TRINITY TUTORIALS EXAM PACK AND STUDY NOTES

Transcription

1 TRINITY TUTORIALS EXAM PACK AND STUDY NOTES THIS PACK CONSISTS OF PAST EXAM PAPERS FROM MAY 2009 NOVEMBER 2013 AND THEIR SUGGESTED SOLUTIONS PLUS NOTES WHICH WILL HELP THE STUDENT TO UNDERSTAND AND APPRECIATE THE MODULE. Pretoria Address:270 Paul Kruger Cnr Pretorius Street Inside Saint Ignatius College, Savelkols Building Call / P age

2 Table of Contents MAY/JUNE 2009 QUESTIONS AND SOLUTIONS.p3 OCT/NOV2009 QUESTIONS AND SOLUTIONS p18 MAY/JUN 2010 QUESTIONS AND SOLUTIONS..p37 OCT/NOV2010 QUESTIONS AND SOLUTIONS.p61 MAY/JUNE 2011 QUESTIONS AND SOLUTIONS.p79 OCT/NOV 2011 QUESTIONS AND SOLUTIONS...p93 MAY/JUNE 2012QUESTIONS AND SOLUTIONS p106 OCT/NOV2012 QUESTIONS AND SOLUTIONS...p119 MAY/JUNE 2013 QUESTIONS AND SOLUTIONS p132 OCT/NOV 2013 QUESTIONS AND SOLUTIONS p152 2 P age

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6 Doc Number SOLUTION 1: CASH JOURNALS DR P HEAL Date Details BANK Debtors Control CASH RECEIPTS JOURNAL (CRJ) Fees VAT earned Output VAT Input SUNDRIES Amount Details 450 Mar 1 K. Kelly J. Jail Y. Old (7) (50) Settlement Discount allowed 453& Deposit (7) (50) HINTS a) Whenever you sell a good or offer a service, you are required to levy output VAT. Any VAT paid out is recoverable from SARS if you are a registered vendor and any VAT received is payable to SARS. b) If goods are sold on credit, the transactions regarding VAT output would have been recorded in the Sales journal. VAT is charged at the point of sale and not at the point of payment. In the CRJ, the VAT is accounted for on cash sales. c) When goods are sold at a discount, the VAT is debited to the VAT Input Account to reduce the amount owing to SARS since the part that is relating to the discount will no longer be received. d) To remove VAT from a figure you multiply that figure by e.g. R1 710 x = e) Calculation of the discount and the VAT element in discount: Discount= Amount Paid-Amount owed = = 57 VAT element= 14/114*57 = 7 We use 14/114 because the discount is at selling price inclusive of VAT. If it was exclusive of VAT, we could have used 14/100. f) The transaction on 15 March is not entered in the CRJ as information is not given on the payment of the consultation fees and unlike on other similar transactions involving receipt of funds, the receipt number is not quoted. 6 P age

7 CASH PAYMENTS JOURNAL (CPJ) DOC NUMBER DATE DETAILS BANK CREDITORS CONTROL VAT INPUT SUNDRIES AMOUNT DETAILS C114 1 Spacious Properties Rental paid C115 2 Cash Electricity C116 2 Pharmacy Trading C Fillup Garage Petrol C Cash Drawings HINTS 1. When you buy a good or make payment for services rendered you are charged VAT input. 2. If you buy a good on credit the VAT transactions are recorded in the Purchases Journal. VAT is charged at the point of purchase, whether for cash or on credit. This means no VAT is adjusted when settling accounts for goods or services previously acquired on credit if the purchase was recorded at the point of purchase. Adjusting VAT again will result in double accounting. 3. Any account not part of the required columns is entered under sundries. 4. All VAT calculations are done using the factor 14/114 since the given payments are inclusive of VAT. If the given amount was exclusive of VAT, we could have used 14/ When an invoice is received as on the transaction on 4 March, no cash is paid on that date. An invoice is a source document for credit purchases. 7 P age

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10 SOLUTION 2: STATEMENT OF CHANGES IN EQUITY BOPA STORES Statement of changes in equity for the year ended 30 April 20.9 Balance at beginning of the year Additional Equity Contributions (Bank & Equipment: ) Drawings (15 000) Total Comprehensive Loss for the year (77 000) end of year NOTES a) The entries on the debit side of the capital account represent reductions in equity whilst those appearing on the credit side represent increases in equity. b) Total comprehensive loss reduces the owner`s equity whilst total comprehensive income increases the owner`s equity. SOLUTION 3: NOTE TO FINANCIAL STATEMENTS BERTA TRADERS NOTES AS AT 28 FEBRUARY 2009 NOTE ON PROPERTY PLANT & EQUIPMENT LAND & VEHICLES EQUIPMENT TOTAL BUILDINGS Carrying amount at beginning of year Cost Accumulated depreciation - (95000) (51000) (146000) Additions Depreciation - (60000) (26000) (86000) carrying - (22000) 2 (19000) 3 (41000) amount Carrying amount at end of year Cost Accumulated depreciation - (112000) (66000) HINTS a) Disposals should be carrying amount that is cast minus accumulated depreciation. b) Any assets bought during the year are recorded as additions. c) The depreciation per line item of assets refers to the total depreciation as added in the Accumulated Depreciation account. 10 P age

11 d) Assets acquired in previous years are recorded as an opening balance so as their related accumulated depreciations. e) The cost prices of assets disposed and so as their related accumulated depreciations are subtracted when finding the closing balance. f) The carrying amount at the end of the year is determined by subtracting the accumulated depreciation at the end of the year, which is the balance brought forward at the end of the year in the respective accumulated depreciation accounts from the cost at the end of the year which is the balance brought down in the assets at cost accounts at the end of the year. Calculations 1 Additions: Vehicles Gumbi Motors China Cycles Cost of Vehicles sold (Vehicles at cost account shown as realisation) Accumulated Depreciation: shown as realisation Carrying amount upon disposal Cost of Equipment sold (Equipment at cost account shown as realisation Accumulated Depreciation: shown as realisation Carrying amount upon disposal P age

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13 SOLUTION 4: STATEMENT OF COMPREHENSIVE INCOME FAC Robot Traders General Journal DR CR (a) Inventory (trading): Statement of Financial Position Trading Account Inventory :stationery 345 Stationery 345 (b) Prepaid expenses 200 Insurances 200 (c) Interest paid (50000x12% x 6 12 ) 3000 Accrued expenses 3000 (d) Accrued Income ( ) 300 Rent income 300 (e) Depreciation Accumulated depreciation : ( ) x 20% Depreciation x 10% 6500 Accumulated depreciation : Furniture 6500 NOTES a) Prepaid expenses - This is when you pay expenses in advance for example, if you pay rent for next year. It is an asset which means it is debited. Due to the matching concept, the prepayment is eliminated from the expenses of this financial period that is why the insurance account was credited. b) Accrued expenses - This is when you incur an expense without paying for it e.g. when you use a contract mobile line. It is a liability which means it is credited in the liability account and it has to be added to the expense account in terms of the matching concept. c) Accrued income - Is when you render a service for which you haven t received income for e.g. if your tenant rents for a month without paying rent. It is an asset which means it is debited. d) Income received in advance Is when you receive income before rendering a service. It is a liability. 13 P age

14 4.2 ROBOT TRADERS Statement of profit or Loss and other comprehensive income for the year ended 28 February 20.9 Revenue ( ) Less: Cost of Sales (155890) Opening inventory Purchases ( ) Carriage on Purchases 660 Less : Closing Inventory (12800) Gross Profit Other Income Rent Income ( ) 3600 Commission Income Expenses Administrative, Distributive & Other expenses (88479) Stationery ( ) 2000 Wages Water & electricity 4400 Packing materials 3300 Insurance ( ) 2200 Depreciation ( ) Credit losses 244 Finance cost Interest on loan from Africa Bank (see above on 4.1) (3000) 3000 Profit for the year HINTS When you calculate finance cost, check if the loan was issued during the year and you calculate interest on a pro rata basis, interest is only chargeable during the periods when respective loans are owing. Carriage on purchases, insurance on purchases, and freight on purchases is part of cost of sales but carriage on sales is an expense under Administrative expenses. Settlement discount allowed reduces revenue but settlement discount received reduces cost of sales. Outstanding amounts/ accrued amounts/ amounts owing are added to the respective expenses or incomes as they belong to this period although they are still unpaid. Prepaid amounts/ amounts in advance are subtracted from the respective expenses or incomes as they belong to future periods although they were paid during this period. 14 P age

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16 SOLUTION 5: NON - PROFIT ORGANISATION; MEMBERSHIP FEES ACCOUNT AND INCOME AND EXPENDITURE STATEMENT 5.1 DOLPHINS DIVING CLUB Membership Fees Account 2008 April Mar 31 Accrued Income b/d Entrance Fees Income & Expenditure (190*R1 000) Income received in advance c/d April Mar 31 Income received in advance b/d Bank Credit Losses Income received in advance b/d HINTS Balancing figure: Income received in advance Accruals of fees at the beginning of the year are assets which are debits in the income account and prepayments are liabilities which appear as a balance b/d on the credit side and when it is a balance c/d it appears on the debit side to complete double entry. 5.2 DOLPHINS CLUB Income and expenditure Statement for the year ended 31 March 20.9 Income Membership fees Donations received 4000 Diving fees received Bar Income Bar gross profit (c1) Bar wages (30000) EXPENDITURE (222080) General expenses ( ) Insurance ( ) 2000 Maintenance Salaries & wages ( ) Credit losses Stationery Depreciation for the year (calculation 2) Surplus for the year Notes Prepayments at the beginning of the year are added to the respective incomes or expenses, because though they were paid or received in the previous period, they belong to the current period. 16 P age

17 Prepayments at the end of the year are subtracted from the respective incomes or expenses, because though they were paid or received in the current period, they belong to the following period. Accruals at the beginning of the year are subtracted from the respective incomes or expenses, because the assumption is that they are paid or received this year though they they belong to the previous period. Accruals at the end of the year are added to the respective incomes or expenses, because though they were not paid or received in the current period, they belong to the current period. CALCULATIONS 1. Bar gross profit Bar sales Less Cost of sales (110000) Opening inventory Purchases Less: closing inventory (20000) Gross profit Depreciation Furniture, equipment and vehicles Crockery and linen ( ) P age

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22 SOLUTION 1: BANK RECONCILIATION Provisional total M. Monk (stale cheque) 2400 T. Tom (direct deposit) 1700 Interest income Cash payment journal (CPJ) April 2009 Provisional total R/D cheque V. Vala 400 B. Borwa (rent stop order) 800 Sundry bank charges 250 Cheque book HINTS a) You update the cash journals with amounts that appear on the bank statement but do not appear in the cash journals e.g. Bank charges and direct deposits, stale cheques. BANK ACCOUNT Balance b/d 9600 Total payment Total receipts Balance c/d Balance b/d Bank Reconciliation Statement at 30 April 20.9 Debit Credit Balance per bank statement 1800 Outstanding cheques Outstanding deposits (7000) 7000 Errors: cheque understated ( ) 1900 Balance per bank account P age

23 NOTES Procedure for bank reconciliation The procedure may be summarized as follows 1. Compare the bank statement with the bank account in the cashbook. Remember to compare the debit of the bank account or the cash receipts journal against the credit of the bank statement, and the credit of the bank account or the cash payments journal against the debit of the bank statement. Place a tick against those items which appear in the both records. 2. Bring the bank account in the cash book up to date by entering any items which appear on the bank statement but which have not yet been entered in the bank account. Such items may be (a)items debited on the bank statement, e.g. bank charges, standing orders paid, etc. These should be credited in the bank account in the cash book or they should be entered in the cash payments journal. (b)items credited on the bank statement, e.g. credit transfers and standing orders paid directly into the bank. These should bed debited in the bank account or entered in the cash receipts journal in the cash book. 3. Correct any errors in the cash book. 4. Balance the cash book. The balance on the bank account is now the true bank balance of the business and this figure will be shown in the balance sheet. 5. Prepare the bank reconciliation statement. (a)start with the balance shown on the bank statement. (b)add on any items that have been debited in the cash book or entered in the cash receipts journal but not yet credited on the bank statement. I.e. amounts not yet credited. (c)deduct any items that have been credited in the cash book or entered in the cash payments journal but not yet debited on the bank statement, i.e. cheques not yet presented. (d)make any necessary adjustments for bank errors. Add back any amounts debited in error by the bank and deduct any amounts credited in error by the bank. (e)the resulting figure should equal the updated bank balance shown in the cash book. 23 P age

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25 SOLUTION 2: FINANCIAL STATEMENTS COMP INSTALLATIONS Statement of profit or loss and other comprehensive income for the year ended 30 April 20.9 Revenue ( ) Less: cost of sales (200000) Gross profit Other income Income from services rendered Interest income (50000x5%) Expenses Administrative, distributive & other expenses (368000) Administrative & general expenses ( ) Depreciation ( ) Profit for the year Other comprehensive income - Total comprehensive income HINTS Stationery on Hand This should be treated as a current asset in the statement of financial position as Inventory, Stationery. This should then be deducted from the stationery expense since the stationery was purchased to this period but will only be used next year. The assumption is that the stationery has been included in the administrative expenses. Interest Accrued on the Investment Although not yet received, this should be included in other income as it belongs to this period. It should also be include under trade and other debtors on current assets in the statement of financial position as this represents amounts owed to the business. 2.2 Statement of changes in equity for the year ended 30 April Balance at beginning of year Add: Total comprehensive income for the year Less: drawings ( ) (99500) Balance at the end of the year HINTS The electricity of the owner paid by the business should be added to drawings. It should not be included under the expenses as this is not an expense of the business but a personal expense of the owner. 25 P age

26 2.3 Statement of financial position as at 30 April 20.9 Assets Non current assets Property Plant & equipment (Note1) Other financial assets :fixed deposit Current assets Inventory (Note 2) Trade and other receivables (Note 3) Cash and cash equivalents ( ) Total assets EQUITY & LIABILITIES Equity Capital (refer to statement of changes in equity) Current Liabilities Trade and other payables Income received in advance Total equity and liabilities HINTS Note 1: Property, Plant and Equipment Vehicles Equipment Total Carrying amount - 1 May Cost Accumulated Depreciation Depreciation for the year ( ) (70 000) ( ) Carrying amount 30 April Cost Accumulated Depreciation Note 2. Inventory Trading inventory Inventory: stationery Note 3 Trade and Other Receivables Trade debtors (debtors control) Interest income accrued P age

27 Cash and cash Equivalents The amount paid for the owner s electricity must be deducted from bank because it is mentioned on the question that it was still to be recorded. Note 4 Trade and Other Payables Creditors control P age

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30 SOLUTION 3: GENERAL LEDGER ACCOUNTS PRONTO DEALERS Total receipts ( ) Bank Account Balance b/d 2220 Total payments ( ) Balance c/d Balance b/d 2982 Cost of Sales Account Balance b/d Trading inventory (sales returns) 125 Trade inventory (cash receipts Balance c/d journal-cash sales) 8000 Trading inventory (credit salessales journal) Balance b/d Trading inventory Account Balance b/d Cost of sales (cash receipts journal-cash sales 8000 Bank 5800 Cost of sales (sales journalcredit sales) 7000 Creditors control (purchases returns journal- purchases returns) 850 Creditors control (purchases Balance c/d journal-credit purchases) 9200 Cost of sales (sales returns journalsales returns) Balance b/d HINTS a) Whenever you buy goods your inventory increases. b) When customers return goods inventory also increases. c) When you sale inventory, your inventory decreases. d) When you return goods to suppliers, inventory decreases. 30 P age

31 SALES ACCOUNT Balance c/d Balance b/d Bank (cash sales - CRJ) Debtors control (credit salessales journal) Balance b/d VAT INPUT ACCOUNT Balance b/d 1500 Creditors control (purchases returns journal) 119 Bank CRJ 20 Balance c/d 3837 Bank CPJ 1148 Creditors control (purchases journal) Balance b/d 3837 VAT OUTPUT ACCOUNT Debtors control 35 Balance b/d 1880 Balance c/d 6070 Bank Bank Debtors control Balance b/d 6070 NB: The references in brackets are only given as an aid for you to understand the source of the transaction but are not necessarily supposed to be included in the accounts. BANK ACCOUNT 1. Total Receipts: these are calculated by adding together the following: Sales Debtors control 5550 Settlement Discount granted (150) VAT Output 2240 VAT input (20) P age

32 (a) Sales represent cash sales; therefore they are included in total. (b) Debtors control is the gross amount settlement discounts before subtracting settlement discounts granted. As a result, the settlement discount should be deducted from the gross amount. (c) VAT Output: this should be included as this is part of the amounts receives by the business although this will later be handed over to SARS. (d) VAT input is to be deducted because it represents reductions in amounts receivable. (e) The cost of sales column is not added as it is used as a tool of updating the cost of sales when using the perpetual inventory system. This column does not affect amounts received. 2. Total Payments These were calculated as follows Purchases 5800 Creditors 8200 VAT Input 1148 VAT Output (25) Settlement Discount Received (100) Sundry expenses Purchases, Sundry expenses and VAT input are included as they represent actual amounts paid. Creditors represents the gross amounts of debts settled, therefore, the settlement discount should then be deducted to arrive at the net amount paid. VAT output in the CPT represents a reduction in amounts payable, therefore it should be subtracted. 32 P age

33 SOLUTION 4: GROSS PROFIT DETERMINATION JUMBO TRADERS Inventory account Balance b/d Cost of sales Creditors control (refer to Balance c/d creditors control account) Balance b/d Debtors control account Balance b/d Credit losses 8000 Sales Bank Balance c/d Balance b/d HINTS Sales is balancing figure Creditors control Bank Balance b/d Balance c/d Inventory HINTS a) Purchases/ Inventory bought = Balancing figure Balance b/d Trading Account Cost of Sales (from inventory Sales account) Profit or loss (gross profit) P age

34 HINTS Gross profit - balancing figure If balancing figure was on the credit side it would have been a gross loss. Inventory Account Inventory is an asset; therefore, the balance b/d is always on the debit side whilst the balance carried forward (c/d) will be on the credit side. The purchases or creditors control is the balancing figure in the creditors control account. The cost of sales refers to the items from inventory that have been sold during the period. In this case it is the balancing figure after period. In this case it is the balancing figure after making all the entries in the inventory account. Debtors Control This is an asset, therefore the balance bought forward is on the debit side whilst the balance carried forward is on the credit side. In this case, since all the balances and are given. The balancing figure represents the sales made during the period. Creditors Control This is a liability; therefore the balance brought forward is on the credit side whilst the balance carried forward is on the debit side. Since the balances (opening and closing are given, the balancing figure represents purchases. 34 P age

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36 SOLUTION 5: NOTE; PROPERTY, PLANT AND EQUIPMENT GOOFY TRDERS NOTE ON PROPERTY PLANT & EQUIPMENT AS AT 31 DECEMBER 20.8 FAC Carrying amount at the beginning of the year Cost price (balance b/d vehicles account) Accumulated depreciation Additions ( ) Depreciation ( ) (from accumulated depreciation account) (53000) Disposals at carrying amount ( ) (35000) Carrying amount at end of year Cost Accumulated depreciation (163000) NOTES QUESTIONS, PROPERTY, PLANT AND EQUIPMENT (a) Additions a. These appear on the debit side of the vehicles account. Bank is the vehicles bought for cash whilst cc Garage represents vehicles bought on credit from CG Garage. (b) Disposals at carrying amount Cost of disposal Accumulated depreciation on disposal The disposals are recorded as realization in the vehicles and accumulated depreciation account. (c) Carrying amount at the beginning of the year. - This is made up of the balance brought forward at the beginning of the year in the vehicles account (1 Jan 2008) subtract the balance brought forward at the beginning of the year in the accumulated depreciation account (I Jan 2008). (d) Carrying out at the end of the year. - This is made up of the balance carried down at the end of the year in the vehicles account (31 Dec 2008) subtract the balance carried down in the accumulated depreciation of vehicles at the end of the year (31 December) 36 P age

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40 QUESTION 1 SOLUTION: CREDITORS RECONCILIATIONS PRUDE TRADERS Creditors control account R 2010 April 30 Balance Purchases understated ( ) April 30 Balance c/d b/d May 1 Balance b/d 9940 R HINTS You only include amendments in the creditors control account amounts that directly affect purchases journal. 2. Creditors statement as at 30 April 2010 R Balance of creditors list Add: Debtor balance under cast (Ferrari ( ) 10 Credit for repairs under cast: Tshwane garage (600-60) 540 Less: Payment to Debs Stationers (Stationery paid) (50) Purchases returns to Dennis cleaners not posted (34) Credit note from Dragon suppliers wrongly credited Instead of debited (R100X2) (200) R (284) Balance as per creditors control account 9940 NOTES -Entries in the creditors control account are made from totals extracted from various books of original entry such as the cash payments journal (total of payments made to creditors), purchases journal (total of credit purchases), purchases returns (total of goods returned to suppliers). -As a result, corrections that should be made in the creditors control should pertain to (a) transactions omitted completely, (b) errors on the totals (understatements and overstatements) of the cash receipts journal (creditors column), purchases journal and the purchases returns journal, (c) transactions wrongly extracted from source documents. NB: In this particular question, the errors shall be corrected as follows: 40 P age

41 3.1. This affects the individual account as this payment was debited to the debit of stationery instead of debiting Debs Stationers. Since it was a payment, which reduces creditors, it should be corrected by deducting it from the list of debtors. No error was made in the Cash Payments Journal; as such no correction is required in the Creditors` control account. The creditors should be reduced by R An error in the individual account should be corrected on the debtors listing or reconciliation statement but no correction should be made in the control account. The account had been under cast by R10 (R7 890 R7880), therefore, R10 should be added to the list of debtors An error in the casting or total of a book of original entry pertaining to creditors affects the creditors control account and it does not affect the creditors` listing (creditors reconciliation statement). This should be credited to the creditors control account to increase creditors (a liability increase on the creditors) since the purchases had been under cast by (R5 554-R5 455= R99) A posting error affects the individual creditors account; therefore, it should be entered in the creditors reconciliation. This is a credit note, which is a proof of a reduction in our account such as a return of goods or reduction in our account such as a return of goods or reduction in charges. Since this reduces creditors, this should be deducted in the creditors` reconciliation. This reduces creditors by R An error in the individual account, therefore, it should be corrected in the creditors listing (reconciliation). No correction is made in the creditors` control account. A credit note is supposed to be debited in the personal account of the creditor but this was credited in error. The correction should be double, one to reverse the wrong error and another one to enter the correct entry. As a result, the creditors listing should be reduced by R100x2= R Errors in the individual account affect the creditors listing only. This invoice had been understated by R540 (R600-R60), therefore, this should be added to the creditors listing. The question is silent on the control account, as such; we assume there was no error in the creditors control account. GENERAL 1. Transactions pertaining to creditors completely omitted affect both the creators control account and the creditors accounts listing in the reconciliation. 2. Errors of extracting figures from source documents to the book of original entry affects both the creditors control account and the creditors accounts listing in the reconciliation. 3. Errors made in adding books of original entry pertaining to creditors are only corrected in the creditors control account and these do not affect the individual listings. 4. Wrong postings to individual creditors accounts are only corrected in the individual listings and these do not affect the control accounts. 41 P age

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43 QUESTION 2 ADJUSTMENTS- GENERAL JOURNAL MOJA TRADERS General Journal 1. Accrued Income ( ) 450 Rent income 450 Rent for 1 month not yet received 2. Packaging material on hand (inventory ) 1550 Packaging material 1550 Packaging material on hand at end of year 3. Commission income 750 Prepaid income 750 Prepaid income (commission) at end of year 4. Credit losses 58 Debtors control : J. John 58 Bad debts written off 5. Depreciation ( ) x 10% 1900 Accumulated depreciation : equipment 1900 Deprecation on equipment for the year 6. Water and electricity 310 Accrued expenses 310 Water & electricity owing 7. Prepaid expenses ( ) 150 Insurances 150 Insurance prepaid for April 2010 GENERAL JOURNAL This is one of the books of original entry. All the transactions that are not entered in any of the six specific books of original entry (journals) are entered in the general journal. Examples of these entries are: i. Purchase of non-current assets on credit; ii. Correction of errors; iii. Closing adjustments; iv. Providing for depreciation; v. Writing off of debtors (credit losses); vi. Provision or allowances for credit losses, e.t.c. Correction of the errors 1. (a) Since only 11 months` rent was received, rent for one month (12-11) is owing. This represents an amount receivable (asset) which should be recognised. As a result the asset rent income accrued is debited. (b) Further income should be recognised in the current period. According to the matching (accruals) concept income should be recognised in the period in which the goods or services are rendered which might not be necessarily the period when the income is received. In this case, the tenant used the premise during the year ended 31 March 2010, as such the one month not yet paid (R4 950/11=R450) is added to income in the current period. 43 P age

44 2. (a) Packaging material on hand at end of year should be recognised as an asset which should be debited in the Inventory: Packaging material account as this should be utilised in future periods. (b) The packaging material on hand was included in the packaging expense when it was bought but now it was not used in the current period and the material will be used in future accounting periods. This material should then be deducted from the expense for this year and it should be expensed in the period when it shall be used (matching concept). The deduction is credited in the packaging material account. 3. (a) Commission was received before performance or the actions that give rise to income. When the money was received, it was credited to the income account. Since it belongs to future periods, it should be deducted from the current year`s income and it should be matched to the periods when performance of the actions that result in income is done. As a result debit commission received (reduction in income). (b) The commission received in advance should also be recognised as a liability. It will only become the income when the entity has fulfilled the requirements. The liability income received in advance should be credited. 4. (a) The debt which will not be recovered is a business expense as the income recognised upon the sale will no longer be receivable. As a result, we credit the credit losses expense. (b) The debtor (an asset) is going down as it is no longer recoverable. This should be credited in the debtors control account and/or J. John`s account in the debtors` ledger. 5. (a) Depreciation is an expense and it should be debited. It is a measure or estimation of the loss in value of non-current assets. In this case, it is being calculated using the diminishing balance method. It is calculated as follows: Percentage (%) x (Cost Accumulated Depreciation) (b) Depreciation reduces the value of non-current assets. A reduction in assets is credited to the asset account. When non-current assts reduce due to depreciation, the depreciation for the period is credited to the accumulated depreciation account according to the International Accounting Standards (IAS16). 6. (a) Water and electricity accrued represents an expense for the current period since the electricity was used during the period for the generation of income. To add to the expenses we debit the water and electricity account. (b) The water and electricity owing is a liability as it represents an obligation to pay money resulting from present activities, that is, the electricity supplied. The liability is credited to the expenses accrued account 7. (a) The insurance paid in advance represents our money; therefore, it should be recognised as an asset: Prepaid expense. It will only belong to the insurance company in the relevant future periods. This asset is debited in the Insurance Prepaid (Asset account). (b) When this insurance was paid it was debited in the insurance expense account. Since this expenditure does not belong to this period, it should be deducted from the insurance expense account. This is credited to the insurance account. 44 P age

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46 SOLUTION 3: INCOMPLETE RECORDS (a) The statement of assets and liabilities is used in most instances to determine equity through the application of the Basic Accounting Equation (BAE); Assets= Equity + Liabilities; transformed to, Equity= Assets Liabilities. Thus, equity is determined by deducting total liabilities from total assets. B. BULL Statement of assets and liabilities as at 31 March 2009 Assets Non Current Assets Property, plant & equipment ( ) Current assets Trade and other receivables ( ) Cash and cash equivalents Inventory Total assets LIBILITIES Non- current liabilities CURRENT LIABILITIES Trade and other payables Total liabilities Accounting equation Assets = Equity + Liabilities R =R? + R Equity = R R = R (b) Bank A bank account is a financial account between a bank customer and a financial institution. A bank account can be a deposit account, a credit card, or any other type of account offered by a financial institution. The opening balance is favourable; therefore, it represents money in the bank, which is an asset. As a result it is banked in the bank account. All payments are credited in the bank account because they reduce an asset representing the amount in our bank account. All receipts are debited in the bank account as they represent an increase in an asset (the money in the bank). 46 P age

47 B. BULL GENERAL LEDGER Date Details Folio Amount Date Details Folio Amount R R Bank Account 2010 March 31 b/d March 31 Balance Receipts ( ) Balance crj c/d Payments ( ) cpj April 1 Balance b/d 580 Debtors This is an asset and it is represented by a debit balance. The opening balance (31 March 2009) will be shown as a debit balance b/d whilst the closing balance (31 March 2010) will be credited as a balance C/D. All reductions in debtors are credited. Examples are payments by debtors, sales returns, settlement discounts granted, credit losses, e.t.c. The only credit in this particular question is the receipt from debtors. All the other deductions are assumed not to have taken place if they are not indicated on the question. Increases in debtors result from transactions such as sales, interest charged on overdue accounts, e.t.c are debited to the debtors account since these increases the asset debtors. The only debit in this question is sales as the existence of debtors automatically means that there were sales during the period. All the other debits are assumed not to have taken place as long as they do not appear on the particular question. The credit sales will therefore be the missing figure. Bills, especially bills of exchange, which are due to be paid by a company's debtors. These should be treated in the same way as opening and closing debtor balances. 47 P age

48 Sources of information for the debtors control account Date Details Folio Amount Date Details Folio Amount R R Debtors Account 2010 March March 31 Balance Bills Receivable Credit sales* b/d b/d s/j Bank Bills Receivable Balance Crj c/d c/d April 1 Bills Receivable Balance b/d b/d *Credit sales (balancing figure= )-( ) =7 650 b/d Creditors This is a liability, therefore, the opening balance (31 March 2009) should be shown on the credit side whilst the closing balance (31 March 2010) should be shown as a balance c/d on the debit side above the total. Increases in creditors from transactions such as credit purchases, interest charged by our suppliers on overdue accounts are credited to the creditors account. In this case, only purchases are credited in addition to the balance b/d. The fact that there are creditors automatically validates the existence of purchases. As the credit purchases are the only unknown figure in the purchases account, this will be calculated as a balancing figure. Decreases in creditors are debited. These result from transactions such as payments to creditors, purchases returns, settlement discounts received e.t.c. In this case, we assume only payments took place since all the others are not mentioned in the question. 48 P age

49 Sources of information for the creditors control account Date Details Folio Amount Date Details Folio Amount R R Creditors Account 2010 March March 31 Bank Balance cpj c/d April 1 Balance Purchases* Balance b/d pj b/d *Credit Purchases= ( ) = Insurance Increases in expenses are debited to the expense account and decreases are credited to the expense account. Insurance is a business expense and payments of expenses are debited to the expense account. The insurance was paid on 2 July 2009 for an annum. The year from the beginning of July 2009 ends in June 2010, which means that the payment for April 2010 to June 2010 (3 months) is a prepayment as it falls outside the current year ended 31 March Since this amount does not belong to this period, it should be deducted from the expense account by crediting the insurance account as prepaid expense. The difference between the debit side and the credit side (balancing figure) will represent the amount to be transferred to the profit and loss account when preparing the final accounts. This amount is normally on the credit side of an expense account. The prepayment (three months) = R800x3/12=R200. Date Details Folio Amount Date Details Folio Amount R R Insurance Account 2010 March 31 Bank cpj March 31 Prepaid expense Profit or loss gj gj P age

50 Rent expense Increases in expenses are debited to the expense account and decreases are credited to the expense account. Rent payable is a business expense and payments of expenses are debited to the expense account. The amount not paid for rent represents an expense for this period, although not yet paid; it should be added to the expense account. The rent was incurred in the current year; therefore, it should be recognised in the current year in compliance with the matching concept. The total will be transferred to the profit and loss account as it represents the actual rent expense for the period. The difference between the debit side and the credit side (balancing figure) will represent the amount to be transferred to the profit and loss account when preparing the final accounts. This amount is normally on the credit side of an expense account. Date Details Folio Amount Date Details Folio Amount R R Rent Expense 2010 March March 31 Profit or loss gj Bank Accrued expenses Cpj gj P age

51 51 P age FAC

52 4. CLOSING ENTRIES AND FINAL ACCOUNTS When preparing the trading account, all the accounts required in the calculation of gross profit are closed off to the trading account. (a) The sales account is debited and the trading account is credited with the sales account balance. Income accounts are transferred to the credit side of final accounts. (b) The inventory account is credited and the trading account is debited with the opening inventory. (c) The purchases account is credited and the trading account is debited with the purchases account balance at end of period. Expense accounts are debited to the final accounts. (d) The closing inventory is debited in the inventory account and credited to the trading account. (e) The sales returns account is credited and the trading account is debited with the sales returns balance at the end of the period. These represent goods previously sold but now returned by our customers for various reasons, e.g. damaged goods, wrong type of goods. As a result these should be deducted from the sales of the period as they had been included in sales on the date of sale. (f) The purchases returns account is debited and the trading account is credited with the purchases returns balance at the end of the period. These represent goods previously purchased but now returned to our suppliers for various reasons, e.g. damaged goods, wrong type of goods. As a result these should be deducted from the purchases of the period as they had been included in purchases on the date of purchase (g) The settlement discount granted balance at end of period is closed off to sales. The settlement discount granted account is credited and the sales account is debited. These are reductions given to customers for paying within the stipulated period and they are offered as an incentive for paying in time. As these reduce the amount that will be finally payable by our customers, they should be deducted from the sales figure as it will have initially included the discount component. (h) The settlement discount received balance at the end of the period is closed off to the purchases account. The settlement discount received account is debited and the purchases account is credited. These are reductions given to the business by the suppliers for paying within the stipulated period and they are offered as an incentive for paying in time. As these reduce the amount that will be finally payable to the suppliers, they should be deducted from the purchases figure as it will have initially included the discount component. (i) Trading expenses balances at end of period such as carriage on purchases, freight on purchases, customs duty, insurance on purchases, e.t.c are credited and the trading account is debited. After all the transfers above have been made to the trading account, the total amounts on the debit side, are compared to the total on the credit side and if: i. The credit side is larger; there is a gross profit, which is closed off by debiting the trading account and crediting the profit or loss account. ii. The debit side is larger; there is a gross loss, which is closed off by crediting the trading account and debiting the profit or loss account. 52 P age

53 Instead of making all the separate closing transfers to the trading account, a combined journal is recorded as follows: Date Details Folio Debit Credit R R 2013 December 31 Sales Purchases returns Inventory (closing) Inventory (opening) Purchases Sales returns Carriage inwards Insurance on purchases Trading account XXX XXX XXX XXX XXX XXX XXX XXX XXX NB: The above closing entries are done after closing off the settlement discounts accounts to sales and purchases If the debit side are more than the credit entries, the trading entry will appear on the credit side (gross profit) and if the credit side are more than the debit entries, the trading entry will appear on the debit side (gross loss). After preparing the trading account, we then prepare the profit or loss account. The gross profit or loss will have been closed off from the trading account to the profit or loss account as stated above. The expense and income accounts are closed off to the profit or loss account. a) Income accounts are closed off by debiting the income accounts and crediting the profit or loss account. b) The expense accounts` balances at the end of the period are closed off by debiting the profit and loss account and crediting the expense accounts. 53 P age

54 Again, instead of closing of the component accounts separately, it can be better to make a combined journal entry of all the incomes and expenses as follows: Date Details Folio Debit Credit R R 2013 December 31 Rent income Interest income Donations received Commission earned Water and Electricity Wages and Salaries Telephone Advertising Stationery Credit losses Depreciation Insurance Packaging materials Donations paid Profit or loss XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX NB: The profit or loss entry depends on which side is larger (it appears on the smaller side). If the debit entries are larger than the credit entries, the profit or loss entry will appear on the credit side and this represents a profit. If the credit entries are larger than the debit entries, the profit or loss entry will appear on the debit side and this represents a loss. The profit or loss account is closed off to the capital account. If there is a profit, we debit the profit or loss account and credit the capital account. If there is a loss, we debit the capital account and credit the profit or loss account. Drawings are closed off to the capital account by debiting capital account and crediting the drawings account. 3.1 Robust Traders 54 P age

55 GENERAL JOURNAL Date Details Folio Debit Credit R 2009 June 30 Capital Drawings June 30 Sales 553 Settlement Discount Granted R June 30 Settlement discount received Purchases June 30 Sales ( ) Purchases returns Closing inventory Trading account June 30 June 30 Trading account Purchases ( ) Carriage on purchases Sales returns Inventory (opening) Trading account (Gross Profit: ) June 30 June 30 June 30 Commission income Rent income Profit and Loss Account Profit or Loss Credit losses Depreciation Insurance Packing materials Wages Water and Electricity Profit or Loss Account: Net Profit ( ) Capital Date Details Folio Amount Date Details Folio Amount R R Trading Account 2009 June March P age Inventory (opening) Purchases (C2) Carriage on Purchases Sales Returns Profit or Loss (Gross Profit) Sales (C1) Inventory: closing Purchases returns

56 Date Details Folio Amount Date Details Folio Amount R R Profit or Loss Account 2009 June March 31 Credit losses Depreciation Insurance Packing materials Wages Water and Electricity Capital (Net Profit) Trading Account (gross profit) Commission income Rent income C1: Sales Sales = Sales-Settlement discount granted = R R553 = R C2: Purchases Purchases= Purchases-Settlement discount received = R R155 = R P age

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58 DATE SOLUTION 5: CASH JOURNALS; VAT CASH RECEIPTS JOURNAL This is a book of original entry in which we record all receipts of money. The analysis columns for receipts are entered at the end of each day as it is entered when amounts are banked. According to the question, cash and cash equivalents are daily deposited at the bank. VAT output refers to the VAT charged to our customers. This amount belongs to SARS. It is entered at the point of charging, not at the point of payment. As such, VAT is charged at the point of sale, whether on cash or on credit. We calculate VAT for cash sales and enter it in the VAT output column in the Cash Receipts Journal and we calculate VAT on credit sales and enter it in the VAT output column in the Sales Journal. No adjustment for VAT is made when customers settle their accounts. If selling price or transactions are inclusive of VAT, as in most cases, calculate VAT by multiplying by the factor 14/114 derived as follows: Price exclusive of VAT = 100% VAT = 14% Price inclusive of VAT = 114% Therefore, vat = 14/114x Price inclusive of VAT Or VAT= 14/100x Price exclusive of VAT Some transactions are exempt of VAT, such as the sale of non-current assets for which VAT is not claimable upon purchase such as motor vehicles, salaries and wages, petrol, e.t.c. DOC. NO DETAILS ANALYSI S OF RECEIPT S Bravo Traders CASH RECEIPTS JOURNAL BANK SALE S DEBTO RS CONTR OL SETTLEM ENT DISCOUN T GRANTE D VAT INPUT VAT OUTP UT SUNDRY ACCOUNTS 2010 Mar 1 CRR Cash sales B. Bord (7) B.Bravo Capital 7 CRR Cash Sales Prince Garage Motor vehicle Disposal CRR Cash sales (7) Cash Sales R684 VAT = 14/114X R684 = R84 Sales = R684- R84 = R P age

59 2 Account balance = R707 Amount received = R650 Settlement discount granted = R 57 VAT =14/114xR57= R7 (VAT Input) Actual settlement discount granted = R50 The VAT on settlement discount granted is transferred to VAT Input account to reduce the amount owed to SARS. When we sold the goods, we had created VAT output from the sale which indicates that we owe SARS but now we are no longer going to receive the VAT component on discount, so we should reduce the amount owed to SARS. This is done by entering in amount owed to SARS. This is done by entering in VAT input. The total amount due, is entered in the debtors column, since this represents the total debt settled. 3 Cash Sales R2 850 VAT = 14/114X R2 850 = R350 Sales = R R350 = R There is no VAT on the sale of vehicles because in accordance to VAT laws, no VAT is claimable upon the purchase of vehicles. If VAT cannot be claimed when we purchase an item, therefore, VAT cannot be payable upon disposal. 5 Cash Sales R7 068 VAT = 14/114X R7 068 = R868 Sales = R R868 = R6 200 In the sales column, we enter the price exclusive of VAT, since this is the amount that belongs to the sales of the business. The VAT is entered in the VAT output whilst the total is entered in the bank column since the customer pays us the sum inclusive of VAT. 6 Banking (1March 2010) = R684+R650+R = R Banking (14 March 2010) = R R7 068 = R CASH PAYMENTS JOURNAL This is the book of original entry in which we record all payments made. The payments are entered inclusive of VAT in the bank column and the VAT component is entered in the VAT input column as this represents an amount we should claim from SARS. VAT is charged when the business are charged for goods or services, as such, no VAT will be accounted for when settling a creditor except for a component of settlement discount received, if any, as the VAT component on settlement discount should be reversed to VAT output. This is because, this is a claim we had initially recorded but we can no longer claim it since we will no longer pay it to the supplier. 59 P age