Bookkeeping to Trial Balance Practice exercise solutions Learning Module: An introduction to business, bookkeeping and accounting Practice exercise 1a (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) D M F E I A L C B H EDGE Learning Media CC 1
Practice exercise 1b (ii) Accounting is the science of recording the monetary values of financial transactions of individuals or businesses, and collecting the results with the aim of supplying financial information by submitting reports as a basis for decision making. Bookkeeping is only one part of the practise of accounting. I.e. it is like a piece of a much larger pie: BOOKKEEPING ACCOUNTING THE BOOKKEEPING PROCESS Use source documents to draw up journals Use journals to post to ledgers Use general ledger balances to draw up the trial balance Traditionally, the bookkeeper s responsibilities involved taking the transactions recorded on source documents and using them to draw up the journals, ledgers and trial balance. Thereafter the accountant takes over and draws up the financial statements; as well as performing other important financial tasks and duties. Practice exercise 1c Bank, fixed deposits, vehicles, inventory and office equipment are all items possessed by the business, from which future economic benefits are likely to be derived. They also represent either cash or items that can be converted into cash. As such they are all considered assets. Advertising and traffic fines are expenses. They do not have a retained value. They represent past resources used by the business in generating its income. The difference between income generated and expenses incurred will equal the profit made by the business. EDGE Learning Media CC 2
Strictly speaking packing materials, fuel and office consumables are assets until used up. However since they will be used up within a relatively short period of time, it is accounting convention to record them as expenses from the moment they are bought. (ii) The accounting cycle can be summarised as follows: Transactions are summarised on source documents. Source documents are entered into, and summarised by subsidiary journals. Subsidiary journals are posted to, and summarised in, the general ledger. The accounts in the general ledger are listed and summarised in a trial balance. At year-end, financial statements are drawn up to summarise the financial performance for the year, as well as the financial position as at the last day of the financial year (refer to p 9 in your learner s book in this regard). Practice exercise 1d Non-current assets R Equipment 120 000 Vehicles 180 000 Land and buildings 400 000 700 000 Current assets R Debtors control 24 000 Petty cash 4 000 Cash float 1 000 Trading inventory 15 000 44 000 (Note: The bank balance is not included with current assets, since it is in overdraft. It will thus be included with current liabilities). EDGE Learning Media CC 3
Non-current liabilities R Mortgage loan 250 000 Loan from Plewman s Bank * 100 000 350 000 * R 124 000 R 24 000 = R 100 000 Current liabilities R Bank overdraft (balance unfavourable) 2 000 Creditors control 30 000 Short-term portion of Long-term loan 24 000 56 000 Owner s equity R Total assets (R 700 000 + 44 000) 744 000 Total liabilities (R 350 000 + 56 000) (406 000) 338 000 Assets are resources controlled by the firm, as a result of past events, and from which future economic benefits are likely to flow to the entity. Owner s equity refers to the net results after deducting the liabilities from the assets. It refers to the wealth of the owner(s) in the business. Liabilities are present obligations, as a result of past events, which need to be redeemed in future. Income is brought about by an increase in assets and/or a decrease in liabilities, and causes an increase in owner s equity. Expenses are brought about by a decrease in assets and/or an increase in liabilities, and causes a decrease in owner s equity. EDGE Learning Media CC 4
Practice exercise 1e Day Assets (R) = Owner s equity (R) + Liabilities (R) 1 40 000 10 000 30 000 2 + 2 000 0 0-2 000 7 + 11 000-11 000 0 0 21 + 12 000 0 + 12 000 31-3 000 0-3 000 Total: 49 000 10 000 39 000 Findings: There has been no change in owner s equity during August 2.07! When only assets and/or liabilities are involved in a transaction, there will be no effect on owner s equity. In this example, none of the transactions had an effect on owner s equity. If a business buys an asset, takes out a loan, or pays off a loan, it does not alter the owner's wealth. EDGE Learning Media CC 5
Practice exercise 1f Type of account Name of account Noncurrent asset Current asset Noncurrent liability Current liability Income Expense Proprietary account E.g. Equipment Wages and salaries Trading inventory Bank overdraft Interest income Settlement discount granted Interest on favourable bank balance Interest on overdraft Capital Mortgage loan Creditors control Rent income Cost of sales Debtors control Savings account Petty cash Drawings Land and buildings Office consumable Stationery Staff refreshments Advertising Credit card account (unfavourable) Rates and taxes Commission received Machinery Traffic fines Long-term loan EDGE Learning Media CC 6
Practice exercise 1g Day Assets (R) = Owner s equity (R) + Liabilities (R) 1 233 415 83 415 150 000 1 + 75 000 + 75 000 0 5 + 34 275 0 + 34 275 6 (a) + 9 000 + 9 000 0 6 (b) - 6 000-6 000 0 7-600 - 600 0 8-2 538-2 538 0 13-1 845-1 845 0 16 + 21 930 0 + 21 930 17-4 500-4 500 0 19 0-1 365 + 1 365 24-450 - 450 0 25 (a) + 4 500 + 4 500 0 25 (b) - 3 000-3 000 0 26-12 000-12 000 0 30 + 3 000-3 000 0 0 Total: 347 187 139 617 207 570 EDGE Learning Media CC 7
(ii) When calculating profit, capital and drawings should be excluded. In other words, deduct the negatives from the positives in the owner s equity column, but exclude the + R 75 000 on day 1, as well as the R 12 000 on day 26. The profit made during September 20.7 can be calculated as follows: Day Profit (R) 1 Not included 1 Not included 5 0 6 (a) + 9 000 (b) - 6 000 7-600 8-2 538 13-1 845 16 0 17-4 500 19-1 365 24-450 25 (a) + 4 500 (b) - 3 000 26 Not included 30 0 Total: - 6 798 EDGE Learning Media CC 8
Practice exercise 1h Date Assets (R) = Owner's equity (R) + Liabilities (R) 1 8 10 15-1 000.00-1 000.00 Cr Trading inventory Dr Drawings - 10 000.00 Cr Bank + 10 000.00 Dr Trading inventory + 5 200.00 + 5 200.00 Dr Computer equipment Cr Creditors control + 4 470.00 + 4 470.00 Dr Debtors control Cr Sales - 2 980.00-2 980.00 Cr Trading inventory Dr Cost of sales + 6 950.00 + 6 950.00 27 28 29 Dr Bank Cr Sales - 4 633.33-4 633.33 Cr Trading inventory Dr Cost of sales + 1 000.00 Dr Bank - 1 000.00 Cr Trading inventory + 800.00 + 800.00 Dr Bank Cr Dividend income EDGE Learning Media CC 9