FAC1501 Learning Unit 3 2024 PDF

FAC1501 LEARNING UNIT 3 THE ACCOUNTING EQUATION: FINANCIAL PERFORMANCE Introductory Financial Accounting  LEARNING UNIT 3 OVERV...

FAC1501 LEARNING UNIT 3 THE ACCOUNTING EQUATION: FINANCIAL PERFORMANCE Introductory Financial Accounting  LEARNING UNIT 3 OVERVIEW 2 Learning outcomes............................................................................................................................... 36 Key concepts........................................................................................................................................ 36 Assessment criteria.............................................................................................................................. 37 3.1 Introduction..................................................................................................................................... 37 3.2 The accounting equation: Financial performance.......................................................................... 37 3.3 The trial balance............................................................................................................................. 46 3.4 The profit or loss account............................................................................................................... 47 3.5 The statement of profit or loss and other comprehensive income.................................................. 50 3.6 Summary........................................................................................................................................ 51 3.7 Exercises and solutions.................................................................................................................. 53 Self-assessment................................................................................................................................... 60 LEARNING OUTCOMES After studying this learning unit, you should be able to: understand the accounting equation concerning income and expenses explain the effects of financial accounting entries concerning income and expenses on the accounting equation prepare entries in general ledger accounts of income and expenses prepare a trial balance for a service entity prepare a profit or loss account for a service entity prepare a statement of profit or loss and other comprehensive income for a service entity KEY CONCEPTS Income Expenses Debtors Trial balance Profit or loss account Statement of profit or loss and other comprehensive income 36  LEARNING UNIT 3 ASSESSMENT CRITERIA Business transactions concerning income and expenses are explained with appropriate examples. when recording in the accounting equation format and in the ledger accounts. Expenses and income and gains and losses are defined and classified for recognition in the statement of profit or loss and other comprehensive income. 3.1 INTRODUCTION The objective of every entity is to earn as large a profit as possible. It is therefore necessary to determine the financial performance of the entity by calculating the financial result over a specific period. 3.2 THE ACCOUNTING EQUATION: FINANCIAL PERFORMANCE The financial result of an entity is measured in terms of the profit or loss which the entity has made over a specific period. This period is known as the financial period and is usually one year. An entity makes a profit when the income it has earned from its business activities is more than the expenditure it has incurred in generating or producing that income. An entity makes a loss when the expenditure it has incurred in generating or producing income is more than the income it has earned. PROFIT/LOSS FOR THE YEAR = INCOME - EXPENSES An entity must earn an income to be able to pay its expenses. Profit for the year is the owner’s reward for the capital invested and the entrepreneurial spirit shown. Profit (gains) or income is credited because it increases the equity (capital) amount owed to the owner of the entity. If equity increases the account must be credited. Dr (debit side) Capital (credit side) Cr - (decrease) + (increase) The following rule can be applied to profit/income: Dr (debit side) Profit/income (credit side) Cr Always credited - (decrease) + (increase) 37  LEARNING UNIT 3 INCOME Profit/income is the increase in economic benefits of an entity during an accounting period which results in an increase in equity. Such an increase can be the result of an increase in assets or a decrease in liabilities. REVENUE PROFIT/GAINS Revenue earned from the entity’s Gains are increases in economic normal activities (daily operating benefits, which do not arise from the activities), for example: normal activities of the entity, for example: fees earned profit on sale of non-current asset sales interest income rental income commission income credit losses recovered Expenses are incurred to earn income. Losses or expenses are debited because it decreases the equity (capital) amount owed to the owner of the entity. If equity decreases the losses or expense accounts must be debited. Dr (debit side) Capital (credit side) Cr - (decrease) + (increase) The following rule can be applied to losses/expenses: Dr (debit side) Losses/expenses (credit side) Cr Always debited + (increase) - (decrease) 38  LEARNING UNIT 3 EXPENSES Losses/expenses are the outflow of economic benefits (payments/losses) during the accounting period, which results in a decrease in equity. Such a decrease can be the result of a decrease in assets or an increase in liabilities. EXPENSES LOSSES Expenses are incurred in the normal Losses are decreases in economic course of the entity’s activities. They benefits, which do not arise from the arise from the generation of income, normal activities of the entity, for for example: example: Cost of sales Loss on sale of non-current asset Rental expenses Interest expenses Wages and salaries Advertising Credit losses Insurance Repairs and maintenance Telephone expenses Water and electricity Postage Rates and taxes Stationery Consumables Packing materials Bank charges Depreciation Administrative expenses 39  LEARNING UNIT 3 Let’s consider a few more transactions of Mr Bongile Sithole for the 20.6 financial year that generate income or give rise to expenditure. The financial year ends annually on 31 December. Transaction 5: Mr Bongile Sithole rendered a service on 15 January, for cash, to a client for R60 000. Explanation: Received money for services rendered, therefore the bank account (an asset) increases and must be debited. Dr (debit side) Assets (credit side) Cr + (increase) - (decrease) Services rendered are income that increase the profit for the year. Therefore, equity increased, and the services rendered account must be credited. You will now see that the double entry principle has been adhered too. Dr (debit side) Profit/income (credit side) Cr - (decrease) + (increase) The effect of the transaction on the accounting equation can be illustrated as follows: A = E + L Bank Tools and Capital Income/ Big Builders Uni Bank equipment expenditure (other (long-term payable) loan) R R R R R R 88 800 8 200 40 000 7 000 50 000 + 60 000 + 60 000 148 800 8 200 = 40 000 60 000 + 7 000 50 000 40  LEARNING UNIT 3 The above transaction will be recorded in the ledger accounts as follows: 1. The debit-side of the bank account: Dr Bank 1 Cr Date Details Fol R Date Details Fol R 20.6 20.6 Jan 1 Capital 40 000 Jan 1 Tools and equipment 1 200 Long-term loan: Uni Bank 50 000 15 Services rendered 60 000 (account to be credited) 2. The credit-entry in the services rendered account: Dr Services rendered 2 Cr Date Details Fol R Date Details Fol R 20.6 Jan 15 Bank (account to be 60 000 debited) Transaction 6: Mr Bongile Sithole rendered a service on 16 January, on credit, to M Beauty for R20 000. Explanation: Clients owe BS Electrical money. These clients are called trade receivables (resource controlled by the entity), as a result of past events (rendering of services), and from which future economic benefits are expected (money to be received). Therefore, it is an asset. Assets increased and M Beauty (a trade receivable) must be debited. A person who owes money to the entity (bought goods or services on credit) is a trade receivable (trade debtor) (asset). A person who buys non-current assets on credit from the entity is an other receivable (other debtor) (asset). Dr (debit side) Assets (credit side) Cr + (increase) - (decrease) Services rendered are income that increase the profit for the year. Therefore, equity increased, and the services rendered account must be credited. Dr (debit side) Profit/income (credit side) Cr - (decrease) + (increase) 41  LEARNING UNIT 3 The effect of the transaction on the accounting equation can be illustrated as follows: A = E + L Bank Tools and M Beauty Capital Income/ Big Uni Bank equipment (trade expenditure Builders (long-term receivable) (other loan) payable) R R R R R R R 88 800 8 200 40 000 7 000 50 000 + 60 000 + 60 000 + 20 000 + 20 000 148 800 8 200 20 000 = 40 000 80 000 + 7 000 50 000 The above transaction will be recorded in the ledger accounts as follows: 1. The debit-side of M Beauty’s account: Dr M Beauty 6 Cr Date Details Fol R Date Details Fol R 20.6 Jan 16 Services rendered 20 000 (account to be credited) 2. The credit-entry in the services rendered account: Dr Services rendered 7 Cr Date Details Fol R Date Details Fol R 20.6 Jan 15 Bank 60 000 16 M Beauty (account 20 000 to be debited) Transaction 7: On 28 January the business’s telephone account for January was paid via internet banking, R1 200. Explanation: Telephone expenses are expenses that decrease the profit for the year. Therefore, equity decreased and the telephone expense account must be debited. Dr (debit side) Losses/expenses (credit side) Cr + (increase) - (decrease) 42  LEARNING UNIT 3 Paid money for the telephone account, therefore the bank account (an asset) decreases and must be credited. To complete the double entry the appropriate expense account must be debited. Dr (debit side) Assets (credit side) Cr + (increase) - (decrease) The effect of the transaction on the accounting equation can be illustrated as follows: A = E + L Bank Tools and M Beauty Capital Income/ Big Uni Bank equipment (trade expenditure Builders (long-term receivable) (other loan) payable) R R R R R R R 88 800 8 200 40 000 7 000 50 000 + 60 000 + 60 000 + 20 000 + 20 000 - 1 200 - 1 200 147 600 8 200 20 000 = 40 000 78 800 + 7 000 50 000 The above transaction will be recorded in the ledger accounts as follows: 1. The entry on the debit-side of the telephone expenses account: Dr Telephone expenses 8 Cr Date Details Fol R Date Details Fol R 20.6 Jan 28 Bank (account to be 1 200 credited) 2. The credit-entry in the bank account: Dr Bank 1 Cr Date Details Fol R Date Details Fol R 20.6 20.6 Jan 1 Capital 40 000 Jan 1 Tools and equipment 1 200 Long-term loan: Uni 28 Telephone expenses 1 200 Bank 50 000 (account to be 15 Services rendered 60 000 debited) 43  LEARNING UNIT 3 Transaction 8: On 31 January the receptionist’s salary for January was paid via internet banking, R6 000. Explanation: Salaries account is an expense that decreases the profit for the year. Therefore, equity decreased, and the salaries account must be debited. Dr (debit side) Losses/expenses (credit side) Cr + (increase) - (decrease) Paid the salary of the receptionist, therefore the bank account (an asset) decreases and must be credited. To complete the double entry the appropriate expense account must be debited. Dr (debit side) Assets (credit side) Cr + (increase) - (decrease) The effect of the transaction on the accounting equation can be illustrated as follows: A = E + L Bank Tools and M Beauty Capital Income/ Big Uni Bank equipment (trade expenditure Builders (long-term receivable) (other loan) payable) R R R R R R R 88 800 8 200 40 000 7 000 50 000 + 60 000 + 60 000 + 20 000 + 20 000 - 1 200 - 1 200 - 6 000 - 6 000 141 600 8 200 20 000 = 40 000 72 800 + 7 000 50 000 The above transaction will be recorded in the ledger accounts as follows: 1. The debit-side of the salaries account: Dr Salaries 9 Cr Date Details Fol R Date Details Fol R 20.6 Jan 31 Bank (account to be 6 000 credited) 44  LEARNING UNIT 3 2. The credit-entry in the bank account: Dr Bank 1 Cr Date Details Fol R Date Details Fol R 20.6 20.6 Jan 1 Capital 40 000 Jan 1 Tools and equipment 1 200 Long-term loan: Uni 28 Telephone expenses 1 200 Bank 50 000 31 Salaries (account to 6 000 15 Services rendered 60 000 be debited) A summary of all the ledger accounts in the general ledger, at the end of January 20.6 is as follows: The bank account must be balanced off. BS ELECTRICAL GENERAL LEDGER Dr Bank 1 Cr Date Details Fol R Date Details Fol R 20.6 20.6 Jan 1 Capital 40 000 Jan 1 Tools and equipment 1 200 15 Long-term loan: Uni 28 Telephone expenses 1 200 Bank 50 000 31 Salaries 6 000 Services rendered 60 000 Balance c/d 141 600 150 000 150 000 Feb 1 Balance b/d 141 600 Dr Capital 2 Cr Date Details Fol R Date Details Fol R 20.6 Jan 1 Bank 40 000 Dr Tools and equipment 3 Cr Date Details Fol R Date Details Fol R 20.6 Jan 1 Big Builders 7 000 Bank 1 200 8 200 45  LEARNING UNIT 3 Dr Big builders 4 Cr Date Details Fol R Date Details Fol R 20.6 Jan 1 Tools and equipment 7 000 Dr Long-term loan: Uni Bank Account 5 Cr Date Details Fol R Date Details Fol R 20.6 Jan 1 Bank 50 000 Dr M Beauty 6 Cr Date Details Fol R Date Details Fol R 20.6 Jan 16 Services rendered 20 000 Dr Services rendered 7 Cr Date Details Fol R Date Details Fol R 20.6 Jan 15 Bank 60 000 16 M Beauty 20 000 Dr Telephone expenses 8 Cr Date Details Fol R Date Details Fol R 20.6 Jan 28 Bank 1 200 Dr Salaries 9 Cr Date Details Fol R Date Details Fol R 20.6 Jan 31 Bank 6 000 The ledger accounts in the general ledger numbered from 1 to 6 are asset accounts, liability accounts and equity accounts. These balances will appear in the statement of financial position. The ledger accounts in the general ledger numbered from 7 to 9 are all income/profit accounts and expense/loss accounts. The arithmetical correctness of the recording of transactions in the general ledger must be tested on a regular basis. This usually takes place once all transactions up to and including a certain date (in this case for the month of January) have been recorded in the general ledger and before any final financial statements are prepared. A trial balance will be compiled to check the arithmetical correctness of the recording of transactions in the general ledger. 3.3 THE TRIAL BALANCE The total of all the debit balances on the ledger accounts should be equal to the total of all the credit balances on the ledger accounts, because all the transactions should have been recorded 46  LEARNING UNIT 3 in accordance with the double-entry principle. To determine whether this is so, the balances of all accounts are determined and recorded in a statement known as the trial balance. A trial balance is a list of all the balances of all the accounts in the general ledger on a particular date. The names and balances are recorded in the trial balance in the order in which they appear in the general ledger. There are two columns in which debit balances and credit balances are recorded. The final totals of the two columns should always be the same. BS ELECTRICAL TRIAL BALANCE AS AT 31 JANUARY 20.6 Debit Credit R R Bank 141 600 Capital 40 000 Tools and equipment 8 200 Big Builders 7 000 Long-term loan: Uni Bank 50 000 M. Beauty 20 000 Services rendered 80 000 Telephone expenses 1 200 Salaries 6 000 177 000 177 000 The errors which may be revealed by a trial balance will be discussed in detail in a later learning unit. The debit balances total is equal to the credit balances total and the profit or loss account can now be compiled. 3.4 THE PROFIT OR LOSS ACCOUNT If Mr Bongile Sithole wants to determine after one month whether it is worthwhile for him to carry on the business, the profit/income accounts and losses/expense accounts must be closed off to the profit or loss account so that the profit for the month can be calculated. The financial result of an entity is measured in terms of the profit or loss which the entity has made over a specific period. This period is known as the financial period and is usually one year. At the end of the financial period (usually a year) all expense/loss accounts and income/ profit accounts of a service entity must be closed off to a profit or loss account which forms the basis for the preparation of a statement of profit or loss and other comprehensive income. 47  LEARNING UNIT 3 Explanation of the transfer of income to the profit or loss account: To close off the services rendered account (income), the services rendered account must be debited with R80 000, which is equal to the total of the amounts on the credit side (R60 000 + R20 000). There is no total on the debit side. To balance off the ledger account the total amount of R80 000 will be entered on the debit side. The name of the account that must be credited to complete the double-entry is profit or loss account. The services rendered account will now balance off. The profit or loss account is credited with R80 000. This is done to adhere to the double-entry principle. Dr Services rendered 7 Cr Date Details Fol R Date Details Fol R 20.6 20.6 Jan 31 Profit or loss (account 80 000 Jan 15 Bank 60 000 to be credited) 16 M. Beauty 20 000 80 000 80 000 Explanation of the transfer of expenditure to the profit or loss account: To close off the telephone expense account (an expense), the telephone expenses account must be credited with R1 200 which is equal to the total amount on the debit side, R1 200. There is no balance on the telephone expense account because the total amount is taken to the profit or loss account. The profit or loss account is debited with R1 200. This is done to adhere to the double-entry principle. Dr Telephone expenses 8 Cr Date Details Fol R Date Details Fol R 20.6 20.6 Jan 28 Bank 1 200 Jan 31 Profit or loss (account 1 200 to be debited) 1 200 1 200 The same principle is applicable to closing off the salaries account (an expense) to the profit or loss account. The salaries account must be credited with R6 000, the total of the amount on the debit side, R6 000. There is no balance on the salaries account because the total amount is taken to the profit or loss account. The profit or loss account is debited with R6 000. This is done to adhere to the double-entry principle. 48  LEARNING UNIT 3 Dr Salaries 9 Cr Date Details Fol R Date Details Fol R 20.6 20.6 Jan 31 Bank 6 000 Jan 31 Profit or loss (account 6 000 to be debited) 6 000 6 000 The profit or loss account is a final account in the general ledger and the statement of profit or loss and other comprehensive income is one of the financial statements an entity must prepare. It uses the same information, but the one is an account while the other is a statement (no debit side or credit side). The profit or loss account is as follows: Dr Profit or loss 10 Cr Date Details Fol R Date Details Fol R 20.6 20.6 Jan 31 Telephone expenses 1 200 Jan 31 Services rendered 80 000 (account to be (account to be credited) debited) Salaries (account to 6 000 be credited) Capital (Profit for the month) (account to 72 800 be credited) 80 000 80 000 An entity makes a profit when the income it has earned is more than the expenditure it has incurred in generating or producing that income. BS Electrical has made a profit for the month because the income earned, R80 000, is more than the expenses incurred in generating the income, R1 200 + R6 000 = R7 200. The income earned (profit) is R80 000 - R7 200 = R72 800. To calculate the profit or loss for the month (the same as calculating the balance c/d): Add the debit side of the profit or loss account and write down the total in pencil: R1 200 + R6 000 = R7 200. Add the credit side of the profit or loss account and write down the total in pencil: R80 000. The credit total of the profit or loss account is more than the debit total. To make the two sides equal the debit side needs an amount of R80 000 - R7 200 = R72 800. This is the balancing amount and is recorded on the side of the profit or loss account that is the smallest in this case, the debit side. It is a profit because the income is greater than the expenses. The account is then totaled (the biggest total in pencil, that side is the credit side total of R80 000). The capital account will be credited, therefore the reference on the debit side of the profit or loss account will be capital account (profit for the month). 49  LEARNING UNIT 3 The last transfer is the entry for the profit for the period that must be credited to the capital account (profit or loss account is debited) because BS Electrical owes the profit to the owner, Mr B Sithole. The profit for the month is the owner’s reward for the capital he has invested and the entrepreneurial spirit he has shown. It therefore increases the equity. Dr Capital 2 Cr Date Details Fol R Date Details Fol R 20.6 Jan 1 Bank 40 000 31 Profit or loss (profit for the month) 72 800 (account to be debited) 112 800 A statement of profit or loss and other comprehensive income will now be compiled using the information included in the profit or loss account. 3.5 THE STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME The aim of the statement of profit or loss and other comprehensive income is to reflect the financial performance (profit/loss) for a financial period. The statement of profit or loss and other comprehensive income is as follows: BS ELECTRICAL STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE MONTH ENDED 31 JANUARY 20.6 Notes R Services rendered 80 000 Distribution, administrative and other expenses (7 200) Telephone expenses 1 200 Salaries 6 000 Profit for the month 72 800 Other comprehensive income for the month* — Total comprehensive income for the month 72 800 * Other comprehensive income for the month falls outside the scope of the FAC1501 syllabus. To complete the set of financial statements the statement of financial position will also be compiled. 50  LEARNING UNIT 3 The statement of financial position is as follows: BS ELECTRICAL STATEMENT OF FINANCIAL POSITION AS AT 31 JANUARY 20.6 Notes R ASSETS Non-current assets 8 200 Property, plant and equipment (Tools and equipment) 8 200 Current assets 161 600 Trade and other receivables (Trade receivables control) 20 000 Cash and cash equivalents (Bank) 141 600 Total assets 169 800 EQUITY AND LIABILITIES Equity 112 800 Capital 112 800 Non-current liabilities 50 000 Long-term borrowings (Long-term loan: Uni Bank) 50 000 Current liabilities 7 000 Trade and other payables (Other payables control) 7 000 Total equity and liabilities 169 800 Learning unit 2 and 3 are the most important learning units in financial accounting. Please make sure you understand the rules concerning assets, liabilities, equity, profit/income accounts and losses/ expense accounts. You will have no problems with financial accounting in future if you understand these rules and know how to apply them. 3.6 SUMMARY The table below presents a useful overview of the accounting equation and the related subcategories of the elements of financial statements. Examples of relevant ledger accounts are provided under each category. 51  ASSETS = EQUITY + LIABILITIES Debit (+) Credit (-) Debit (-) Credit (+) Debit (-) Credit (+) * DRAWINGS * CAPITAL NON-CURRENT ASSETS EXPENSES INCOME NON-CURRENT LIABILITIES Land and buildings Cost of sales Sales Long-term loans Equipment Rental expenses Rental income Mortgage Vehicles Interest expense Interest income Furniture Wages and salaries Dividend income Machinery Advertising Commission income Goodwill Insurance expenses Credit losses recovered Investments (financial) Repairs and maintenance Profit on sale of a non- Telephone expenses current asset Water and electricity CURRENT ASSETS Credit losses CURRENT LIABILITIES Trading inventory Postage Short-term loans Trade receivables control Rates and taxes Trade payables control Other receivables control Stationery Other payables control 52 Prepaid expenses Consumables Bank overdraft Accrued income Packaging materials Current portion of long-term loans Bank Loss on sale of a non-current Accrued expenses Petty cash asset Income received in advance Cash float LEARNING UNIT 3  LEARNING UNIT 3 3.7 EXERCISES AND SOLUTIONS EXERCISE 1 3 (a) How is the financial result calculated in financial accounting terms? (b) Which financial report reflects the financial result? (c) Give three examples of income. (d) Give three examples of expenditure. (e) How is profit/loss determined for a financial period? (f) Does a loss increase or decrease the equity of the owner? SOLUTION: EXCERCISE 1 4 (a) PROFIT FOR THE YEAR = INCOME - EXPENDITURE (b) The statement of profit or loss and other comprehensive income for the year ended … (c) fees earned sales interest income rental income commission income credit losses recovered (d) cost of sales rental expenses interest expense wages and salaries advertising credit losses insurance repairs and maintenance telephone expenses water and electricity postage rates and taxes stationery consumables packing materials bank charges depreciation administrative expenses (e) PROFIT FOR THE YEAR = INCOME - EXPENDITURE (f) A loss decreases income and profits and therefore also decreases the equity. 53  LEARNING UNIT 3 EXERCISE 2 5 The financial position of T Payn, an attorney, at 28 February 20.6 is as follows: A = E + L R50 000 = R30 000 + R20 000 For the year ended 28 February 20.7 he had the following income and expenditure: R Fees earned 180 000 Salaries 100 000 Administrative expenses 20 000 Insurance expenses 10 000 6 REQUIRED Calculate T Payn’s equity as at 28 February 20.7. SOLUTION: EXCERCISE 2 7 Income = Fees earned R180 000 Expenditure = Salaries R100 000 + Administrative expenses R20 000 + Insurance expenses R10 000 = R130 000 Profit for the year = Income - Expenses = R180 000 - R130 000 = R50 000 Equity = Capital + Profit for the year E = R30 000 (20.6) + R50 000 (20.7) E = R80 000 EXERCISE 3 8 REQUIRED 9 List each of the following ledger accounts under one of the categories in the table below. “Furniture” is inserted as an example. ASSETS EQUITY LIABILITIES Non-current assets Current assets Capital Income Expenditure Non-current Current liabilities liabilities Furniture 54  LEARNING UNIT 3 Ledger accounts to be classified: (a) land and buildings (b) mortgage (c) petty cash (d) postage (e) interest income (f) vehicles (g) salaries (h) trade receivables (i) trade payables (j) bank overdraft (k) fees earned (l) electricity deposit (m) subscriptions SOLUTION: EXCERCISE 3 10 ASSETS EQUITY LIABILITIES Non-current Current Capital Income Expenditure Non-current Current assets assets liabilities liabilities (a) land and buildings (b) mortgage (c) petty cash (d) postage (e) interest income (f) vehicles (g) salaries (h) trade receivables (i) trade payables (j) bank overdraft (k) fees earned (l) electricity deposit * (m) subscriptions * Electricity deposit is an amount paid by the entity to serve as security for the payment of the electricity account. The amount will be paid back to the entity if they sell the land and buildings and will no longer make use of the electricity; therefore, it is not an expense but a current asset. 55  LEARNING UNIT 3 EXERCISE 4 11 D Paulus started a television antenna installation service on 1 June 20.6. The following transactions took place during the first month: Transactions: June 1 Cash in the bank deposited as opening capital, R25 000. 2 D Paulus made his private equipment available to the business, R9 000. 3 Additional equipment purchased and paid via internet banking, R12 000. 4 Installation fees for work done on account for Kannadrift Municipality, R4 200. 6 Vehicle purchased on credit from Virginia Cars Limited, R22 400. 17 Kannadrift Municipality paid R2 200 on their account. 28 Wages paid, R4 000. 30 Paid R9 000 to Virginia Cars Limited in part settlement of the entity’s account. REQUIRED 12 Use the accounting equation to analyse the above-mentioned transactions as follows: NB: (1) Show the effect of each transaction on the accounting equation with a plus sign (+) for an increase and a minus sign (-) for a decrease. Example: On 1 July 20.6, D Paulus received R2 000 in cash for an installation done for Cook Financing Corporation. Accounting equation Date Assets = Equity + Liabilities 20.6 July 1 + R2 000 + R2 000 0 Cash received will increase the bank, therefore assets increased. The cash was for installation fees, an income, therefore equity increased. 56  LEARNING UNIT 3 SOLUTION: EXCERCISE 4 13 Date Accounting equation Assets = Equity + Liabilities 20.6 June 1 + R25 000 + R25 000 2 + R 9 000 + R 9 000 3 + R12 000 - R12 000 4 + R 4 200 + R 4 200 6 + R22 400 + R22 400 17 + R 2 200 - R 2 200 28 - R 4 000 - R 4 000 30 - R 9 000 - R 9 000 R47 600 R34 200 R13 400 Assets (R47 600) = Equity (R34 200) + Liabilities (R13 400) EXERCISE 5 14 The following transactions relate to Witblits Electricians: Transactions: Oct 1 W Blits, the owner, deposited opening capital, R10 000. Obtained a loan from SA Bank, R6 000. 3 Bought equipment on credit from Sparks Dealers, R1 000. 9 Made an internet banking payment for an advertisement in a local newspaper, R200. 12 Paid the telephone account via internet banking, R75. 13 Received a payment from H House for services rendered, R500. 24 As an additional capital contribution W Blits transferred his motor vehicle to the business, R9 000. 27 Paid salaries via internet banking, R2 000. 30 Made an internet banking payment to SA Bank as a repayment on the loan, R1 500. REQUIRED 15 Prepare the appropriate general ledger accounts which reflect the above transactions in the books of Witblits Electricians. The general ledger accounts must be properly balanced at 31 October 20.6. NB: Indicate the correct contra general ledger account. 57  LEARNING UNIT 3 SOLUTION: EXCERCISE 5 16 WITBLITS ELECTRICIANS GENERAL LEDGER Dr Capital 1 Cr Date Details Fol R Date Details Fol R 20.6 Oct 1 Bank 10 000 24 Motor vehicles 9 000 19 000 Dr Bank 2 Cr Date Details Fol R Date Details Fol R 20.6 20.6 Oct 1 Capital 10 000 Oct 9 Advertisements 200 Long-term loan: 12 Telephone expenses 75 SA Bank 6 000 27 Salaries 2 000 13 Services rendered 500 30 Long-term loan: SA Bank 1 500 31 Balance c/d 12 725 16 500 16 500 Nov 1 Balance b/d 12 725 Dr Long-term loan: SA Bank 3 Cr Date Details Fol R Date Details Fol R 20.6 20.6 Oct 30 Bank 1 500 Oct 1 Bank 6 000 31 Balance c/d 4 500 6 000 6 000 Nov 1 Balance b/d 4 500 Dr Equipment 4 Cr Date Details Fol R Date Details Fol R 20.6 Oct 3 Sparks Dealers 1 000 Dr Motor vehicles 5 Cr Date Details Fol R Date Details Fol R 20.6 Oct 24 Capital 9 000 58  LEARNING UNIT 3 Dr Sparks Dealers 6 Cr Date Details Fol R Date Details Fol R 20.6 Oct 3 Equipment 1 000 Dr Services rendered 7 Cr Date Details Fol R Date Details Fol R 20.6 Oct 13 Bank 500 Dr Telephone expenses 8 Cr Date Details Fol R Date Details Fol R 20.6 Oct 12 Bank 75 Dr Salaries 9 Cr Date Details Fol R Date Details Fol R 20.6 Oct 27 Bank 2 000 Dr Advertisements 10 Cr Date Details Fol R Date Details Fol R 20.6 Oct 9 Bank 200 59  FAC1501/1 SELF-ASSESSMENT 17 After you have worked through this learning unit, are you able 128 to: define income? ☺   define expenses? ☺   explain the difference between (and give examples of) income and expenses? ☺   explain the rules for debiting and crediting different types of profit/income and losses/expense accounts? ☺   correctly classify any given profit/income and losses/ expense account? ☺   correctly enter any given transaction considering profit/ income and losses/expense into the accounting equation? ☺   correctly apply the accounting equation to any given transaction considering profit/income and losses/expense? ☺   correctly enter any given transaction concerning profit/ income and losses/expense in the ledger accounts? ☺   prepare a trial balance? ☺   prepare a profit or loss account? ☺   prepare a statement of profit or loss and other comprehensive income? ☺   If you have marked all ☺ you may continue to the next learning unit. If you have marked any  you have to revise that specific section. If you have marked any  you have to re-study that specific section. 60