LIVE: FINANCIAL STATEMENTS (SOLE TRADER) 10 NOVEMBER 2014

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1 LIVE: FINANCIAL STATEMENTS (SOLE TRADER) 10 NOVEMBER 2014 In this lesson we: Lesson Description Understand how to do year-end adjustments with particular reference to the income statement Understand the concepts relating to the matching principle of Accounting Challenge Question How would you journalise the following adjustment? T Majola, a debtor, was declared insolvent. T Majola owed Wallaby Traders R800. A dividend of 30c in the rand was received and the balance of the account is to be written off. Summary At the end of the financial year, we prepare TWO financial statements: o Income statement = to calculate our net profit or loss for the year o Balance sheet = to show our financial position, i.e. the Accounting Equation at year-end Incomes and expenses are shown in the Income statement Assets, Liabilities, Capital and Drawings are shown in the balance sheet In particular, you should know how to do the following adjustments: o Trading stock deficit / surplus o Consumable stores on hand o Writing off bad debts / recording bad debts recovered o Dealing with bank charges, stop orders and debit orders o Accrued income o Income received in advance o Accrued expenses o Prepaid expenses o Depreciation (covered in detail in Grade 11) o Calculating interest due on a loan / interest due on a fixed deposit o Closing transfers STUDY the format of the notes and income statement carefully! In particular you need to know the notes for: o Interest income o Interest expense o Inventory o Trade and other receivables o Cash and cash equivalents o Owner s equity o Trade and other payables P a g e 1

2 Test Yourself Choose the correct option to answer these multiple choice questions. Question Julies Bookshop purchases goods on credit from Yebo Publishers for R The entries in the ledger will be: (a) Debit Trading Stock R Credit Creditors Control R (b) Debit Purchases R Credit Creditors Control R (c) Debit Creditors control R Credit Trading Stock R (d) Debit Trading Stock R Credit Bank R Julies Bookshop sells books for cash to a customer, I Reid, for R The entries in the ledger will be: (a) Debit Debtors Control R1 750; Credit Sales R1 750 Debit Cost of Sales R1 000; Credit Trading Stock R1 750 (b) Debit Debtors Control R1 750; Credit Trading Stock R1 750 Debit Cost of Sales R1 000; Credit Sales R1 000 (c) Debit Bank R1 750; Credit Sales R1 750 Debit Cost of Sales R1 000; Credit Trading Stock R1 000 (d) Debit Bank R1 750; Credit Sales R A credit customer, B Booker, returns books that she did not order. The cost price of the books was R200. Julies Bookshop issues a credit note for the appropriate sales amount. The entries in the ledger will be: (a) (b) (c) (d) Debit Debtors Allowances R350; Credit Bank R350 Debit Cost of Sales R200; Credit Trading Stock R200 Debit Debtors Control R350; Credit Debtors allowances R350 Debit Trading Stock R200; Credit Cost of Sales R200 Debit Sales R350; Credit Debtors allowances R350 Debit Cost of Sales R200; Credit Trading Stock R200 Debit Debtors Allowances R350; Credit Debtors Control R350 Debit Trading Stock R200; Credit Cost of Sales R200 P a g e 2

3 1.4 June Julies takes goods for personal use. The marked selling price of these books is R420. The entries in the ledger will be: (a) (b) (c) (d) Debit Drawings R420 Credit Trading Stock R420 Debit Drawings R240 Credit Trading Stock R240 Debit Drawings R315 Credit Trading Stock R315 Debit Trading Stock R315 Credit Trading Stock R The physical stock count reveals books on hand at the end of the year to have a cost price of R The Trading Stock Account reflects a balance of R The entries in the ledger will be: Question 1 (a) Debit Trading Stock R6 000 Credit Closing Stock R420 (b) Debit Drawings R6 000 Credit Trading Stock R6 000 (c) Debit Trading Stock Deficit R6 000 Credit Trading Stock R6 000 (d) Debit Trading Stock R6 000 Credit Trading Stock Surplus R6 000 Exam Questions (Adapted from DoE Exemplar, 2006, Question 3) Peggy Perumal owns a ladies dress shop called Peggy s Fashions. Her bookkeeper has drafted an Income Statement for the year ended 28 February 2005, but she has not taken certain adjustments into account. REQUIRED: 1.1 Correct the Income Statement to reflect the correct profit or loss for the year. Correct any errors by crossing out the original figures and inserting the correct figures. (25) 1.2 Prepare a Balance Sheet on 28 February You are not required to prepare any notes to the Balance Sheet. Show your calculations in brackets so that you can earn marks for your adjustments. (50) P a g e 3

4 INFORMATION: PEGGY PERUMAL TRADING AS PEGGY S FASHIONS DRAFT INCOME STATEMENT FOR YEAR ENDED 28 FEBRUARY 2005 The following balances appeared in the Balance Sheet section of the ledger before any adjustments: P a g e 4

5 ADJUSTMENTS AND ADDITIONAL INFORMATION: 1. Peggy took stock of dresses for her personal use at cost price, R This has not been recorded. 2. A stock count at the year-end revealed dresses of R on hand. 3. A computer was purchased on credit on 31 December 2004 for R This has not been recorded. The amount due will be paid in March Provide for interest owing on the loan from Credfin. No loan repayments have been made since the loan was originally received in 2003, but R has to be repaid on 30 June Half of the fixed deposit matures in April The bank statement for February reflected the following which have not been recorded yet: - Service fees, R300 - Interest on favourable bank account, R60 7. The rent for February 2005 has not been paid yet. Provide for the amount owing. 8. A debtor, N Norris, complained that she was overcharged on her latest invoice. Peggy agreed to adjust her account by R800, but this has not been recorded. The cost of sales was correctly recorded. 9. A debtor, F Frutt, has been declared insolvent. He owes R His insolvent estate will pay out 60 cents in the rand. 10. Commission of R1 500 is owed to Peggy s Fashions for sale of fashion magazines. This will be received in March An amount of R1 800 was paid to the Daily News on 2 January This has been recorded in the books. However, this is in respect of three identical advertisements that are scheduled to appear in the newspaper one in January, one in February and one in March. Answers Challenge Question: Dr Bank R240 Dr Bad debts R560 Cr Debtors Control R800 Test Yourself 1.1. A 1.2. C 1.3. D 1.4. B 1.5. C P a g e 5

6 Exam Questions Question 1 (Adapted from DoE Exemplar, 2006, Question 3) 1.1 PEGGY PERUMAL TRADING AS PEGGY S FASHIONS INCOME STATEMENT FOR THE YEAR ENDING 28 FEBRUARY 2005 P a g e 6

7 1.2 PEGGY PERUMAL TRADING AS PEGGY S FASHIONS BALANCE SHEET AS AT 28 FEBRUARY 2005 P a g e 7

SUBJECT: ACCOUNTING GRADE 12 CHAPTER: COMPANIES LESSON: PUBLISHED FINANCIAL STATEMENTS LESSON OVERVIEW (KNOWLEDGE AREAS) LESSON INTRODUCTION

SUBJECT: ACCOUNTING GRADE 12 CHAPTER: COMPANIES LESSON: PUBLISHED FINANCIAL STATEMENTS LESSON OVERVIEW (KNOWLEDGE AREAS) LESSON 1. Introduction 2. Income Statement 3. Balance sheet INTRODUCTION A company