FAC1502 Financial Accounting 1 PDF

FAC1502 PART B COLLECTING AND PROCESSING THE ACCOUNTING DATA OF ENTITIES Financial Accounting 1: Financial Accounting Concepts, Principles and Procedures  TOPIC B...

FAC1502 PART B COLLECTING AND PROCESSING THE ACCOUNTING DATA OF ENTITIES Financial Accounting 1: Financial Accounting Concepts, Principles and Procedures  TOPIC B COLLECTING AND PROCESSING THE ACCOUNTING DATA OF ENTITIES Learning outcome You should be able to collect, to process, to adjust (where necessary) and to record financial information in order to complete the statement of profit or loss and other comprehensive income (thereby calculating the gross and net profits) and the statement of changes in equity for the financial period and the statement of financial position at the end of the financial period of a sole proprietor. 2 CONTENTS Study-units 5 PROCESSING ACCOUNTING DATA 6 ADJUSTMENTS 7 THE CLOSING-OFF PROCEDURE, DETERMINING THE PROFIT OF AN ENTITY AND PREPARING FINANCIAL STATEMENTS 3 STUDY UNIT 5 Processing accounting data Learning outcome You should be able to prepare all journals, to post entries to ledger accounts and to prepare a trial balance. Contents Page Key concepts 5 5.1 Introduction 5 5.2 The accounting cycle 5 5.3 Books of first entry: journals 6 5.4 Types of journals 6 5.5 Cash journals 7 5.5.1 Cash receipts journal 7 5.5.2 Cash payments journal 8 5.6 Credit journals and the general journal 16 5.6.1 Introduction 16 5.6.2 Inventory systems 16 5.6.3 Purchases journal and purchases returns journal 16 5.6.4 Sales journal and sales returns journal 18 5.6.5 General journal 20 5.7 The trial balance 21 5.8 Revision exercise and solution 22 5.9 Settlement discount 32 5.9.1 Settlement discount granted 32 5.9.2 Settlement discount received 32 5.10 Value added tax (VAT) 33 5.10.1 Background 33 5.10.2 Tax period 35 4  5.10.3 Accounting bases 35 5.11 Revision exercise and solution 42 Self-assessment 43 KEY CONCEPTS Source documents General ledger Accounting cycle Trade receivables ledger Cash receipts journal Trade payables ledger Cash payments journal Comprehensive taxation Purchases journal Vendor Purchases returns journal Taxable supplies Sales journal Exempted supplies Sales returns journal Settlement discount granted General journal Settlement discount received Output (VAT) Value added tax (VAT) Zapper payments Input (VAT) E-wallet payments Snapscan payments Electronic Funds Transfer CashPay payments 5.1 INTRODUCTION In the previous study units you learnt how to analyse transactions and to determine their effect on the basic accounting equation. You were then shown how to record all the transations in the accounts in the general ledger. We explained the principles of the double- entry system and emphasised the importance of that system. This created a framework for studying the processing of accounting data in greater detail, which is what we are going to do next. 5.2 THE ACCOUNTING CYCLE Accounting data are processed within a definite framework, which is known as the accounting cycle. The following diagram shows the accounting cycle: 5  Transactions taking place Completion of source documents Recording of transactions in journals Posting to ledgers Reporting in financial statements Analysis and interpretation of financial statements Decision-making by management 5.3 BOOKS OF FIRST ENTRY: JOURNALS Because a large number of transactions take place in an entity, recording each transaction directly in the ledger will make the ledger very bulky and unmanageable, and, in a manual system only one person can write up the books. For this reason, transactions of the same type are grouped together and analysed in subsidiary journals or books of first entry before they are recorded in summarised form in the ledger. A journal is thus a link between source documents and the ledger. No transaction may be recorded in the ledger before it has been recorded in a journal and no transaction may be recorded in a journal without the necessary source document as proof that a transaction actually took place. 5.4 TYPES OF JOURNALS There are various types of journals or books of first entry. For the time being, we will concentrate on the cash receipts journal and the cash payments journal, in which all cash transactions are recorded the purchases journal and the purchases returns journal, in which all credit purchases and returns of credit purchases are recorded 6  the sales journal and the sales returns journal, in which all credit sales and returns of credit sales are recorded the general journal, in which transactions are recorded that are not recorded in one of the other journals, for example, the correction of errors and the writing off of credit losses (bad debts) are recorded 5.5 CASH JOURNALS 5.5.1 Cash receipts journal All moneys received that are deposited in the entity’s bank account are recorded in the cash receipts journal. At the end of the month only one amount, which represents the entire month’s cash receipts, is debited to the bank account. The other column totals represent the contra accounts and are credited to such accounts. The amounts in the sundry accounts column are credited individually to the relevant accounts. Let us now go back to the information we had for Fix-'n-Mat in study unit 4, sections 4.4 and 4.5. Fix-'n-Mat’s cash receipts journal and ledger accounts will look as follows: FIX-'N-MAT CASH RECEIPTS JOURNAL - FEBRUARY 20.1 CRJ1 Sundry accounts Document Day Details Analysis of Bank Service number receipts fees Amount Fol Details R R R R B/S R001 1 T Tom 130 000 130 000 Capital B/S R002 2 ABC Bank 25 000 25 000 Loan: ABC Bank B/S R003 13 S Silver 1 000 1 000 Receipt 001 28 C Canon 2 000 2 000 2 000 C Canon 158 000 1 000 157 000 Dr Bank Cr Dr Capital Cr 20.1 R 20.1 R Feb 28 Total receipts 158 000 Feb 1 Bank 130 000 Dr Service fees Cr Dr Loan: ABC Bank Cr 20.1 R 20.1 R Feb 18.......... Feb 2 Bank 25 000 28 Bank 1 000 Dr C Canon Cr 20.1 R 20.1 R Feb 18.......... Feb 28 Bank 2 000 7  COMMENTS Source documents for entries in the cash receipts journal are the cash register roll, the bank statement, duplicate receipts, duplicate cash invoices and duplicate deposit slips. The cash (EFT, cash, credit card, debit card or Zapper) receipts for the month are recorded and analysed in date order. Each cash amount received in the course of a day is not banked immediately. Cash receipts are first recorded in the analysis of receipts column, and the amount that is banked for that day is recorded in the bank column. Any direct payment into the bank account of the entity will not be entered into the analysis of receipts column but will be entered directly into the bank column. Electronic Funds Transfers are deposited directly into the bank account and will be entered every day in the books of the entity from the bank statement of the entity. These amounts will be entered directly in the bank column. The addition in the columns must be checked by cross-casting. In other words, when the totals of the analysis columns are added, they must equal the total in the bank column. Entries in the sundry accounts column are posted individually to the general ledger. Only the totals of the other columns are posted. The cash receipts journal is a book of first entry. The double-entry system has to be applied in the general ledger. The amounts are not recorded individually again in the bank account in the general ledger. Note that the credit entries in the accounts add up to R158 000, which corresponds to the debit entry in the bank account. The number and headings of columns in the journal will depend on the frequency of occurrence of transactions and can differ from one entity to another. Generally, transactions that occur more frequently, will have dedicated columns. 5.5.2 Cash payments journal All cash payments, that is, payments made by way of cheque (no longer accepted by most banks), EFT, credit card, debit card, cash, e-wallet, Snapscan, CashPay and Zapper are recorded in the cash payments journal. At the end of the month only one amount, which represents the entire month’s cash payments, is credited to the bank account. The other column totals represent the contra accounts and are debited to such accounts. The amounts in the sundry accounts column are debited individually to the relevant accounts. Fix-'n-Mat’s cash payments journal and ledger accounts will look as follows: 8 FIX-'N-MAT CASH PAYMENTS JOURNAL – FEBRUARY 20.1 CPJ1 Sundry accounts Document Day Details Bank Wages Amounts Fol Details number R R R P/R P001 6 XY Furnishers 100 000 100 000 Equipment P/R P002 11 Joc Limited 2 000 2 000 Joc Limited P/R P003 12 Cash 1 000 1 000 Drawings P/R P004 16 Cash 800 800 103 800 800 103 800 Dr Bank Cr Dr Furniture Cr 20.1 R 20.1 R 20.1 R Feb 28 … Feb 28 Sundry Feb 6 Bank 100 000 payments 103 800 Dr Wages Cr Dr Joc Limited Cr 20.1 R 20.1 R 20.1 R Feb 28 Bank 800 Feb 11 Bank 2 000 Feb 10…... Dr Drawings Cr 20.1 R Feb 1 Bank 1 000 The complete bank account will now take the following form: Dr Bank Cr 20.1 R 20.1 R Feb 28 Total receipts CRJ1 158 000 Feb 28 Total payments CPJ1 103 800 Balance c/d 54 200 158 000 158 000 20.1 Mar 1 Balance b/d 54 200 Note that this balance is the same as the bank balance we calculated using the BAE in section 4.6 and the bank account in section 4.13 of study unit 4. 9  COMMENTS Source documents for entries in the cash payments journal are cheque counterfoils (cheques are no longer accepted by most of the commercial banks), debit notes and credit card slips, together with original cash invoices or the bank statement issued by the bank (EFT transactions will be numbered in the bankstatement according to payment request numbers, p for payment and number). The original cash invoices will be attached to the payment requests. Entries are recorded and analysed in the cash payments journal in the same order as the payment request numbers. The amount that appears on the payment request is the amount that is recorded in the bank column. The addition in the columns must be checked by cross-casting to ensure it is correct. In other words, when the totals of the analysis columns are added, they must equal the total of the bank column. Entries in the sundry accounts column are posted individually to the general ledger. Only the totals of the other columns are posted. The amounts are not recorded individually again in the bank account in the general ledger. The cash payments journal is a book of first entry. The double-entry system has to be applied in the general ledger. More analysis columns can be included as required by the entity. EXERCISE 5.1 Ms Beauty Baloyi opens a hairdressing salon, Beauty’s Hair, on 1 June 20.3 and enters into the following transactions in June: 20.3 Jun 1 Ms Beauty Baloyi deposited R10 000 directly into the business’s bank account. Made an EFT to Huurtru, to pay the month’s rental of R1 000. Made an EFT to pay the water-and-electricity deposit of R500. 2 Bought R2 500’s worth of equipment and R845’s worth of consumable inventory from Head Suppliers and paid the amount of R3 345 with the credit card of the business. 5 Money for services rendered paid directly into the bank account of Beauty’s Hair, R350. 7 Ms Beauty Baloyi withdrew cash from the business account at an ATM to pay her assistant’s wages of R200. 10 10 Cash register roll total for services rendered, R556. The money was deposited into the bank account of the business. 14 Ms Beauty Baloyi withdrew R500 cash from the business account at an ATM to pay the week’s wages of R200, the remainder being for Ms Baloyi’s own use. 15 Cash register roll total for services rendered, R642. The money was deposited into the bank account of the business. 17 Bought stationery from Office Suppliers, R80, and paid with the credit card of the business. 19 Cash register roll total for services rendered, R438. The money was deposited into the bank account of the business. 21 Made an e-wallet payment to pay the week’s wages, R200. 22 Bought shampoo and other accessories from Head Suppliers and made a direct payment into their bank account for the amount of R550. 24 Cash register roll total for services rendered, R387. The money was deposited into the bank account of the business. 25 Made a direct payment to Telkom to pay the telephone account, R260, which included installation costs of R180. 28 Ms Beauty Baloyi withdrew R1 500 cash from the business account at an ATM. R1 300 was for Ms Baloyi’s own use and R200 was for the week’s wages. 30 Cash register roll total for services rendered, R875. The money was deposited into the bank account of the business. REQUIRED (1) Prepare the cash receipts journal for Beauty's Hair for June 20.3. (2) Prepare the cash payments journal for Beauty's Hair for June 20.3. (3) Show the postings from these journals to the general ledger accounts. (4) Prepare the trial balance as at 30 June 20.3. 11  SOLUTION: EXERCISE 5.1 (1) BEAUTY'S HAIR CASH RECEIPTS JOURNAL - JUNE 20.3 CRJ1 Analysis Sundry accounts Document- Date Details of Bank Services Amount Fol Details number receipts rendered R R R R Rec 001 1 B Baloyi 10 000 10 000 B4 Capital CRR 001 5 Services rendered 350 350 350 CRR 002 10 Services rendered 556 556 556 CRR 003 15 Services rendered 642 642 642 CRR 004 19 Services rendered 438 438 438 CRR 005 24 Services rendered 387 387 387 CRR 006 30 Services rendered 875 875 875 13 248 3 248 10 000 B3 N1 (Rec = Receipt) (CRR = Cash register roll) (2) BEAUTY'S HAIR CASH PAYMENTS JOURNAL - JUNE 20.3 CPJ1 Sundry accounts Document Date Details Bank Consumable Wages Amount Fol Details number stores R R R P/R P001 1 Huurtru 1 000 1 000 N2 Rental expenses P/R P002 Municipality Water and 500 500 B2 electricity deposit P/R P004 7 Cash 200 200 P/R P005 14 Cash 500 200 300 B5 Drawings P/R P007 21 Cash 200 200 P/R P008 22 Head 550 Suppliers 550 P/R P009 25 Telkom 260 260 N4 Telephone expenses P/R P0010 28 Cash 1 500 200 1 300 B5 Drawings 4 710 550 800 3 360 B3 N5 N6 12 BEAUTY'S HAIR GENERAL JOURNAL - JUNE 20.3 GJ1 Date Details Fol Debit Credit R R 2 Equipment B1 2 500 Consumable stores N5 845 Bank: Credit card/trade payables control B6 3 345 Paid R2 500 for equipment and consumable stores bought from Head Suppliers by credit card. PR P003, duplicate credit card slip, original receipt and cash regsiter slip. 17 Stationery 80 Bank: Credit card/trade payables control 80 Paid for stationery bought from Office Suppliers by credit card. PR P006, duplicate credit card slip, original receipt and cash register slip. The general journal will be discussed in the next section (section 5.6). Credit card payments is a liability because you will owe the bank the money owed on the credit card until the amount is paid in full. The amount can therefore not be entered into the cash payments journal. (3) BEAUTY'S HAIR GENERAL LEDGER Dr Equipment B1 Cr 20.3 R Jun 2 Bank: credit card/trade payables control GJ1 2 500 Dr Water and electricity deposit B2 Cr 20.3 R Jun 1 Bank CPJ1 500 Dr Bank B3 Cr 20.3 R 20.3 R Jun 30 Total receipts CRJ1 13 248 Jun 30 Total payments CPJ1 4 710 Balance c/d 8 538 13 248 13 248 20.3 Jul 1 Balance b/d 8 538 Dr Capital B4 Cr 20.3 R Jun 1 Bank CRJ1 10 000 13 Dr Drawings B5 Cr 20.3 R Jun 14 Bank CPJ1 300 28 Bank CPJ1 1 300 1 600 Dr Trade payables control B6 Cr 20.3 R Jun 2 Equipment GJ1 2 500 Consumable stores GJ1 845 Stationery GJ1 80 3 425 Dr Services rendered N1 Cr 20.3 R Jun 30 Bank CRJ1 3 248 Dr Rental expenses N2 Cr 20.3 R Jun 1 Bank CPJ1 1 000 Dr Stationery N3 Cr 20.3 R Jun 17 Bank: credit card/trade payables control GJ1 80 Dr Telephone expenses N4 Cr 20.3 R Jun 25 Bank CPJ1 260 Dr Consumable stores N5 Cr 20.3 R Jun 2 Bank:Credit card/trade payables control GJ1 845 Jun 30 Bank CPJ1 550 1 395 Dr Wages N6 Cr 20.3 R Jun 30 Bank CPJ1 800 14 (4) BEAUTY'S HAIR TRIAL BALANCE AS AT 30 JUNE 20.3 Fol Debit Credit R R Equipment B1 2 500 Water and electricity deposit B2 500 Bank B3 8 538 Capital B4 10 000 Drawings B5 1 600 Trade payables control B6 3 425 Services rendered N1 3 248 Rental expenses N2 1 000 Stationery N3 80 Telephone expenses N4 260 Consumable stores N5 1 395 Wages N6 800 16 673 16 673 COMMENTS The B numbers indicate the accounts that will be balanced and shown in the statement of financial position and the N numbers indicate the nominal accounts that the accounts that will be posted and closed off to the profit or loss account (statement of profit or loss and other comprehensive income). Nominal accounts are income and expenditure accounts while statement of financial position accounts are capital, asset and liability accounts. In the folio column in the general ledger, the cash receipts or cash payments journal is given as a reference, but in the details column the names of the contra ledger accounts (other accounts involved in the transaction) are entered. The summarising effect of the subsidiary journals can be clearly seen in the general ledger. Note the entries in the bank account and the services rendered account. An e-wallet payment is a payment that is made to a person who does not have a bank account. The cell phone number of that person (the recipient) becomes their account number. The recipient can draw the money at a ATM using their ID number as well as the verification number sent by the person who made the payment. 15 5.6 CREDIT JOURNALS AND THE GENERAL JOURNAL 5.6.1 Introduction In many business entities, goods are bought and sold on credit. In the process, accounts have to be opened for debtors and creditors individually. If all these accounts are included in the general ledger, the same sort of problem arises that we have already mentioned – the general ledger becomes too bulky and unmanageable, and, in a manual system, only one person can write up the books. For this reason, a trade receivables ledger and a trade payables ledger are opened in which the individual debtors’ accounts and creditors’ accounts are kept. A single account is then held in the general ledger for debtors, namely, a trade receivables control account, and one account is held for creditors, namely, a trade payables control account. This means that the entire accounting system is adapted to make provision for the control accounts. In the cash receipts journal and the cash payments journal, provision is made for additional columns for trade receivables control and trade payables control. You can learn more about trade receivables control in study unit 9 and trade payables control in study unit 13. 5.6.2 Inventory systems We distinguish between the periodic inventory system and the perpetual inventory system, which will be dealt with in detail in study unit 7. At this stage, all you need to know is that trading inventory (merchandise) that is purchased has to be debited to a purchases account if the periodic inventory system is used. Provision must therefore be made for a purchases column in the subsidiary journal. If the perpetual inventory system is used, trading inventory (merchandise) is debited to an inventory account, and an inventory column is required instead of a purchases column in the subsidiary journal. 5.6.3 Purchases journal and purchases returns journal Merchandise purchased on credit is recorded in the purchases journal. At the end of the month, only the total of the credit purchases for the month is debited to the purchases account and credited to the trade payables control account. If some of the goods are returned, they are recorded in the purchases returns journal. Because entities have a large number of creditors, a separate subsidiary ledger, called the trade payables ledger, is kept in which all the individual creditors are entered. NB: For the purpose of this module, only merchandise purchased on credit is recorded in the purchases journal. All other credit purchases are recorded in the general journal. A trade discount is often granted by wholesalers to retailers. The discount percentage that is agreed upon, is calculated and deducted on the cash or credit invoice. The net amount on the invoice is recorded as the amount of purchases in the accounting records of the purchaser. Thus, the trade discount amount is never recorded in the accounting records of the purchaser. To encourage a debtor to pay his/her account within a certain perod, a discount option is given to the debtor. If the account is settled within the stipulated period, the discount will be 16 recorded in the settlement discount granted account in the seller’s accounting records and the settlement discount received account in the buyer’s accounting records. The full amount of the invoice must be paid if the account is not settled within the stipulated period. A purchases journal and purchases returns journal have the following formats: ABC DEALERS PURCHASES JOURNAL - MAY 20.3 PJ5 Trade Invoice Date Details Fol Purchases payables number control R R 1534 3 Grand Wholesalers CL2 1 258 1 258 1535 7 XY Company CL3 983 983 1536 11 AA Limited CL1 2 324 2 324 1537 14 XY Company CL3 437 437 1538 21 XY Company CL3 1 212 1 212 1539 25 Grand Wholesalers CL2 538 538 1540 30 AA Limited CL1 215 215 6 967 6 967 ABC DEALERS PURCHASES RETURNS JOURNAL - MAY 20.3 PRJ5 Trade Credit note Date Details Fol Purchases payables number returns control R R C115 10 Grand Wholesalers CL2 158 158 C116 27 XY Company CL3 114 114 272 272 GENERAL LEDGER TRADE PAYABLES LEDGER Dr Purchases Cr 20.3 R R Date Details Fol Debit Credit Balance May 31 Trade payables control 6 967 20.3 R R R May Dr Trade payables control Cr AA Limited CL1 20.3 R 20.3 R 11 Invoice 1536 PJ5 2 324 2 324 May 31 Purchases returns 272 May 31 Purchases 6 967 30 Invoice 1540 PJ5 215 2 539 Dr Purchases returns Cr Grand Wholesalers CL2 20.3 R 3 Invoice 1534 PJ5 1 258 1 258 May 31 Trade payables 10 Credit note C115 ATJ5 158 1 100 control 272 25 Invoice 1539 PJ5 538 1 638 XY Company CL3 7 Invoice 1535 PJ5 983 983 14 Invoice 1537 PJ5 437 1 420 21 Invoice 1538 PJ5 1 212 2 632 27 Credit note C116 PRJ5 114 2 518 17  COMMENTS The source documents for entries in the purchases journal are original invoices. Because these invoices come from different businesses, they are renumbered consecutively. The source documents for entries in the purchases returns journal are the original credit notes received from the creditors and they must be renumbered consecutively. Entries are recorded and analysed in date order in the purchases journal and the purchases returns journal. A creditor’s name and the amount for which purchases or returns were made must be clearly shown. Only the totals of the columns are posted to the general ledger. The amounts in the purchases and the trade payables control columns are the same in the purchases journal because we are still ignoring VAT. The same goes for the purchases returns journal. The creditors’ accounts are credited individually in the trade payables ledger with purchases and debited with returns. A three- column ledger is preferable to the traditional T-account format because the balance can be calcutated after each transaction. The total of all the balances of the individual creditors’ accounts must correspond with the balance of the trade payables control account. The purchases journal and the purchases returns journal are books of first entry. The double-entry procedure has to be applied in the general ledger. 5.6.4 Sales journal and sales returns journal Merchandise sold on credit is recorded in the sales journal. At the end of the month, only the total credit sales for the month are credited to the sales account and debited to the trade receivables control account. If the debtors return some of the goods, they are recorded in the sales returns journal. Because entities have a large number of debtors, a separate subsidiary ledger, called the trade receivables ledger, is kept in which all the individual debtors are entered. NB: For the purposes of this module, only merchandise sold on credit is recorded in the sales journal. All other credit sales are recorded in the general journal. A sales journal and a sales returns journal have the following formats: 18 ABC DEALERS SALES JOURNAL - MAY 20.3 SJ5 Trade Invoice Date Details Fol Sales receivables number control R R 2018 2 M Moloi DL4 268 268 2019 5 A Abdul DL1 315 315 2020 12 G Green DL3 424 424 2021 14 E Els DL2 176 176 2022 17 G Green DL3 587 587 2023 21 M Moloi DL4 643 643 2024 29 E Els DL2 269 269 2025 30 A Abdul DL1 103 103 2 785 2 785 ABC DEALERS SALES RETURNS JOURNAL - MAY 20.3 SRJ5 Trade Credit note Date Details Fol Sales receivables number returns control R R D223 8 M Moloi DL4 75 158 D224 19 G Green DL3 114 114 D225 21 E Els DL2 92 92 281 281 GENERAL LEDGER TRADE RECEIVABLES LEDGER Dr Sales Cr 20.3 R Date Details Fol Debit Credit Balance May 31 Trade receivables 20.3 R R R control 2 785 Mayi Dt Trade receivables control Cr A Abdul DG1 20.3 R 20.3 R 5 Invoice 2019 SJ5 315 315 May 31 Sales 2 785 May 31 Sales returns 281 30 Invoice 2025 SJ5 103 418 Dr Sales returns Cr E Els DG2 20.3 R 14 Invoice 2021 SJ5 176 176 May 31 Trade receivables 21 Credit note D225 SRJ5 92 84 control 281 29 Invoice 2024 SJ5 269 353 G Green DG3 12 Invoice 2020 SJ5 424 424 17 Invoice 2022 SJ5 587 1 011 19 Credit note D224 SRJ5 114 897 M Moloi DG4 2 Invoice 2018 SJ5 268 268 8 Credit note D223 SRJ5 75 193 21 Invoice 2023 SJ5 643 836 19  COMMENTS The source documents for entries in the sales journal are the duplicates of sales invoices. The source documents for entries in the sales returns journal are the duplicates of credit notes issued to the debtors. A debtor’s name and the amount of the transaction should be clearly indicated. Entries are recorded and analysed in date order in the sales journal and the sales returns journal. Only the totals of the columns are posted to the general ledger. The amounts in the sales and the trade receivables control columns are the same in the sales journal and the sales returns journal because we are still ignoring VAT. The effect of VAT will be explained later. The same goes for the sales returns journal. The debtors’ accounts are debited individually in the trade receivables ledger with sales and credited with sales returns. The total of all the balances of the individual debtors’ accounts must correspond with the balance of the trade receivables control account. The sales journal and the sales returns journal are books of first entry; they provide a summary of sales and returns. The double- entry system has to be applied in the general ledger. 5.6.5 General journal All transactions that cannot be entered in one of the journals we have discussed are entered in the general journal. Examples are credit losses (bad debts) that are written off, interest on debtors‘ accounts, errors that are corrected and year-end adjustments (which will be discussed in study unit 6). NB: Purchases and sales of goods, other than merchandise, are recorded in the general journal for the purposes of this module. A general journal takes the following form: 20 ABC DEALERS GENERAL JOURNAL - MAY 20.3 GJ5 Date Details Fol Debit Credit R R 5 Vehicles 43 000 Loan: ABC Bank 43 000 Delivery vehicle bought on credit per invoice F147 from ORA Motors. The delivery vehicle was financed by obtaining a loan from ABC Bank at an interest rate of 9% per annum. 16 Packing material 430 Stationery 430 Packing material per invoice Z214 incorrectly debited to the stationery account. 18 Credit losses (bad debts) 84 F Field/ Trade receivables control 84 F Field’s balance written off as irrecoverable. COMMENTS The account that is entered first is the account that has to be debited in the general ledger. The narration is very important since it gives the reason for the entry; it must also refer to source documents. The general journal is a book of first entry. The double-entry system has to be applied in the general ledger. The general journal can have additional columns that make provision for trade receivables control debit and credit columns as well as trade payables control debit and credit columns. The totals of these columns will be posted to either the trade receivables control account or the trade payables control account as journal debits or journal credits. Theoretically, all transactions can be recorded in the general journal. 5.7 THE TRIAL BALANCE For each transaction, the debit entry must equal the credit entry. The total of all the debit balances should, therefore, correspond to the total of all the credit balances. A list of balances is prepared periodically to determine whether any errors have been made. This list of balances is called a trial balance. 21 5.8 REVISION EXERCISE AND SOLUTION On 1 March 20.5 A Apple opened a supermarket under the tradename AA Supermarket. He decided to use the periodic inventory system and entered into the following transactions in March 20.5: 20.5 March 1 A Apple deposited R50 000 directly into the bank account of the entity as a capital contribution. Made an EFT to JHB Letting Agents to pay the rent of R2 000. Bought shop equipment from EQUIP on credit, R10 000, and paid R1 000 by credit card as a deposit. Made a direct payment to the municipality to pay the water and electricity deposit, R1 000. 2 Purchased merchandise on credit from TR Wholesalers, R23 541. Purchased packing material from S Suppliers and paid by credit card, R468. 3 Drew cash at an ATM from the account of the entity, R500. The amount will be used as cash float. 4 Cash sales per cash register roll on opening day, R18 674. 5 Purchased merchandise on credit from the following wholesalers: BB Dealers R7 832 DBN Distributors R6 965 6 Sublet a storeroom to G Gold, who paid an amount of R250 directly into the bank account of AA Supermarket. Cash sales per cash register roll, R12 455. 10 E-wallet payments were made to pay wages, R1 200. 12 Issued invoices to the following people for goods sold on credit: B Blue R478 S Silver R693 13 Made an EFT of R5 378 to Z Zulu for merchandise purchased. 14 Purchased a computer from HI-Q, R5 260. Paid R1 478 by credit card, which included a deposit of R1 000 and R478 for paper and computer supplies. 15 Sold goods on credit to the following people: G Gree R324 R Red R299 16 Cash sales per cash register roll, R8 790. 22 20.5 March 17 Drew money at an ATM for the following: Wages R1 500 Owner’s own use R1 000 19 B Blue made a payment of R200 directly into the bank account of AA Supermarket. 20 Made an EFT of R2 675 to TR Wholesalers for merchandise purchased. Merchandise sold for cash as per cash register roll, R12 570. 21 Goods sold on credit: B Blue R362 R Red R178 23 S Silver paid R100 cash on his account. Cash sales as per cash register roll, R10 238. 24 Made an EFT of R550 to The Newsmaker for the placement of advertisements. Drew cash to pay wages, R1 500. 25 Purchased stationery on credit from HI Q, R267. Issued a receipt to R Red for R299 in part payment of his account. 27 Made EFTs to the following entities in part settlement of their accounts: TR Wholesalers R20 000 BB Dealers R 6 000 DBN Distributors R 5 000 HI-Q R 1 000 29 Credit sales to S Silver, R262. He paid R200 on his account. Cash sales as per cash register roll, R16 742. 30 Made EFTs for the following: L Lemon, salary of the manager R2 500. EQUIP on account R1 000. JHB Letting Agents for April’s rental R2 000. 31 Made a direct payment to Telkom to pay the telephone account, R595. Cash sales as per cash register roll, R15 284. Issued receipts to the following debtors for money received on their accounts: G Green R324 B Blue R640 Drew R3 000 cash at the ATM to pay wages, R1 500, and the balance was for the owner’s own use. 23  REQUIRED Prepare (1) the subsidiary journals of AA Supermarket for March 20.5. (2) the general, trade receivables and trade payables ledgers of AA Supermarket for March 20.5. (3) the trial balance of AA Supermarket as at 31 March 20.5. Ignore VAT. Solution: Revision exercise (1) SUBSIDIARY JOURNALS (a) AA SUPERMARKET CASH RECEIPTS JOURNAL - MARCH 20.5 CRJ1 Analysis Trade Sundry accounts Document Date receivables number Details Fol of Bank Sales receipts control Amount Fol Details R R R R R Rec 1 1 A Apple 50 000 50 000 B7 Capital CRR 1 4 Sales 18 674 18 674 18 674 Rec 2 6 G Gold 250 250 N2 Rental income CRR 2 Sales 12 455 12 455 12 455 CRR 3 16 Sales 8 790 8 790 8 790 Rec 3 19 B Blue DL1 200 200 CRR 4 20 Sales 12 570 12 570 12 570 Rec 4 23 S Silver DL2 100 100 CRR 5 Sales 10 238 10 338 10 238 Rec 5 25 R Red DL4 299 299 299 Rec 6 29 S Silver DL2 200 200 CRR 6 Sales 16 742 16 942 16 742 CRR 7 31 Sales 15 284 15 284 Rec 7 G Green DL3 324 324 Rec 8 B Blue DL1 640 16 248 640 146 766 94 753 1 763 50 250 B5 N1 B3 24 (b) AA SUPERMARKET CASH PAYMENTS JOURNAL - MARCH 20.5 CPJ1 Trade Sundry accounts Document Date Details Fol Bank payables Purchases Wages Amount Fol Details numbers control R R R R R P/R P001 1 JHB Letting Agents 2 000 2 000 N8 Rental expenses P/R P003 Municipality 1 000 1 000 B2 Water and electricity deposit P/R P005 3 Cash 500 500 B4 Cash float P/R P006 10 Cash 1 200 1 200 P/R P007 13 Z Zulu 5 378 5 378 P/R P009 17 Cash 2 500 1 500 1 000 B8 Drawings P/R P010 20 TR Wholesalers 2 675 2 675 P/R P011 24 The Newsmaker 550 550 N6 Advertisements P/R P012 Cash 1 500 1 500 P/R P013 27 TR Wholesalerss CL1 20 000 20 000 P/R P014 BB Dealers CL2 6 000 6 000 P/R P015 DBN Distributors CL3 5 000 5 000 P/R P016 HI-Q CL5 1 000 1 000 P/R P017 30 L Lemon 2 500 2 500 N7 Salaries P/R P018 EQUIP CL5 1 000 1 000 P/R P019 JHB Letting Agents 2 000 2 000 N8 Rental expenses P/R P020 31 Telkom 595 595 N9 Telephone expenses P/R P021 Cash 3 000 1 500 1 500 B8 Drawings 58 398 33 000 8 053 5 700 11 645 B5 B6 N3 N10 (c) AA SUPERMARKET PURCHASES JOURNAL - MARCH 20.5 PJ1 Trade Invoice Date Details Fol Purchases payables number control R R A0001 2 TR Wholesalers CL1 23 541 23 541 A0002 5 BB Dealers CL2 7 832 7 832 A0003 DBN Distributors CL3 6 965 6 965 38 338 38 338 N3 B6 25 (d) AA SUPERMARKET SALES JOURNAL - MARCH 20.5 SJ1 Trade Invoice Date Details Fol Sales receivables number control R R F001 12 B Blue DL1 478 478 F002 S Silver DL2 693 693 F003 15 G Green DL3 324 324 F004 R Red DL4 299 299 F005 21 B Blue DL1 362 362 F006 R Red DL4 178 178 F007 29 S Silver DL2 262 262 2 596 2 596 N1 B3 (e) AA SUPERMARKET GENERAL JOURNAL - MARCH 20.5 GJ1 Date Details Fol Debit Credit R R 1 Equipment B1 10 000 EQUIP/Trade payables control CL4/B6 10 000 Shop equipment bought on credit per invoice Z001 EQUIP/Trade payables control CL4/B6 1 000 Bank: credit card/Trade payables control CL6/B6 1 000 Paid R1 000 deposit to EQUIP by credit card. P/R P002 and original receipt. 2 Packing material N5 468 Bank: credit card/Trade payables control CL6 468 Purchased packing material and paid by credit card. P/R P004, duplicate credit card slip and cash register slip. 14 Equipment B1 5 260 HI-Q/Trade payables control CL5/B6 5 260 Computer bought on credit per invoice Z002 Stationery N4 478 HI-Q/Trade payables control CL5/B6 1 000 Bank: credit card/Trade payables control CL6/B6 1 478 Paid R1 000 deposit to HI-Q and bought stationery from them and paid by credit card. PR P008, duplicate credit card slip, original receipt and cash regsiter slip. 25 Stationery N4 267 HI Q/Trade payables control CL5/B6 267 Stationery bought on credit per invoice Z003 26 (2) LEDGERS (a) AA SUPERMARKET GENERAL LEDGER Dr Equipment (at cost) B1 Cr 20.5 R Mar 1 EQUIP/Trade payables control GJ1 10 000 14 HI-Q/Trade payables control GJ1 5 260 15 260 Dr Water and electricity deposit B2 Cr 20.5 R Mar 1 Bank CPJ1 1 000 Dr Trade receivables control B3 Cr 20.5 R 20.5 R Mar 31 Sales SJ1 2 596 Mar 31 Bank CRJ1 1 763 Balance c/d 833 2 596 2 596 20.5 Apr 1 Balance b/d 833 Dr Cash float B4 Cr 20.5 R Mar 3 Bank CPJ1 500 Dr Bank B5 Cr 20.5 R 20.5 R Mar 31 Total receipts CRJ1 146 766 Mar 31 Total payments CPJ1 58 398 Balance c/d 88 368 146 766 146 766 20.5 Apr 1 Balance b/d 88 368 Dr Trade payables control B6 Cr 20.5 R 20.5 R Mar 1 Bank: credit card GJ1 1 000 Mar 1 Equipment GJ1 10 000 14 Bank: credit card GJ1 1 000 EQUIP 1 000 31 Bank CPJ1 33 000 Packing material GJ1 468 Balance c/d 21 811 14 Equipment GJ1 5 260 HI-Q GJ1 1 000 Stationery GJ1 478 25 Stationery GJ1 267 31 Purchases PJ1 38 338 56 811 56 811 20.5 Apr 1 Balance b/d 21 811 27 Dr Capital B7 Cr 20.5 R Mar 1 Bank CRJ1 50 000 Dr Drawings B8 Cr 20.5 R Mar 17 Bank CPJ1 1 000 31 Bank CPJ1 1 500 2 500 Dr Sales N1 Cr 20.5 R Mar 31 Trade receivables control SJ1 2 596 Bank CRJ1 94 753 97 349 Dr Rental income N2 Cr 20.5 R Mar 6 Bank CRJ1 250 Dr Purchases N3 Cr 20.5 R Mar 31 Trade payables control PJ1 38 338 Bank CPJ1 8 053 46 391 Dr Stationery N4 Cr 20.5 R Mar 14 Bank: credit card/Trade payables control GJ1 478 25 HI-Q/Trade payables control GJ1 267 745 Dr Packing material N5 Cr 20.5 R Mar 2 Bank: credit card GJ1 468 28 Dr Advertisements N6 Cr 20.5 R Mar 24 Bank CPJ1 550 Dr Salaries N7 Cr 20.5 R Mar 30 Bank CPJ1 2 500 Dr Rental expenses N8 Cr 20.5 R Mar 1 Bank CPJ1 2 000 30 Bank CPJ1 2 000 4 000 Dr Telephone expenses N9 Cr 20.5 R Mar 31 Bank CPJ1 595 Dr Wages N10 Cr 20.5 R Mar 31 Bank CPJ1 5 700 (b) AA SUPERMARKET TRADE RECEIVABLES LEDGER B Blue DL1 Date Details Fol Debit Credit Balance 20.5 R R R Mar 12 Invoice F001 SJ1 478 478 19 Receipt number 3 CRJ1 200 278 21 Invoice F005 SJ1 362 640 31 Receipt number 8 CRJ1 640 - S Silver DL2 Date Details Fol Debit Credit Balance 20.5 R R R Mar 12 Invoice F002 SJ1 693 693 23 Receipt number 4 CRJ1 100 593 29 Invoice F007 SJ1 262 855 Receipt number 6 CRJ1 200 655 G Green DG3 Date Details Fol Debit Credit Balance 20.5 R R R Mar 15 Invoice F003 SJ1 324 324 31 Receipt number 7 CRJ1 324 - 29 R Red DG4 Date Details Fol Debit Credit Balance 20.5 R R R Mar 15 Invoice F004 SJ1 299 299 21 Invoice F006 SJ1 178 477 25 Receipt number 5 CRJ1 299 178 Trade receivables list R S Silver 655 R Red 178 833 Corresponds to the balance of account B3. GOLDEN RULE The total of all the balances of the individual debtors’ accounts in the subsidiary trade receivables ledger MUST equal the balance of the trade receivables control account in the general ledger. (c) AA SUPERMARKET TRADE PAYABLES LEDGER TR Wholesalers CL1 Date Details Fol Debit Credit Balance 20.5 R R R Mar 2 Invoice A0001 PJ1 23 541 23 541 27 P/R P013 CPJ1 20 000 3 541 BB Dealers CL2 Date Details Fol Debit Credit Balance 20.5 R R R Mar 5 Invoice A0002 PJ1 7 832 7832 27 P/R P014 CPJ1 6 000 1 832 DBN Distributors CL3 Date Details Fol Debit Credit Balance 20.5 R R R Mar 5 Invoice A0003 PJ1 6 965 6 965 27 P/R P015 CPJ1 5 000 1 965 EQUIP CL4 Date Details Fol Debit Credit Balance 20.5 R R R Mar 1 Invoice Z001 PJ1 10 000 10 000 P/R P002 GJ1 1 000 9 000 30 P/R P018 CPJ1 1 000 8 000 30 HI-Q CL5 Date Details Fol Debit Credit Balance 20.5 R R R Mar 14 Invoice Z002 GJ1 5 260 5 260 P/R P008 CPJ1 1 000 4 260 25 Invoice Z003 GJ1 267 4 527 27 P/R P016 CPJ1 1 000 3 527 Bank: credit card CL6 Date Details Fol Debit Credit Balance 20.5 R R R Mar 1 P/R P002 GJ1 1 000 1 000 2 P/R P004 GJ1 468 1 468 14 P/R P008 GJ1 1 478 2 946 Trade payables list R TR Wholesalers 3 541 Dealers 1 832 DBN Distributors 1 965 EQUIP 8 000 HI-Q 3 527 Bank: credit card 2 946 21 811 Corresponds to the balance of account B6. GOLDEN RULE The total of the balances of the individual creditors’ accounts in the subsidiary trade payables ledger MUST equal the balance of the trade payables control account in the general ledger. 31 (3) AA SUPERMARKET TRIAL BALANCE AS AT 31 MARCH 20.5 Fol Debit Credit R R Equipment (at cost) B1 15 260 Water and electricity deposit B2 1 000 Trade receivables control B3 833 Cash float B4 500 Bank B5 88 368 Trade payables control B6 21 811 Capital B7 50 000 Drawings B8 2 500 Sales N1 97 349 Rent income N2 250 Purchases N3 46 391 Stationery N4 745 Packing material N5 468 Advertisements N6 550 Salaries N7 2 500 Rental expenses N8 4 000 Telephone expenses N9 595 Wages N10 5 700 169 410 169 410 5.9 SETTLEMENT DISCOUNT 5.9.1 Settlement discount granted A discount is often offered to debtors in order to encourage quick settlement of their debts within the stated credit term. The credit term will be shown on the credit invoice, for example, 30 days from the date of sale. 5.9.2 Settlement discount received A discount is often received from creditors in order to encourage quick settlement of entities’ outstanding accounts. 32 5.10 VALUE-ADDED TAX (VAT) 5.10.1 Background VAT is levied at every point in the chain of production and distribution of goods and services. VAT is based on a tax credit system that allows every producer or distributor along the chain to recover the VAT that was previously paid by the business. The tax borne by each producer or distributor through whose hands the goods or services pass before reaching the end user is, in effect, the tax on the value added by the business. The tax that must eventually (every two months for most entities) be paid to the South African Revenue Service (SARS) is the tax on the supply of goods (sales) and/or services rendered by the entity (OUTPUT VAT) less the tax paid by the entity on the goods (purchases) and/or services supplied to the entity (INPUT VAT). GOLDENT RULES OUTPUT VAT is the tax levied (charged) by the entity on sales of goods or services rendered by the business. INPUT VAT is the tax paid (or payable) on goods delivered and/or services rendered to the entity, including imports. Deductions for input tax will only be allowed if a proper tax invoice is received and kept. OUTPUT VAT minus INPUT VAT = amount payable/refundable, that is, the amount that is payable to SARS or the amount that can be claimed from SARS. VAT can only be charged by persons who, in terms of the Value-Added Tax Act, are registered as VAT vendors. Registration is compulsory if a person carries on as an entity and the total value of the entity’s supplies for a 12-month period exceeds or is likely to exceed a stipulated (in the Act) amount. An entity may also register voluntarily if the total value of its sales or services rendered is below the stipulated amount. The stipulated amount excludes tax, exempted supplies and abnormal receipts. Some products are zero-rated supplies, which will be indicated in transactions. An input tax (15%) can be claimed on these products, but no output tax because the products are zero- rated (0%) – that means no tax can be levied on the final products for human consumption. The following goods and services are zero-rated: Exports 19 basic food items Illuminating paraffin Goods that are subject to the fuel levy (petrol and diesel) International transport services Farming inputs Sales of going concerns Certain grants offered by government Since changes can occur in the list of zero-rated supplies, you are advised to go to www.sars.gov.za. 33 The following basic foodstuffs are zero-rated in South Africa: Dried beans Samp Maize meal Rice Brown bread Vegetables Fruits Vegetable oil Mealie rice Pilchards in tins Edible legumes and pulses of leguminous plants Eggs Milk Dried mealies Dairy powder blend Lentils Cultured milk Milk powder Brown wheaten meal Sanitary pads Bread flour Cake flour Financial services, especially interest received and interest paid, and educational services provided by the State are exempt from VAT. This means that neither input tax nor output tax can be claimed on these services. Goods and services exempted from VAT are: Non-free-related financial services Educational services provided by an approved educational institution Residential rental accommodation Public road and rail transport If an entity is not registered as a VAT vendor, no output tax may be charged and no deduction for input tax can be claimed. The onus is on the entity to register, where necessary, and this must be done within 21 days of becoming liable to register. Salaries and wages are subjected to income tax such as pay as you earn (PAYE) and not VAT. 34 5.10.2 Tax period A tax period is allocated to every entity. The return submitted by an entity must cover the period allocated to it. Some entities registered for VAT (vendors) must submit their returns every two months for those two months. Some entities must complete and submit their returns for unequal months, that is, January, March, May and so on, and others must submit theirs for equal months, that is, February, April and so on. 5.10.3 Accounting bases There are only two bases for the calculation of a VAT liability, namely, the invoice basis the payments basis On the invoice basis, tax is accounted for upon the issue of an invoice or the receipt of payment, whichever comes first On the payments basis, tax is accounted for when payments are made (purchases) and payments are received (sales). Certain requirements have to be met before a vendor may use the payments basis. 35  EXERCISE 5.2 To grasp the principles of VAT, work through the following exercise thoroughly. VAT at 15% is applicable. The following information relates to Rundu Dealers, who is registered as a VAT vendor and who uses the periodic inventory system: (the VAT period of the business ends on unequal months): (a) TRIAL BALANCE AS AT 28 FEBRUARY 20.4 Debit Credit R R Capital 177 150 Land and buildings 144 200 Equipment 29 700 Inventory - 1 November 20.3 19 200 Bank 4 467 W Wolf 1 583 L Lion 770 T Tiger 2 310 VAT input 2 715 VAT output 2 925 Sales 86 400 Purchases 45 650 Distribution, administration and other expenses 20 500 268 785 268 785 (b) TRANSACTIONS FOR MARCH 20.4 March 1 Cash sales, R15 640. 5 Paid the account of T Tiger by direct payment after deducting a R115 discount.. 7 Received a direct payment from W Wolf for R1 468 in full settlement of his account. Received a direct payment from L Lion for R701 and granted a R69 discount. 12 Received an account from Stationers Ltd for the printing of documents, R690. 13 Credit sales: - L Lion R2 300 - W Wolf R1 150 14 Sold an old computer to O Old for R299 and received his direct payment for the amount due. Cash sales, R6 900. 36 21 Issued a credit note to L Lion for an overcharge on the invoice of the 13th, R69. 23 Paid C Cheetah by a direct payment for carraige on goods purchased, R1 150. 28 Received a credit invoice from T Tiger for goods purchased, R14 720. 29 Made direct payments for salaries and wages, R5 746, and for purchases from B Bam, R8 050. 30 Issued a debit note to T Tiger for goods returned to him, R805. REQUIRED (1) Record the above transactions in the following subidiary journals, properly totalled, of Rundu Dealers for March 20.4: (a) Cash receipts journal (analysis columns for bank, sales, VAT output, trade receivables control, VAT input (Dr), settlement discount granted and sundries) (b) Cash payments journal (analysis columns for bank purchases, trade payables control, settlement discount received, VAT input, VAT output (Cr) and sundries) (c) Sales journal (analysis columns for VAT output, sales and trade receivables control) (d) Purchases journal (analysis columns for VAT input, purchases and trade payables control) (e) Sales returns journal (analysis columns for VAT output, sale returns and trade receivables control) (f) Purchases returns journal (analysis columns for VAT input, purchases returns and trade payables control) (g) General journal (2) Post the entries recorded above to the VAT input and VAT output accounts. Close off these accounts to the VAT control account. Balance the VAT control account at 31 March 20.4, the end of the business’s VAT period. 37 SOLUTION: EXERCISE 5.2 (1) SUBSIDIARY JOURNALS (a) RUNDU DEALERS CASH RECEIPTS JOURNAL --- MARCH 20.4 CRJ2 Settlement VAT Trade VAT discount Sundry accounts Date Details Fol Bank Sales output receivables input granted control Dr Dr Amount Fol Details R R R R R R R 1 Sales 15 640 13 600 2 040 7 W Wolf 1 468 1 583 (15*)# (100) L Lion 701 770 (9)# (60) 14 O Old 299 39 260 Equipment Sales 6 900 6 000 900 25 008 19 600 2 979 2 353 (24) (160) 260 B16 B15 * Discount includes 15% VAT, therefore, R115 /1 x 15/115 = R15. The VAT output has already been calculated on the sales amount and paid over to SARS, but now the full amount of the sales will not be paid because the business granted a discount. The business can therefore claim the amount of VAT paid on the discount back as VAT input. # VAT input is debited. (See # under comments on p 38.) (b) RUNDU DEALERS CASH PAYMENTS JOURNAL - MARCH 20.4 CPJ2 Trade VAT VAT Settlement Sundry accounts Date Details Fol Bank Purchases payables input output discount control received Amount Fol Details Cr Cr R R R R R R R 5 T Tiger 2 195 2 310 (15*) (100) 23 C Cheetah 1 150 150 1 000 Carriage on purchases 29 Cash 5 746 5 746 Salaries and wages B Bam 8 050 7 000 1 050 17 141 7 000 2 310 1 200 (15) (100) 6 746 B15 B16 * Discount includes 15% VAT, therefore, R115 /1 x 15/115 = R15. The VAT input has already been calculated on the purchases amount and claimed from SARS, but now the full amount of the purchases will not be paid because the business received a discount. The business must therefore pay the amount of VAT claimed on the discount received over as VAT output. 38 (c) RUNDU DEALERS SALES JOURNAL - MARCH 20.4 SJ2 Trade Date Details Fol VAT Sales receivables output control R R R 13 L Lion 300 2 000 2 300 W Wolf 150 1 000 1 150 450 3 000 3 450 B16 (d) RUNDU DEALERS PURCHASES JOURNAL