this chapter, you should have some understanding of the first
steps in the accounting cycle as well as the need for different type of source
documents.

Self-Assessment Questions

1. Which of the following is not a necessity on the source document for cash
receipts?
a) The date.
b) Amount of the transaction.
c) The name of the supplier.
2. Complete the following table:
Source document Journal involved
Cash purchases
Credit sales
Cash sales
Other sundry
transactions

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 Small amounts of
Cash paid
Sales of assets
Other income
Interest charged on
debtors

3. Indicate the relevant source document for the following transactions:

a) Cash purchases of assets.
b) Payment of water and electricity.
c) Sending back of goods by debtor.
d) Cash sales for the day.
e) Payment to creditor.
f) Cash deposits into bank account.

4. Record the transactions for May 2021 in these subsidiary journals:

a) Cash receipts journal, with analysis columns for Analysis of receipts,
Bank, Sales, Cost of sales, Debtors control, Discount allowed and
Sundry accounts.
b) Cash payments journal, with analysis columns for Bank, Trading
inventory, Wages, Creditors control, Discount received and Sundry
accounts.
c) Debtors’ journal.
d) Creditors’ journal, with analysis columns for Creditors control, Trading
inventory, Equipment Stationery and Sundry accounts.
e) Debtors allowances journal.
f) Creditors allowances journal, with analysis columns for Creditors
control, Trading inventory Equipment, Stationery and Sundry
accounts.
g) General journal, with analysis columns for Debtors control and
Creditors control.

Note:
Record document numbers.
Transactions: May 2021
1 Paid rent by cheque 124 to Modern Estates, R3 200.
Received cheque from A. Dkoma to settle debt less 5% discount
(Receipt 27).
Goods sold for cash, R6 300 (cost price R4 200).
4 Issued invoice 33 to A. Dkoma for merchandise supplied on credit,
R252 (cost price R168).

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 Received invoice (numbered 22) from BA Wholesalers for
merchandise supplied on credit, R1 240.
5 Drew cheques in favour of:
Invoices received: Cottesloe Suppliers for merchandise, R840.
QP Enterprises for equipment, R300.
BA Wholesalers for packing materials, R150.
Homeria Traders for merchandise, R3 500.
Africa Traders for stationery, R80.
Paid week’s wages by cheque, R3 100.
7 Returned goods (not as sample) to Cottesloe Suppliers; issued
debit note 11 for R100.
9 Supplied merchandise on credit:
A. Dkoma, R132 (cost price R88).
G. Inskip, R228 (cost price R152).
11 Issued credit note 11 for R42 to G. Inskip to correct overcharge
on invoice issued on 9 May (cost price R28).
12 Issued debit note for R60 to QP Enterprises for unsuitable
equipment returned to them
Cashed cheque to pay week’s wages, R3 100.
14 Paid by cheque to Council for water and electricity, R486.
15 Received cheque for R400 on account from G. Inskip; allowed R10
discount
Credit card sales of merchandise, R6 000 (cost price R4 000).
16 D. Fox declared insolvent; received cheque in payment of dividend
of 60c in the rand; balance of debt written off.
18 Bank returned Inskip’s cheque of 15 May marked RD. Charged G.
Inskip R20 interest on overdue account.
20 Owner, I. Ivan, took goods from inventory for own use, R100 Paid
by cheque to Cottesloe Suppliers amount owing to them less R16
discount.
22 Received invoice from Cottesloe Suppliers for stationery bought on
credit, R90.
24 Owner drew business cheque to pay personal telephone account
of R268
25 Drew cheque for R4 000 in favour of Lakeside Bank as an
investment on fixed deposit with interest at 14% per annum.

5. You are required to do the revision exercises from your textbook on pages
100 – 106.

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 Topic 5
Accounting Cycle: Ledgers and Trial Balance

Prescribed Reading

Use this topic to support your learning when studying Chapter 5 of the prescribed
textbook.

5.1 Introduction

After completing this topic, you should be able to:

• Explain what a ledger is and what the General Ledger means.
• Post data accurately and correctly from subsidiary journals to the correct
general ledger accounts.
• Demonstrate an understanding of what credit sales are.
• Post credit sales data accurately and correctly from subsidiary journals to
the correct general ledger accounts.
• Demonstrate an understanding of what credit purchases are.
• Post credit purchases data accurately and correctly from subsidiary journals
to the correct general ledger accounts.
• Demonstrate and understanding of balancing ledger accounts.
• Accurately and correctly, balance ledger accounts.
• Demonstrate an understanding of the accounting procedure for VAT.
• Accurately and correctly, process VAT transactions.
• Demonstrate an understanding of incomplete accounting records.
• Accurately and correctly, determine the equity of a business.
• Accurately and correctly, convert accounting information to the double-
entry system.
• Demonstrate an understanding of the role and purpose of a trial balance.
• Distinguish the different types of trial balances.
• Demonstrate an understanding of the errors revealed and not revealed by
trial balances.
• Trace and correct errors in a trial balance accurately and correctly.
• Accurately and correctly present VAT in a trial balance.

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 Note

You will be required to prepare ledgers and trial balances for trading entities only.

This chapter explain the next phase in the accounting process. Accounting data
recorded in the subsidiary journals must now be summarised and transferred
(posted) to the individual ledger accounts that reflects the different types or
categories of transactions.

Once again it is of extreme importance that you not only intensely study this
chapter to ensure that you know what a ledger is, what the “General Ledger” is,
but that you also understand how ledger accounts are developed using a “Chart
of Accounts” and how these different accounts are then classified into relevant
categories.

You must be able to develop as set of ledger accounts, classify these accounts
according to standard ledger categories and compile a General Ledger.

You must not only be able to compile a general ledger and describe and explain
the posting procedure from subsidiary journal, you must also be able to
accurately and correctly post data from a subsidiary journal to the correct journal
accounts. You also need to understand the correct procedure followed to close
off ledger accounts at the end of an accounting period and accurately calculate
the closing balances for the different accounts.

Pay attention to the general format of a ledger account as you will be expected
to reproduce such formats and use such formats to post transactions correctly.

This chapter also includes the preparation of a trial balance, which is a summary
of the balances of the different ledger accounts. Ledger accounts will individually
have either debit or credit balances. The purpose of a trial balance is to list the
debit and credit balances of the general ledger accounts and then total the debit
and credit balances separately. The debit and credit grand totals should be
exactly equal.

The purpose of a trial balance is that the sum total of all debit balances should
be equal to the sum total of all credit balances in the General Ledger. This is a
critical control instrument because if the trial balance totals are not equal it is an
indication that errors or omissions occurred during the transaction recording
process.

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These errors and omissions must be found and corrected before the trial balance
can be accepted as correct.

It is expected of you to prepare an accurate and correct trial balance. You also
need to be able to trace and correct all possible errors and omissions that affect
the accuracy of a trial balance.

An accurate trial balance brings the accounting process one step closer to the
preparation of the financial statements for a business.

It is very important that you realise that you must develop a high degree of
competence in terms of the contents of this chapter. Competence means you
must have thoroughly mastered the learning contained in this chapter as well as
developed the skill to practically apply the knowledge in real or simulated
situations with accuracy.

You also need to have a clear understanding of how to process the accounting
data according to set accounting conventions and formats.

5.2 The General Ledger

5.2.1 What is a Ledger?

The group of accounts kept by an entity in a book with a big letter T on every
page is called a ledger. It is also possible to have more than one ledger, but an
entity at least has a general ledger. This general ledger contains all the asset,
equity, liability accounts.

The General Ledger Is Drawn Up from the Information Obtained in the Subsidiary
Journals (Topic 3.5)

Activity 5.1

Study pages 109 – 110 [par. 5.2.1] in your prescribed textbook. ALSO study
example 5.1 (p 111).

With every transaction, at least two accounts are involved. One account is
debited and another is credited.

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The debit-credit procedure is as follows:
Step 1: Read and understand the transaction.
Step 2: Think about the effect of the transaction on the accounting
equation.
Step 3: Identify the two accounts that are affected. Which account(s) must
be debited and which account(s) must be credited?
Step 4: Enter the data into one account and complete the double entry
principle by completing the contra entry. (Contra = opposite).

Remember there must be BOTH a DEBIT and CREDIT entry once

you have posted a transaction!

Note

• When we debit an account, we write the name of the account we are going
to credit in the details column.
• When we credit an account, we write the name of the account we are going
to debit in the details column.

5.2.2 Posting to a Ledger from All the Journals

Posting is the transfer of transaction data from a journal to the ledger by means
of the double entry principle in the accounts.

Activity 5.2

Study pages 110 -118 in your prescribed textbook in this regard.

Study all examples thoroughly. This is very important!

5.3 The Balancing of an Account

Once all debit and credit entries have been made to the ledger accounts, the
next step is to determine the balance of each account. If the total debits exceed
the total credits of an account, the account has a debit balance and if the total
credits exceed the total debits, it has a credit balance.

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Total debits > Total credits = Debit balance on account
E.g. R150 (dr) > R100 (cr) = R50 (Debit balance)

Total credits > Total debits = Credit balance on account.

E.g. R200 (cr) > R140 (dr) = R60 (Credit balance)

The balance of an account is determined in the following manner:

1. Add up the debit side of the T-account and enter the total in pencil.
2. Add up the credit side of the T-account and enter the total in pencil.

Example:
Cleaning Materials GL 55
Date Details Folio Amount Date Details Folio Amount
02-Jun BP Supplies INV28 855 07-Jun Hex Cons CN26 120
07-Jun Hex Cons INV77 1 025 07-Jun BP Supplies CN55 99
18-Jun BP Supplies INV345 760
25-Jun BP Supplies INV399 450
3 090 219

3. Subtract the smaller total from the larger one. The difference determined
in this way is the balance of that particular account. This balance is entered
on the side of the account that has the smaller total.

Example: 3 090 - 219 = 2 871

Cleaning Materials GL 55
Date Details Folio Amount Date Details Folio Amount
02-Jun BP Supplies INV28 855 07-Jun Hex Cons CN26 120
07-Jun Hex Cons INV77 1 025 07-Jun BP Supplies CN55 99
18-Jun BP Supplies INV345 760 Balance 2 871
25-Jun BP Supplies INV399 450

4. The totals are now entered in ink. After entering the balance discussed in
(3) above, the totals of the debit and the credit sides will obviously be the
same.

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Example:

Cleaning Materials GL 55
Date Details Folio Amount Date Details Folio Amount
02-Jun BP Supplies INV28 855 07-Jun Hex Cons CN26 120
07-Jun Hex Cons INV77 1 025 07-Jun BP Supplies CN55 99
18-Jun BP Supplies INV345 760 Balance c/o 2 871
25-Jun BP Supplies INV399 450
3 090 3 090

5. Finally, the balance entered above the totals in (4) is now carried over to
the opposite side from the one where it was entered in step (3) and entered
below the total. It accordingly forms the opening balance at the beginning
of the new month’s transactions.

Example:

Cleaning Materials GL 55
Date Details Folio Amount Date Details Folio Amount
02-Jun BP Supplies INV28 855 07-Jun Hex Cons CN26 120
07-Jun Hex Cons INV77 1 025 07-Jun BP Supplies CN55 99
18-Jun BP Supplies INV345 760 Balance c/o 2 871
25-Jun BP Supplies INV399 450
3 090 3 090
01-Jul Balance b/d 2 871

5.4 Accounting Procedure for Recording VAT

Calculating vat
Selling price incl. 100 SP X 100/115 Excl. amount
Vat 15% SP X15/115 VAT amount
Selling price excl. 115 SP + 15% Incl. amount

SP incl. = 1 220 x 100 / 115 = R1 060.87 SP excl.

VAT = 1 220 x 15 / 115 = R159.13

Activity 5.3

Study pages 228 – 239 in your prescribed textbook in this regard.

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5.5 The Treatment of Incomplete Records

Activity 5.4

Study paragraph 5.5 page 124 – 129 in this regard.

Work through all examples

5.6 The Trial Balance

5.6.1 What Is a Trial Balance?

It is a list of debit and credit balances and totals found in the ledger and it tests
the accuracy of the double entry and the arithmetical correctness of the accounts.

If all transactions have been recorded in compliance with the double-entry

system, each debit entry has a corresponding credit entry: the totals of all debit
balances on accounts must be equal to the totals of all credit balances.

The trial balance is used to confirm this. Therefore, a trial balance is a two-
column (debit & credit) list of all the balances of all accounts on a particular date.

5.6.2 Types of Trial Balances

There are mainly three types of trial balances, namely:

• Pre-adjustment trial balance.
• Post-adjustment trial balance.
• Post-closing trial balance.

If you recall the work you did in Topics 2 and 3, you will be able to draw up a
Trial Balance.

Activity 5.5

Please ensure that you study pages 130 – 134 in your prescribed textbook for
more detail.

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 Summary

After studying this topic, you should have some understanding of the link
between subsidiary journals and the different ledger accounts. You should also
have developed a high level of competence to use ledger account information for
preparation of trial balances.

Self-Assessment Questions

1. D. Doc, a medical practitioner, entered into the following transactions

during November 20....
Nov 2 Paid rent for November, R1 600.
6 Withdrew cash for own use, R1 000.
10 Sent an account to S Sick for medical services rendered, R2 700.
13 Paid membership fees to the Medical Society, R300.
17 Purchased medical equipment from Medsup for R3 800, and pays
R900 in cash.
22 Received a cheque from S Sick in settlement of his account.
24 Purchased stationery for cash, R140.
26 Paid salaries, R2 000.
Required:
Draft a table as follows and indicate for each of the above transactions which
account should be debited and credited:

Date Account Account Amount

2. The following information was obtained on 1 January 20... (beginning of

financial year) from the incomplete records of Johan Enterprises:
Land and buildings 400 000
Vehicles 130 000
Equipment 18 000
Bank (cash on hand) 9 000
Trading inventory 7 000
Sundry creditors 29 000

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 Sundry debtors 17 000
Petty cash 1 000
First bond over land and buildings 320 000
Interest payable 2 000
Required:
Calculate the owner’s interest on 1 January 20...

3. CA Accon, an accountant, entered into the following transactions during

June 20... :
June 1 CA Accon opens a practice and deposits R16 000 into a bank
account in the name of the practice.
4 He pays rent for offices, R1 700.
6 Office furniture is purchased from Modfurn for R11 000 on credit.
8 He pays R5 000 to Modfurn.
13 Accounts are sent to the following persons for services rendered:
P Port R1 500
E Em R3 500.
18 A cheque is received from P Port for R1 000.
24 He withdraws R1 500 cash for his own use.
30 E Em sends cash in settlement of his account, and CA Accon pays
salaries, R3 400.
Required:
a) Record the above transactions in relevant ledger accounts and balance
the accounts.
b) Compile a trial balance.

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 Topic 6
The Accounting Cycle: Adjustments

Prescribed Reading

Use this topic to support your learning when studying Chapter 6 of the prescribed
textbook.

Note

It is very important that you realise that you must develop a high degree of
competence in terms of the contents of this chapter. Competence means you
must have thoroughly mastered the learning contained in this chapter as well as
developed the skill to practically apply the knowledge in real or simulated
situations with accuracy.

You also need to a clear understanding of how to process the accounting data
according to set accounting conventions and formats.

6.1 Introduction

After completing this topic, you should be able to:

• Explain the role and purpose of adjustments in the accounting process.
• Demonstrate an understanding of income adjustments.
• Accurately and correctly perform required income adjustments to
accounting records.
• Demonstrate an understanding of expense adjustments.
• Accurately and correctly perform required expense adjustments to
accounting records.
• Demonstrate an understanding of accruals.
• Accurately and correctly prepare accruals where relevant.
• Demonstrate an understanding of credit losses.
• Accurately and correctly process credit losses.
• Demonstrate an understanding of inventory.
• Accurately and correctly process inventory adjustments.

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• Demonstrate an understanding of reversal on entries after year-end.
• Accurately and correctly process reversal entries after year-end.
• Demonstrate an understanding of VAT and adjustments.
• Accurately and correctly process VAT and adjustments.

This topic deals specifically with the explanation of the necessity of adjustment
entries as well as to determine and record the most important type of
adjustments.

Despite the fact that an accurate and well managed accounting system will record
all the relevant transactions as required, there are however circumstances that
require that some of the transactions have to be either adjusted or updated to
include the correct information.

Adjustments are usually necessitated by circumstances such as:

• Transaction data that may only have to be recorded at financial year-end,
for example having to pay the interest on a loan or determining the
depreciation of assets.
• The adjustment to an inventory after having conducted physical inventory
checks to determine inventory losses due to theft, damage or obsolescence.
• Correcting transactions that flow over accounting periods. The business may
have made a credit sale on the last day of the financial year. Payment will
however only be received during the next financial year.
• Other transactions that affect the accuracy or timing of transaction data.

6.2 What Are Adjustments?

Before the financial statements can be prepared, the following must first be
investigated and answered:
Were all the income and expenses for the period under review, as well as the
accompanying assets and liabilities taken into consideration?
Which part of the equipment that was used during the period under review should
be recognised as an expense for that period?
Were all consumables acquired during the period under review, indeed consumed
in the period under review?

Example

1. Rent expense amounts to R18 150 for the period 1 July – 30 June 2021 and
has been paid for the period 1 July 2011 to 31 May 2021. This means that
1 month is still accrued or outstanding, therefore 18 150/11 = 1 650. This

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 amount is accrued and must be added to adjust the amount for Rent
Expense: 18 150 + 1 650 = 19 800 – this is the adjusted amount.
2. An amount of R7 800 was put on fixed deposit on 1 Feb 2021 at 16% p.a.
No interest had been received by 30 June 2021, calculated as follows:
1 Feb to 30 June = 5 months – 7 800 x 16/100 x 5/12 = R520 amount
is accrued.

Figure 6.1 Cycle of Adjustments

Year-End Adjustments

A business draws up the final ledger accounts (Trading account and Profit and
loss account) for a fixed period called the accounting period. They can then
compare the results for the various accounting periods. The income and expenses
in the relevant final ledger accounts should show the correct amount for the
relevant accounting period.

Before drawing up the final ledger accounts, the bookkeeper calculates whether
the amounts in the various accounts are a true reflection of the income and
expenses of the business for the relevant accounting period.

If this is not done the net profit calculated in the Profit and loss account will not
be a true reflection of the actual net profit.

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We usually need to make certain adjustments in the form of additional entries.
We may need to increase or decrease some income and expense accounts to
reflect the actual amounts for the relevant accounting period. When doing
adjustments, take the relevant accounting period as the starting point of your
reasoning.

6.3 The Necessity of Adjustments, Income Adjustments and

Expense Adjustments

Activity 6.1

Study pages 165 – 181 in your prescribed textbook in detail.

Summary

After studying this chapter, you should have some understanding of the fact that
income and expenses appear in the Statement of Comprehensive Income in the
period they were earned and incurred, not necessarily when it was received or
paid for in cash. Also known as the accrual concept. Therefore, income is earned
when it is realised.

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 Self-Assessment Questions

1. The following pre-adjustment trial balance was obtained from the books of
Madjadji Traders:
Madjadji Traders
Pre-Adjustment Trial Balance at 30 June 20....
R R
Capital: L Lebomgoe 225 000
Drawings: L Lebomgoe 105 000
Furniture and equipment 150 000
Accumulated depreciation: Furniture and equipment 37 500
Long-term loan 75 000
Debtors 56 250
Bank 30 000
Creditors 18 750
Commission earned 168 750
Insurance 22 500
Salary 58 125
Rent expense 90 000
Telephone 13 125
525 000 525 000

Additional information
a) Insurance paid in advance at 30 June 19.6, R5 625.
b) Accumulated interest on long-term loan, R15 000.
c) Salaries accrued, R7 500.
d) Commission earned not yet invoiced, R34 875.
e) Provide for depreciation on furniture and equipment, R11 250.
f) Write R250 off as irrecoverable.
Required:
a) Journalise the adjustments at 30 June 20...
b) Prepare a post-adjustment trial balance.

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2. The trial balance below was prepared by the inexperienced accountant of
Kitty Nursery School on 30 June 20......

Kitty Nursery School Trial Balance at 30 June 20....

Dr Cr
Capital 43 840
Bank (unfavourable) 60
Prepaid expenses 510
Expenses in arrears 460
Income received in advance 100
Drawings 1600
Debtors control 34 000
Creditors control 5 000
Furniture at cost price 16 000
Accumulated depreciation: Furniture 3 200
52 120 52 650

As auditor of the nursery school, you discovered the following errors:

a) The credit side of the debtors control account was undercharged with
R100.
b) Discount received of R50 was recorded twice on the creditors control
account.
c) Depreciation at 20% per annum on the carrying amount of furniture
had not yet been provided for.
c) Drawings of R250 by the owner was correctly recorded in the bank
account, but was credited to his capital account.
Required:
Prepare a corrected trial balance for Bambi Nursery School on 30 June 20….

3. You are also required to do the revision exercises from your textbook on
pages 145 – 158.

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 Topic 7
Closing Process and Financial Statement

Prescribed Reading

Use this topic to support your learning when studying chapter 7 of the prescribed
textbook.

7.1 Introduction

After completing this topic, you should be able to:

• Correctly and accurately prepare a post-adjustment trial balance.
• Prepare correct and accurate financial statements for service and trading
entities.

Note

You will be required to prepare ledgers and trial balances for Trading Entities
only. Section 7.2 is therefore EXCLUDED from the syllabus.

This topic deals specifically with the explanation of the purpose and use of a post-
adjustment trial balance, typical closing entries and the preparation of a simple
set of financial statements.

It is very important that you realise that you must develop a high degree of
competence in terms of the contents of this chapter. Competence means you
must have thoroughly mastered the learning contained in this chapter as well as
developed the skill to practically apply the knowledge in real or simulated
situations with accuracy.

You also need to have a clear understanding of how to process the accounting
data according to set accounting conventions and formats.

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7.2 Finalisation of the Accounting Cycle

7.2.1 Post-Adjustment Trial Balance

In the previous units and chapters in your textbook, you were introduced to the
post-adjustment trial balance. This trial balance now contains all the adjustment
or corrections to all the accounts that were involved, and the financial statements
can be drawn up from this trial balance.

7.2.2 Gross Profit and Profit Determination

Activity 7.1

ONLY Study paragraphs 7.1.2.1 and 7.1.2.2 – diagrams 7.1; 7.2 and 7.3 of your
prescribed textbook.

7.2.3 The Closing Process

Figure 7.1 The Closing Process

Source: Myburgh, et al. 2021:192

The information in these accounts refers only to a particular accounting period;

accounts need to be closed off at the end of the accounting period. The balances
in the income and expense accounts need to be transferred to a profit and loss
account. This is known as the closing process and is recorded by means of closing
journal entries and posted to the ledger.

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The closing process can be illustrated as follows:

Figure 7.2 Illustration of the Closing Process

Source: Myburgh, et al. 2021:193

7.2.3.1 Profit and Loss Account

Figure 7.3 Profit and Loss Account

Source: Myburgh, et al. 2021:194

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 Activity 7.2

Study paragraph 7.1.3.3 and example 7.5 on page 195 of your prescribed
textbook.

7.3 Financial Statements

7.3.1 Statement of Comprehensive Income

Activity 7.3

Study paragraph 7.2.2.1 on page 202 of your prescribed textbook.

7.3.2 Statement of Financial Position

Activity 7.4

Study the format of this statement in paragraph 7.2.2.2 on page 203 of your
prescribed textbook.

Study paragraph 7.3 pages 204 – 219.

Summary

After studying this chapter, you should have a good understanding of the fact
that income and expenses appear in the Statement of Comprehensive Income in
the period they were earned and incurred, not necessarily when it was received
or paid for in cash. You should now also have an understanding of how the
financial statements are drawn up at the end of a financial period.

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 Self-Assessment Questions

1. The following information is available regarding a trading enterprise.

Sales returns and allowances 80 000
Net sales 3 920 000
Opening inventory 600 000
Purchases returns and allowances 120 000
Net purchases 2 360 000
Closing inventory 400 000
Selling expenses 120 000
Net profit 160 000

Required:
a) Sales.
b) Cost of goods sold.
c) Gross profit.
d) Sundry operating cost.

2. The following extract from the nominal section of the post-adjustment trial
balance is provided.
Nominal accounts section
Sales 388 260
Cost of sales 192 160
Debtors allowances 3 940
Rent income 12 000
Interest on loan 2 700
Salaries 95 000
Bank charges 1 360
Rates 2 100
interest on overdraft 550
Water and electricity 4 200
Discount received 1 750

Required:
a) Open account with given totals.
b) Journalise all the closing transfers.
c) Post to the general ledger.

3. You are supplied with the following information of Anfield traders, and asked
to prepare the necessary statements to find the financial results of the

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business to date and to show the financial position of the business on 28
February 2021.

Pre-Adjustment Trial Balance of Airfield Traders on 28 February 2021

Debit Credit
Statement of Financial Position accounts
section
Capital 328 350
Land and Buildings 338 660
Vehicles 180 400
Equipment 48 900
Accumulated depreciation on vehicles 44 800
Accumulated depreciation on equipment 18 700
Trading Stock 60 122
Debtors Control 36 240
Provision for Bad Debts 2 000
Bank 51 338
Petty Cash 500
Creditors Control 41 229
Mortgage Bond 80 000
Nominal Accounts Sections
Sales 548 210
Cost of Sales 263 994
Debtors Allowances 13 216
Packing Material 6 128
Rent Income 33 800
Commission received 28 440
Bad Debts 1 050
Insurance 9 000
Interest on mortgage bond 8 700
Salaries and Wages 84 676
Sundry expenses 12 401
Bank Charges 904
Telephone 9 300
1 125 529 1 125 529

Adjustments and Additional Information:

1. A physical stocktaking on 28 February 2021 revealed the following:
Trading Stock on hand, R56 211.
Packing Material, R 1 050.
2. Rent was received from a tenant for March 2021.
3. The commission for February 2021 was not received, R4 400.
4. The account of K. Dee (a debtor) must be written off, (R840).
5. The provision for bad debts must be adjusted to 5% of the outstanding
debtors.

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6. Interest on the mortgage bond is calculated at 14,5% p.a. The interest
for the last quarter was still outstanding.
7. Provide for depreciation as follows:
7.1 On equipment at 10% p.a. on cost.
7.2 On the diminishing balance of vehicles at 20% p.a.

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 References

Myburgh, J.E., Fouché, J.P. & Cloete, M. 2021. Accounting – An introduction.

14th edition. South Africa: Lexis Nexis

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