MTG Accounting Grade 12 Study Guide PDF

g n i t n u Acco e d i u G Study Grade 12 © Department of Basic Education 2014 Accounting e Study Guid Grade 12 © Department of Basic Education 2014 This content may not be sold or used for commercial purposes. Curriculum and Assessment Policy Statement (CAPS) Mind the Gap Grade 12 Study Guide Accounting ISBN 978-1-4315-1950--7 This publication has a Creative Commons Attribution NonCommercial Sharealike license. You can use, modify, upload, download, and share content, but you must acknowledge the Department of Basic Education, the authors and contributors. If you make any changes to the content you must send the changes to the Department of Basic Education. This content may not be sold or used for commercial purposes. For more information about the terms of the license please see: http://creativecommons.org/licenses/by-nc-sa/3.0/. Copyright © Department of Basic Education 2014 222 Struben Street, Pretoria, South Africa Contact person: Dr Patricia Watson Email: [email protected] Tel: (012) 357 4502 http://www.education.gov.za Call Centre: 0800202933 The first edition published in 2012 Revised National Curriculum Statement (RNCS) Mind the Gap Grade 12 Study Guide Accounting: ISBN 978 0 621 40908 6 Second edition published in 2014 Curriculum and Assessment Policy Statement (CAPS) Mind the Gap Grade 12 Study Guide Accounting : ISBN 978-1-4315-1950--7 Mind the Gap team Series managing editor: Dr Patricia Watson Production co-ordinator for CAPS edition: Lisa Treffry-Goatley and Radha Pillay Authors: Anthony Ash, Kirsti Chapman, Lesiba Sydney Leso, Tracey Megom, Florence Nxumalo, Glynis Schreuder, Estelle van Schie, Barbara Wies Expert readers: Johnson Adekoya, Sali Ameen, Trevor Hall, Eugenia Maila, Melanie Marchbank, Jacqualine Ndlovu, Joe Ramsamy, Thandi Sindane Study skills: Margarita Karnasopoulos Editors: Julia Grey, Herbert Opland Proofreader: Jenny de Wet Designers: Alicia Arntzen, Philisiwe Nkosi, Michele Dean, Nomalizo Ngwenya Illustrators: Michele Dean, Kenneth Kunene, Vusi Malindi, Bié Venter Cover illustration: Alastair Findlay Onsite writers’workshop support: Wayne Cussons Quick © Department of Basic Education 2014 Ministerial foreword The Department of Basic Education has pleasure in releasing the second edition of Mind the Gap study guides for Grade 12 learners. These study guides continue the innovative and committed attempt by the Department of Basic Education to improve the academic performance of Grade 12 candidates in the National Senior Certificate (NSC) examination. The study guides have been written by subject expert teams comprised of teachers, examiners, moderators, subject advisors and subject coordinators. Research started in 2012 shows that the Mind the Gap series has, without doubt, had a positive impact in improving grades. It is my fervent wish that the Mind the Gap study guides take us all closer towards ensuring that no learner is left behind, especially as we move forward in our celebration of 20 years of democracy. The second edition of Mind the Gap is aligned to the 2014 Curriculum and Assessment Policy Statement (CAPS). This means that the writers have considered the National Policy pertaining to the programme, promotion requirements and protocol for assessment of the National Curriculum Statement for Grade 12 in 2014. The Mind the Gap CAPS study guides take their brief in part from the 2013 National Diagnostic report on learner performance and draws on the 2014 Grade 12 Examination Guidelines. Each of the Mind the Gap study guides provides explanations of key terminology, simple explanations and examples of the types of questions that learners can expect to be asked in an exam. M a r k i n g m e m o r a n d a are included to assist learners in building their understanding. Learners are also referred to specific questions in past national exam papers and examination memos that are available on the Department’s website – www.education.gov.za. The CAPS edition include Accounting, Economics, Geography, Life Sciences, Mathematics, Mathematical Literacy and Physical Sciences. The series is produced in both English and Afrikaans. There are also nine English First Additional Language study guides. They include EFAL Paper 1 (Language); EFAL Paper 3 (Writing); and a study guide for each of the Grade 12 prescribed literature set works. The study guides have been designed to assist those learners who have been underperforming due to a lack of exposure to the content requirements of the curriculum and aims to mind-the-gap between failing and passing, by bridging the gap in learners’ understanding of commonly tested concepts so candidates can pass. All that is now required is for our Grade 12 learners to put in the hours preparing for the examinations. Learners make us proud – study hard. We wish each and every one of you good luck for your Grade 12 examinations. _________________________________ Matsie Angelina Motshekga, MP Minister of Basic Education May 2014 Matsie Angelina Motshekga, MP Minister of Basic Education Table of contents Dear Grade 12 learner........................................................................................................ vi How to use this study guide............................................................................................... vii Top 10 study tips................................................................................................................ viii Study skills to boost your learning..................................................................................... ix On the day of the exam ….................................................................................................. xii Question words to help you answer questions............................................................... xiii Learner’s checklist..............................................................................................................xiv Chapter 1: Basic Accounting concepts........................................................... 1 1.1 Basic concepts........................................................................................................1 1.2 Rules of Accounting.................................................................................................2 1.3 Classification of accounts.......................................................................................3 1.4 Steps to recording transactions.............................................................................5 Chapter 2: Companies....................................................................................... 6 2.1 Concepts relating to companies.............................................................................6 2.2 Company General Ledger accounts.......................................................................8 2.3 Preparation of Financial Statements for companies......................................... 15 2.4 Cash Flow Statements......................................................................................... 40 2.5 Analysis and interpretation of Financial Statements......................................... 46 2.6 Comments on an audit report............................................................................. 54 Chapter 3: Manufacturing............................................................................... 60 3.1 Important concepts of manufacturing................................................................ 61 3.2 Production Cost Statement.................................................................................. 64 Chapter 4: Budgets.......................................................................................... 71 4.1 Key concepts........................................................................................................ 71 4.2 Debtors’ collection schedule............................................................................... 72 4.3 Creditors’ payment schedule (creditors’ budget)................................................74 4.4 Analysis of cash budget....................................................................................... 78 Chapter 5: Reconciliations.............................................................................. 82 5.1 Bank reconciliation............................................................................................. 83 5.2 Debtors’ reconciliation......................................................................................... 86 5.3 Debtors’ age analysis......................................................................................... 91 5.4 Creditors’ reconciliation with the creditor’s statemennt................................... 94 Chapter 6: Inventories..................................................................................... 99 6.1 Inventory systems................................................................................................. 99 6.2 Inventory valuation methods............................................................................. 100 Chapter 7: Value Added Tax (VAT)................................................................ 119 7.1 VAT calculations..................................................................................................120 7.2 VAT Control Account...........................................................................................123 Chapter 8: Fixed assets................................................................................. 127 8.1 Introduction to Fixed assets.............................................................................. 127 8.2 Asset register......................................................................................................128 8.3 Residual value/called scrap value of R1..........................................................129 8.4 Note to the Balance Sheet and Asset disposal................................................ 131 Appendix: Past Grade 12 exam papers........................................................ 138 © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting contents v © Department of Basic Education 2014 Dear Grade 12 learner Another name for a Balance Sheet is a Statement of Financial Position. An Income Statement is also known as a Statement of Financial Performance. This Mind the Gap study guide has been CAPS aligned and helps you to prepare for the end-of-year Accounting Grade 12 examination. This study guide does not cover the entire curriculum, but it does focus on core content of each knowledge area and points out where you can earn easy marks. You must work your way through this study guide to improve your understanding, identify your areas of weaknesses and correct your own mistakes. We are confident that this Mind the Gap can help you to prepare well so that you pass the end-of-year exams. To ensure a high quality pass, you should also cover the remaining aspects of the curriculum using other textbooks and your class notes. Also pay special attention to the way the workings have been shown in the worked examples. This is the best way for you to earn maximum marks. In order for you to be successful in Accounting you must: Ensure that you know the formats or layouts of the: –– Income Statement –– Balance Sheet –– Cash Flow Statement –– Production Cost Statement –– General Ledger accounts Understand the concepts explained in this guide and know how to do calculations. Work through as many past examination papers as you can (use the explanations and steps in this guide to assist you). There are some suggested questions from past papers at the end of each section for extra practice. Be careful when working through questions relating to Companies of past papers as there are some aspects that are treated differently under CAPS. Remember, your success in the final exam will depend on how much extra time you put into preparing. Overview of the CAPS Accounting Grade 12 exam There is one exam of 3 hours for 300 marks. All questions are compulsory (no choice questions). There are no different sections. All past papers have had 6 questions. Each question covers different levels so all learners should be able to gain some marks in every question. All questions should be attempted. Questions will include conceptual understanding, application, interpretation and reflective type questions. Learners will be provided with a specially prepared answer book for their answers. This is specially designed for the Accounting exam. The answer booklet provides space for every question. All calculations, workings and final answers will be done in this answer booklet. © Department of Basic Education 2014 vi introduction Mind the Gap CAPS Grade 12 Accounting © Department of Basic Education 2014 Look out for these icons in the study guide. How to use this study guide This study guide covers selected parts of the different topics of the Grade 12 Accounting curriculum. The selected parts of each topic are presented NB in the following way: PAY SPECIAL ATTENTION NB NB An explanation of terms and concepts Worked examples to explain and demonstrate PAY SPECIAL ATTENTION Activities with questions for you to answer NB NB HINT! hint Answers for you to use to check your own work hint NB hint PAY SPECIAL ATTENTION Pay special attention HINT! Step-by-step instructions NBhint e.g. e.g. exams Hints to help you HINT! remember a concept - worked examples orEGguide you in solving problems e.g. exams EG - worked examples Refers you to exam questions PAY SPECIAL ATTENTION NB HINT! EG - worked examples Worked examples Activities with questions for you to answer exams e.g. from the exam guidelines for Accounting has been A checklist EG - worked examples provided on page xiv for you to keep trackactivity of your progress. Once ACTIVITIES boy youexams have mastered the core concepts and have confidence in your and girl-left and right of page answers to the questions provided, tick the last column of the activity activity checklist. activity ACTIVITIES boy and girl-left and right of page activity ACTIVITIES boy and girl-left and right of page The activities are based on exam-type questions. Cover the answers providedactivity and do each activity on your ownactivity using the suggested comment Step by step comment steps in this guide. ThenACTIVITIES check boy your answers. Reward yourself for and girl-left and of page get any incorrect answers, make sure the things you get right. right If you Step by step comment you understand onto the nextcomment activitywhere you went wrong before moving section. Pay special attention to the way the workings have been shown in the worked examples. This is the best way for you to earn maximum marks. Where you see this tick you will be awarded a comment Step by step comment mark even if your answer is incorrect, provided you have followed the correct procedure (e.g. adding, subtracting or transferring figures). Exemplar Exam papers are also included in the study guide for you to do. Check your answers by looking back at your notes and the exam memoranda. Past exam papers go a long way in preparing you for what to expect and help reduce exam anxiety. Go to www.education.gov.za to download more past exam papers. Step by step comment Use this study guide as a workbook. Make notes, draw pictures and highlight important concepts. © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting introduction vii comment © Department of Basic Education 2014 Top 10 study tips Try these study tips to make learning easier. 1. Have all your materials ready before you begin studying – pencils, pens, highlighters, paper, etc. 2. Be positive. Make sure your brain holds onto the information you are learning by reminding yourself how important it is to remember the work and get the marks. 3. Take a walk outside. A change of scenery will stimulate your learning. You’ll be surprised at how much more you take in after being outside in the fresh air. 4. Break up your learning sections into manageable parts. Trying to learn too much at one time will only result in a tired, unfocused and anxious brain. 5. Keep your study sessions short but effective and reward yourself with short, constructive breaks. 6. Teach your concepts to anyone who will listen. It might feel strange at first, but it is definitely worth reading your revision notes aloud. 7. Your brain learns well with colours and pictures. Try to use them whenever you can. 8. Be confident with the learning areas you know well and focus your brain energy on the sections that you find more difficult to take in. 9. Repetition is the key to retaining information you have to learn. Keep going – don’t give up! 10. Sleeping at least 8 hours every night, eating properly and drinking plenty of water are all important things you need to do for your brain. Studying for exams is like strenuous exercise, so you must be physically prepared. © Department of Basic Education 2014 viii introduction Mind the Gap CAPS Grade 12 Accounting © Department of Basic Education 2014 Study skills to boost your learning This guide makes use of 3 study techniques you can use to help you learn the material: 1. Mobile notes 2. Mnemonics 3. Mind maps Mobile notes Mobile notes are excellent tools for learning all the key concepts in the study guide. Mobile notes are easy to make and you can take them with you wherever you go: 1. Fold a blank piece of paper in half. Fold it in half again. Fold it again. 2. Open the paper. It will now be divided into 8 parts. 3. Cut or tear neatly along the folded lines. 4. On one side of each of these 8 bits of paper, write the basic concept. 5. On the other side, write the meaning or the explanation of the basic concept. 6. Use different colours and add pictures to help you remember. 7. Take these mobile notes with you wherever you go and look at them whenever you can. 8. As you learn, place the cards in 3 different piles: I know this information well. I’m getting there. I need more practice. 9. The more you learn them, the better you will remember them. These techniques will help you to study smarter! 1. Fold an A4 paper into 8 squares. Cut or tear neatly along the folded lines. liabilit y 2. W rite the basic concept on one side of a bit of paper. An amount a person oorwed by to another business business. person or 3. W rite the definition of the basic concept on the back of the piece of paper. © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting introduction ix © Department of Basic Education 2014 Success in Accounting is a balancing act! Mnemonics A mnemonic code is a useful technique for learning information that is difficult to remember. This is an example of a word mnemonic using the word BALANCE where each letter of the word stands for something else: B – Best – doing your best is more important than being the best. A L – Attitude – always have a positive attitude. – Load – spread the load so you don’t leave everything to the last minute. Use a study timetable to plan. A – Attention – pay attention to detail. Only answer what is required. N C – E Never give up! Try, try and try again! – Calm – stay calm even when the questions seem difficult. – Early – sleep early the night before your exam. If you prepare well you will not need to cram the night before. Mnemonics are code information and make it easier to remember. The more creative you are and the more you link your ‘codes’ to familiar things, the more helpful your mnemonics will be. This guide provides several ideas for using mnemonics. Be sure to make up your own. Neither you nor the world knows what you can do until you have tried. Ralph Waldo Emerson © Department of Basic Education 2014 x introduction Mind the Gap CAPS Grade 12 Accounting © Department of Basic Education 2014 Mind maps There are several mind maps included in this guide, summarising some of the sections. Have a look at the following pictures of a brain cell (neuron) and, below it, a mind map: Figure 1: Brain cell or neuron Figure 2: Mind map rules Mind maps work because they show information that we have to learn in the same way that our brains ‘see’ information. As you study the mind maps in the guide, add pictures to each of the branches to help you remember the content. You can make your own mind maps as you finish each section. How to make your own mind maps: 1. Turn your paper sideways so your brain has space to spread out in all directions. 2. Decide on a name for your mind map that summarises the information you are going to put on it. 3. Write the name in the middle and draw a circle, bubble or picture around it. 4. Write only key words on your branches, not whole sentences. Keep it short and simple. 5. Each branch should show a different idea. Use a different colour for each idea. Connect the information that belongs together. This will help build your understanding of the learning areas. 6. Have fun adding pictures wherever you can. It does not matter if you can’t draw well. Mind mapping your notes makes them more interesting and easier to remember. © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting introduction xi © Department of Basic Education 2014 On the day of the exam … GOOD LUCK! 1. Make sure you have all the necessary stationery for your exam, i.e. pens, pencils, eraser and calculator (with new batteries). Make sure you bring your ID document and examination admission letter. 2. Arrive on time, at least one hour before the start of the exam. 3. Go to the toilet before entering the exam room. You don’t want to waste valuable time going to the toilet during the exam. 4. Use the 10 minutes reading time to read the instructions carefully. This helps to ‘open’ the information in your brain. All questions in Accounting are compulsory, but you do not have to answer them in order. Start with the question you think is the easiest to get the flow going. 5. Break the questions down to make sure you understand what is being asked. If you don’t answer the question properly you won’t get any marks for it. Look for the key words in the question to know how to answer it. A list of question words is on page ix of this study guide. 6. Try all the questions. Each question has some easy marks in it so make sure that you do all the questions in the exam. 7. Never panic, even if the question seems difficult at first. It will be linked to something you have covered. Find the connection. 8. Manage your time properly. Don’t waste time on questions you are unsure of. Move on and come back if time allows. 9. Check weighting – how many marks have been allocated for your answer? Take note of the ticks in this study guide as examples of marks allocated. Do not give more or less information than is required. 10. Write big and bold and clearly. You will get more marks if the marker can read your answer clearly. Show workings in brackets for Accounting as suggested in this study guide. © Department of Basic Education 2014 xii introduction Mind the Gap CAPS Grade 12 Accounting © Department of Basic Education 2014 Question words to help you answer questions It is important to look for the question words (the words that tell you what to do) to correctly understand what the examiner is asking. Use the words in the following table as a guide when answering questions. Question word Analyse Classify Comment Compare Define Describe Discuss Evaluate Explain Forecast Give/provide NB Identify Interpret List Mention Name State Suggest hint What is required of you Separate, examine and interpret Divide into groups or types so that things that are similar are in the same group Write generally about Point out or show both similarities or differences Give a clear meaning List the main characteristics of something Consider all information and reach a conclusion Express an opinion based on your findings Make clear, interpret and spell out Say what you think will happen in the future Write down only facts PAY SPECIAL ATTENTION NB Name the essential characteristics Give the intended meaning of Write a list of items Refer to relevant points HINT! something – give, identify or mention State Write down information without discussion Offer an explanation or solution e.g. Examples of question words EG - worked examples Choose a definition from COLUMN B that matches the type of account in COLUMN exams A. Draw a line from COLUMN A to COLUMN B to match the definitions. Column A 1. Fixed/tangible A assets 2. Current assets B 3. 4. 5. 6. 7. Column B This increases profit and therefore increases owner’s equity. This decreases profit and therefore decreases owner’s equity. Non-current C Amounts owing that will take longer than 12 months liabilities to pay off. ACTIVITIES boy and girl-left and Current D Assets which are expected to be kept for a long right of page liabilities period of time, usually longer than a year. Without activity them the business will not exist or earn a profit. Income E The value (net worth) of the business at any point in time (total assets – total liabilities). Expenses F Amounts owing that will be paid back within 12 months. Owner’s G Assets which are expected to be converted into cash comment Step by step comment equity in a short period of time (i.e. less than a year). activity In every exam question, put a CIRCLE around the question word and underline any other important key words. These words tell you exactly what is being asked. © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting introduction xiii © Department of Basic Education 2014 Learner’s Checklist 1. Basic Accounting Concepts 2. Companies I understand I do not understand Topic Covered in the Study Guide Use this checklist to monitor your progress when preparing for your examination. 3 Accounting equation 3 Company concepts 3 GAAP principles 3 Company ledger accounts 3 Final accounts of companies: Trading account 3 Profit and loss account 3 Appropriation account 3 Financial statements with adjustments: 3. 4. 5. 6. 7. 8. Income Statement 3 Balance Sheet 3 Cash Flow Statement 3 Notes to the financial statements 3 Analysis and Interpretation of financial statements 3 Comment on an audit report 3 Manufacturing Manufacturing concepts 3 Production Cost Statement with notes 3 Cost calculations 3 Break-even point 3 Trading and Profit and Loss Statements * Budgets Budgeting concepts 3 Debtors’ collection schedule 3 Creditors’ payment schedule 3 Cash budget (analyse and interpret) 3 Projected Income Statement (analyse and interpret) 3 Reconciliations Bank reconciliation 3 Debtors reconciliation 3 Age analysis 3 Creditors reconciliation 3 Inventories Inventory concepts 3 Inventory valuation – specific identification, FIFO and weight average methods 3 VAT Concepts and calculations 3 VAT control account 3 Fixed Assets Asset disposal 3 © Department of Basic Education 2014 xiv introduction Mind the Gap CAPS Grade 12 Accounting Chapter 1 Basic accounting concepts 1.1 Basic concepts Term Definition Accrued expenses/ expenses payable Expenses that are still owing at the end of the financial year. Accrued income/income receivable Income that is still owing to the business at the end of the financial year. Asset Item of value owned by a person or business which enables a profit to be made. Bad debts Debts written off as the debtors are unlikely to settle their accounts. Cost of sales Cost of sales is the cost price of all goods that have been sold. Creditors People/suppliers the business owes money to. Debtors People who owe the business money for goods bought on credit. Depreciation The amount by which fixed assets reduce in value over time due to use. These definitions help you understand the meaning of basic accounting concepts that are used in this study guide. Income received in Income that has already been received by a advance/deferred income business but which is for the next financial year. Liability An amount owed by a person or business to another person or business. Loss When the expenses are more than the income. Mark-up The percentage added to the cost price to calculate the selling price, i.e. the profit %. Owners’ equity The net worth (value) of the business at any given time. Or, assets less liabilities. Prepaid expenses Expenses that have already been paid but which are for the next financial year. Profit When the income is more than the expenses. Trading stock deficit This amount is calculated when the physical stock-take figure is less than the figure for trading stock in the general ledger. Trading stock surplus This amount is calculated when the physical stock-take figure is more than the figure for trading stock in the general ledger. Spend time learning the meanings of these terms. Use mobile notes to help you learn them. See page ix for more infomation. © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting chapter 1 B asic accounting concepts 1 1 Chapter 1.2 Rules of Accounting PAY SPECIAL ATTENTION NB NB These rules of accounting do not change. LEARN THEM WELL!!! HINT! hint Assets e.g.Dr + A Owner’s equity Dr Drawing Cr EGCr - worked examples + − exams − Dr Expenses Cr Liabilities Dr Capital Cr − Dr + − L Cr + Dr Income Cr + − − + (if expenses increase then profit decreases) (if expenses decrease then profit increases) (if income decreases then profit decreases) (if income increases then profit increases) activity ACTIVITIES boy and girl-left and right of page activity Step by step comment comment © Department of Basic Education 2014 2 chapter 1 basic accounting concepts Mind the Gap CAPS Grade 12 Accounting Chapter 1 1.3 Classification of accounts NON-CURRENT ASSETS Tangible/fixed assets Land and buildings Equipment Vehicles Financial assets Fixed deposit (longer than 12 months) CURRENT ASSETS Inventories Trading stock Consumable stores on hand Trade and other receivables Debtors’ control Accrued income/income receivable Prepaid expenses Cash and cash equivalents Bank (DR) Petty cash Cash float Fixed deposit (less than 12 months) OWNER’S EQUITY Expenses Income Cost of sales Interest expense Rent expense Salaries and wages Stationery Fuel Packing material Repairs Insurance Advertising Discount allowed Telephone Water and electricity Loss on sale of asset Bad debts Depreciation Trading stock deficit Provision for bad debts adjustment (+) Sales Current income Interest income Rent income Discount received Bad debts recovered Profit on sale of asset Trading stock surplus Provision for bad debts adjustment (–) NON-CURRENT LIABILITIES (to be paid over more than 12 months) Mortgage bond Loans CURRENT LIABILITIES (to be paid in less than 12 months) Trade creditors Bank overdraft (CR) Short term portion of loan Accrued expenses/ expenses payable Income received in advance/deferred income Activity 1: Matching items Choose a definition from COLUMN B that matches the type of account in COLUMN A. Draw a line from COLUMN A to COLUMN B to match the definitions. Column A Column B 1. Fixed/tangible assets A This increases profit and therefore increases owner’s equity. 2. Current assets B This decreases profit and therefore decreases owner’s equity. 3. Non-current liabilities C Amounts owing that will take longer than 12 months to pay off. 4. Current liabilities D Assets which are expected to be kept for a long period of time, usually longer than a year. Without them the business will not exist or earn a profit. 5. Income E The value (net worth) of the business at any point in time (total assets – total liabilities). 6. Expenses F Amounts owing that will be paid back within 12 months. 7. Owner’s equity G Assets which are expected to be converted into cash in a short period of time (i.e. less than a year). © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting chapter 1 B asic accounting concepts 3 1 Chapter Answers to activity 1 Column A Column B 1 D 2 G 3 C 4 F 5 A 6 B 7 E Activity 2: Multiple-choice questions Three options are provided as possible answers to the following questions. Circle the correct answer. 1. Bank overdraft is classified as a... 2. Consumable stores on hand is classified as... A Non-current liability A Owner’s equity B Current asset B Current asset C Current liability C An expense Answers to activity 2 1 C This is a current liability because it will be paid back within 1 year (short-term). 2 B This is a current asset because the business will use them within the next 12 months. © Department of Basic Education 2014 4 chapter 1 basic accounting concepts Mind the Gap CAPS Grade 12 Accounting Chapter 1 1.4 Steps to recording transactions Refer to Rules of Accounting and Classification of accounts on page 2. 1. Read the transaction/adjustment. Three questions that will assist Bought stationery and paid by cheque, R150. you: 2. Identify the two accounts affected – (double entry principle). 1. If an Asset: is it increasing 1. Stationery 2. Bank or decreasing my 3. Decide what type of accounts these are (classify). possessions? Stationery = expense and therefore affects owner’s equity 2. If a liability: is it increasing Bank = current asset or decreasing my debt? 3. If an Owners’ equity: it is 4. Decide which account is debited and which account is credited. increasing or decreasing The expense is increasing therefore DR stationery the interest of the owner? The asset is decreasing therefore CR bank 5. Record your answer showing the effect on Assets (A), Owners’ equity (O) and Liabilities (L): Account debit Stationery Account Credit Bank A= −150 O+ −150 L 0 A zero indicates no effect. DO NOT leave blank! Activity 3: Accounting equation Refer to Steps to recording transactions 1–4 above. Record the transactions in the Table below assuming bank is favourable (Dr) at all times. 1. Wrote off a debtor’s account of R500 as a bad debt. 2. Sent a cheque to a creditor to settle our account of R2 000. 3. Received rent of R5 000 from a tenant. 4. Bought trading stock on credit for R1 800. 5. Bought equipment for R600 and paid by cheque. Account debit Account credit A= O+ When a bank is favourable it means it is an asset of the business and remains in a debit balance. L 1 2 3 4 5 Answers to activity 3 Account debit Bad debts (expense increasing) Creditors control (liability decreasing) Bank (asset increasing) Trading stock (asset increasing) Equipment (asset increasing) 1 2 3 4 5 Account Credit A= O+ L Debtors control −500 −500 0 (asset decreasing) Bank (asset −2 000 0 −2 000 decreasing) Rent income +5000 +5000 0 (income increasing) Creditors control +1800 0 +1 800 (liability increasing) Bank (asset ±600 0 0 decreasing) Keep going! © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting chapter 1 B asic accounting concepts 5 2 Chapter Companies 2.1 Concepts relating to companies Persons in a company: AL ATTENTION d examples p Concept NB People who are appointed by the shareholders to run the company. Directors SPECIAL ATTENTION Companies is thePAY BIGGEST NB section in your exam. Spend time on it! Use mobile HINT! notes to learn these concepts. See page ix for instructions on how to make them. hint e.g. EG - worked examples Explanation NB Independent auditor (external) An auditor who expresses an opinion on the financial statements in an auditor’s report but does not work for the company. Internal auditor An auditor, who supervises the preparation of the financial statements, is responsible for internal control and is employed by the company. Shareholders People who own the company. South African Revenue Services (SARS) The government department to whom the company must pay income tax on the profits and VAT when due. Documents relating to companies exams Concept Auditor’s report ACTIVITIES boy and girl-left and Qualified right of page auditor’s report activity Unqualified auditor’s report Disclaimer activity Explanation This is an opinion given by a qualified person on whether the financial statements are reliable or not. When the auditors find the financial statements acceptable EXCEPT for some aspects that need to be changed, fixed or investigated. Whenboy the ACTIVITIES and girl-left and rightWhen of page the auditors find the financial statements acceptable in ALL respects. auditors are not prepared to express an opinion on the financial statements (because they are too unreliable). comment Balance Sheet This statement reflects the assets, liabilities and net worth (owners’ equity of the company). Another term for this is ‘Statement of Financial Position’. Cash Flow Statement This shows the flow of cash in a company (money coming in and money going out). comment Step by step comment comment Income Statement This statement shows the profit or loss made from business operations (income and expenses). Another term for this is ‘Statement of Comprehensive Income’. Tax assessment This is issued by SARS to confirm the amount of income tax which the company has to pay based on profits. © Department of Basic Education 2014 6 chapter 2 companie s Mind the Gap CAPS Grade 12 Accounting Chapter 2 Further concepts relating to companies Concept Authorised share capital Dividends Interim dividends Final dividends Income tax Issued share capital Limited liability No par value Provisional tax Retained income Issue price Shareholders earnings Shareholders for dividends Buy back shares Explanation The maximum number of shares a company can sell. That portion of the profits (after tax) which has been approved to be shared amongst the shareholders (total dividends = interim + final). Dividends that are paid to the shareholders during the year. Dividends that are declared (recommended) to the shareholders at the end of the financial year. Tax the company pays to SARS on its profits. The number of shares that have actually been sold to shareholders. Use number of issued shares to calculate dividends. The liability of the shareholders is limited to their investment in the company (they cannot lose their personal assets). There is no value attached to shares until they are issued. Payments made to SARS during the year based on estimated profits (every 6 months). A portion of the profits after tax that are not paid out to the shareholders in dividends but kept (retained) for future growth of the company. The price at which shares are issued to the public. Net profit after tax. The amount still owing to shareholders for dividends declared but not yet paid. Issued shares that have been repurchased by the company and are retired or cancelled. Some acronyms (abbreviations) used in companies AGM CA CIPRO GAAP IFRS JSE MOI SAICA SAIPA Annual General Meeting Chartered Accountant Company and Intellectual Property Commission Generally Accepted Accounting Practice International Financial Reporting Standards Johannesburg Securities Exchange Memorandum of Incorporation South African Institute for Chartered Accountants South African Institute for Professional Accountants Gaap concepts Concept Business entity rule Going concern Historical cost Matching Materiality Prudence Explanation The finances of the company are kept separate from that of the shareholders Financial statements are prepared with the understanding that the company will continue operating in the future All assets are recorded at their original cost price e.g. Land and Buildings are recorded at the price that you paid for them Income and expenses must be recorded in the correct financial year e.g. sales and cost of sales All important items must be shown separately in the financial statements (e.g. directors’ fees) or when decisions must be made (e.g. is it worth having separate accounts for wages and salaries if you have only two employees?) Figures used in financial statements should be realistic (conservative – always record the worst scenario). The aim of this principle is to show the reality “as it is” and not make things prettier than what they are. E.g. you will show ‘net debtors’ in the balance sheet (trade debtors minus provision for bad debts) © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting chapter 2 compani es 7 2 Chapter PAY SPECIAL ATTENTION NB 2.2 Company General Ledger NB accounts PAY SPECIAL ATTENTION NB SARS (income tax) implies a liability owing to SARS. HINT! hint e.g. These are HINT!the Ordinary share capital most commonly hint asked company sars (income tax) Shareholders for dividends ledger accounts. Income tax Dividends on ordinary shares (ordinary share dividends) EG - worked examples Appropriation account e.g. For any words you do not PAY SPECIAL ATTENTION understand, refer to NB the company concepts at the beginning of this section. EG - worked examples NB exams exams ctivity 1: Typical examination A questions activity HINT! hint e.g. a) b) c) d) e) f) ACTIVITIES boy and girl-left and right of page activity EG - worked examples ACTIVITIES boy Worked example and girl-left and1 right of page activity Use the following information to complete the ledger accounts activity given on the answer sheet for kwik fix ltd for the financial year exams ended 30 June 2011. Step by step 1 000 000 ÷ 500 000 shares = R2 Information 1 To calculate the average share price, use this figure and divide it by the no. of shares issued. 1 July 2010 Step by step activity comment comment At the beginning of the year, the company had the following opening balances: Ordinary share capital (500 000 shares) Retained income SARS ACTIVITIES (Incomeboy tax) and girl-left and right of page Shareholders for dividends R1 000 000 180 000 (ct) 9 000 130 000 2 1 July 2010 activity Issued 50 000 shares to the public at R7,50 per share 3 23 July 2010 Paid the amounts owing to SARS and the shareholders. 4 31 December 2010 A first provisional tax payment of R112 500 was made to SARS half-way through the financial year. 5 31 December 2010 6 31 March 2011 An interim dividend comment of 15 cents per share was paid to shareholders. 7 30 June 2011 A second provisional tax payment of R120 000 was made to SARS at the end of the financial year. 8 30 June 2011 Final dividends of 30 cents per share were declared at the AGM but have not yet been paid to the shareholders. 9 30 June 2011 After the completion of the audit, the income tax figure for the year was determined as R240 000. This was calculated on a net profit figure of R800 000. Step by step 10 30 June 2011 comment Bought back 20 000 shares from a disgruntled shareholder. The directors decided to buy back these shares at R8,50 per share. Show the closing transfers to the final accounts. © Department of Basic Education 2014 8 chapter 2 compani es Mind the Gap CAPS Grade 12 Accounting comment Chapter 2 Notes below refer to the information above and to the ledger accounts below ( 1 – 10): 1 The balances for SARS (Income tax) and Shareholders for dividends are the amounts that were not paid last year and need to be paid this year. 2 Shares issued to the public at issue price of R7,50 per share 3 The amounts owing to SARS and the shareholders from last year are now being paid. 4 7 The first provisional tax payment is always made half-way (6 months) into the financial year and the second provisional tax payment is made at the end of the financial year. 5 The interim dividend is paid during the year 8 The final dividend is declared (not paid) at the end of the financial year. 6 Shares bought back at R8,50 per share from a shareholder. New average price to be calculated. To calculate average price, find the value of Ordinary Share Capital, R1 375 000 ÷ 55 000 = R2,50). It means that you’re only going to claim R2,50 per share and the rest will be claimed from Retained Income. 9 The income tax figure for the year is the amount of tax the company owes calculated on the net profit for the year. This needs to be compared to the provisional tax payments made to see whether the company owes SARS more tax (liability) or whether SARS owes the company (asset). The net profit of R800 000 is calculated in the Profit and Loss Account and transferred to the Appropriation Account. 10 The final accounts include the Trading Account, Profit and Loss Account (covered in this example) and the Appropriation Account. EXAMPLE OF A TRADING ACCOUNT AND PROFIT AND LOSS ACCOUNT (exactly the same as a sole trader or partnership) TRADING ACCOUNT (F1) 2011 June 28 Cost of Sales GJ Profit and loss GJ 2011 300 000 June 28 Sales N GJ 1 170 000 1 470 000 1 470 000 PROFIT AND LOSS ACCOUNT (F2) 2011 June 28 Salaries GJ 2011 130 000 June Directors fees (new) GJ 160 000 Audit fees (new) GJ 40 000 Provision on bad debts adjustment GJ 1 000 Water and electricity GJ 29 000 Telephone / cell phones GJ 50 000 Appropriation 1 470 000 28 N Trading account (gross profit) GJ 1 170 000 Rent Income GJ 24 000 Profit on sale of asset GJ 16 000 800 000 1 210 000 1 210 000 © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting chapter 2 compani es 9 2 Chapter General Ledger of Kwik Fix Ltd Average price of shares: Shares issued: 500 000 + 50 000 = 550 000 shares issued. These numbers refer to the explanations above. Mar R1 375 000 ÷ 550 000 shares = R2,50 Balance Sheet Section Ordinary Share Capital Dr 2011 R1 000 000 + R375 000 = R1 375 000 31 Bank 6 (20 000 × R2,50) Balance CPJ c/d 50 000 2010 July Cr 1 Balance 1 b/d 31 Bank 2 (50 000 × R7,50) GJ 1 375 000 2011 July 23 Bank 3 CPJ 9 000 2010 Dec 31 Bank 4 CPJ 112 500 2011 June 30 Bank 7 CPJ 120 000 Balance c/d 7 500 July 1 Balance b/d Balance Sheet Section SARS (Income tax) Dr 375 000 1 325 000 1 375 000 2010 1 000 000 2010 July 2011 June 1 325 000 Cr 1 Balance 1 b/d 30 Income tax 9 GJ 249 000 9 000 240 000 249 000 2011 July 1 Balance b/d 7 500 The Income Tax assessment was more than the provisional payments. Therefore the balance is on the credit side making it a liability (Trade and Other Payables). Nominal Accounts Section Dr INCOME TAX 2011 June 30 SARS (Income tax) 9 GJ 240 000 2011 June 30 Cr Appropriation 10 Balance Sheet Section SHAREHOLDERS FOR DIVIDENDS Dr 23 Bank 3 CPJ 130 000 2010 July 1 Balance 1 b/d 130 000 2011 June 30 Balance c/d 159 000 2011 June 30 Dividends on ordinary shares 8 GJ 159 000 289 000 289 000 1 Balance 240 000 Cr 2010 July 2011 July GJ b/d 159 000 The R159 000 is the final dividend and is still owing to the shareholders. This is a liability (Trade and Other Payables). © Department of Basic Education 2014 10 chapte r 2 companie s Mind the Gap CAPS Grade 12 Accounting Chapter 2 Nominal accounts section Dr DIVIDENDS ON ORDINARY SHARES 2010 Dec 31 2011 June 30 Bank 5 (550 000 × 0.15) CPJ Shareholders for dividends GJ 8 (530 000 × 0.30) 82 500 2011 June 30 Cr Appropriation 10 GJ 241 500 159 000 241 500 241 500 There are three different ways of preparing the Appropriation account. Choose the alternative that you have been taught. Option 1: The Retained Income for the year is transferred from the Appropriation account to the Retained Income account. (R8,50 – 2,50 = R6) Balance Sheet Section RETAINED ACCOUNT Dr 2011 Mar 31 Bank (20 000 × R6) 6 GJ 120 000 June 30 Balance c/d 378 500 2011 June 30 Cr Balance b/d 180 000 Appropriation GJ 318 500 498 500 498 500 July Balance 378 500 Final accounts section APPROPRIATION ACCOUNT Dr 2011 June 1 30 Income tax 10 GJ 240 000 Dividends on ordinary shares 10 GJ 241 500 Retained income GJ 2011 June 30 Cr GJ Profit & loss 9 800 000 318 500 800 000 800 000 Option 2: The Retained Income at the beginning of the year less the buy-back of shares adjustment is transferred to the Appropriation account. The Retained Income (after the share buy-back adjustment) at the end of the year is transferred from the Appropriation account to the Retained Income account Balance sheet section RETAINED ACCOUNT Dr 2011 Mar 31 Bank (20 000 × R6) 6 GJ 120 000 June 30 Appropriation GJ 60 000 2010 July 1 Cr Balance b/d 180 000 180 000 2011 June 2011 June 1 Appropriation GJ Final accounts section APPROPRIATION ACCOUNT Dr 30 Income tax 10 GJ 240 000 Dividends on ordinary shares 10 GJ 241 500 Retained income GJ 180 000 2011 June 30 378 500 Cr GJ Profit & loss 9 Retained Income (180 000 – 120 000) 800 000 60 000 378 500 860 000 860 000 © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting chapter 2 companies 11 2 Chapter Option 3: The Retained Income at the beginning of the year is transferred to the Appropriation account. The Retained Income (before the share buy-back adjustment) at the end of the year is transferred from the Appropriation account to the Retained Income account Balance sheet section RETAINED ACCOUNT Dr 2011 Mar 31 Bank (20 000 × R6) 6 GJ June 30 Appropriation GJ Balance c/d Cr 120 000 2011 July 1 Balance b/d 180 000 180 000 2011 June 30 Appropriation GJ 498 500 378 500 678 500 678 500 2011 July 1 Balance b/d 378 500 The balance of the Retained Income account stays R378 500 as in Options 1 and 2 Final accounts section APPROPRIATION ACCOUNT Dr 2011 June 30 Income tax 10 GJ 240 000 Dividends on ordinary shares 10 GJ 241 500 Retained income GJ 498 500 2011 June 30 980 000 Cr Profit & loss 9 Retained Income GJ 800 000 180 000 980 000 Practice task 1 General ledger of kwik fix ltd Balance sheet section Dr Ordinary Share Capital Cr © Department of Basic Education 2014 12 chapte r 2 companie s Mind the Gap CAPS Grade 12 Accounting Chapter 2 Dr Retained income Cr Dr sars (Income tax) Cr Dr Shareholders for Dividends Cr Nominal section Dr Income Tax Cr © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting chapter 2 companies 13 2 Chapter Dr Dividends on Ordinary Shares Cr Final accounts section Dr Appropriation Account Cr © Department of Basic Education 2014 14 chapte r 2 companie s Mind the Gap CAPS Grade 12 Accounting Chapter 2 2.3 Preparation of Financial Statements for companies Income statement Use the following steps to prepare an income statement from a pre-adjustment trial balance: 1. Enter the pre-adjustment trial balance figures from the nominal section onto the answer sheet next to the detail. 2. Read each adjustment: a) If necessary calculate the adjustment amount b) Decide on which account is to be debited and which account is to be credited. c) On your answer sheet reflect a (+) or a (–) in respect of each adjustment next to the already entered pre-adjustment figure. i) Outstanding/accrued amounts will be added (+) and prepaid/received in advance amounts will be subtracted (–) 3. When all the adjustments have been done, calculate your final figures and write them in the column. Remember a pre-adjustment trial balance refers to a trial balance that is NOT final and requires adjustments (entries) to be made to finalise the figures to be used in the preparation of the annual Financial Statements. Look at the format you have been given. Do you notice any missing details? Fill them in. THESE ARE EASY MARKS! © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting chapter 2 companies 15 2 Chapter Summary of the year end adjustments Ensure that you know all possible yearend adjustments before attempting the given activities. Make use of the Pre-adjustment Trial balance of Carl Stores to complete the Income Statement for the year ended 30 June 2014 and the Balance Sheet on 30 June 2014. PRE-ADJUSTMENT TRIAL BALANCE ON 30 JUNE 2014 BALANCE SHEET ACCOUNTS SECTION DEBIT CREDIT Ordinary Share capital 351 000 Retained Income 9 100 Loan from Lowveld Bank 50 000 Land and buildings 270 000 Equipment (at cost) 75 000 Vehicle 100 000 Accumulated depreciation on vehicles 30 000 Accumulated depreciation on equipment 30 500 Fixed Deposit 10 000 Trading stock 74 000 Debtors control 16 100 Provision for bad debts 600 Deposit on water and electricity 1 000 Bank 15 900 Cash float 800 Petty cash 300 Creditors control 9 500 South African Revenue Services: (PAYE) Creditors for salaries Pension fund Medical aid fund NOMINAL ACCOUNTS SECTION Sales 550 000 Debtors allowances 10 000 Cost of sales 320 000 Salaries 95 000 Wages 30 000 Water and electricity 7 000 Pension Fund contribution 4 000 Medical Fund contribution 2 700 Bad debts 1 000 Rent income 13 000 Commission income 8 700 Packing materials 1 200 Insurance 600 Bank charges 5 300 Discount allowed 1 000 Telephone 12 500 Interest on fixed deposit 800 Interest on debtors 200 1 053 400 1 053 400 © Department of Basic Education 2014 16 chapte r 2 companie s Mind the Gap CAPS Grade 12 Accounting Chapter 2 Make use of the following adjustments to revise on the adjustments learnt previously 1 Prepaid expenses: Insurance prepaid, R200 2 Accrued expenses: Water and electricity still due, R2 000. 3 Income received in advance: Rent income received in advance, R1 000 4 Accrued income: Interest R400 (not capitalized) 5 Bank charges, R700, interest on overdraft, R200 on late bank statement to be brought into account. 6 Bank Statement also showed a RD cheque, R1 000 (receive from debtor B. Bam in settlement of his account of R1 100) 7 Interest capitalized. Loan b/d R55 000 (1 July 2011). Total payments R15 000. Closing balance of loan R50 000. 8 Depreciation: Depreciate vehicles at 10% p.a. at cost price and Equipment at 10 % p.a. at carrying value 9 Bad debts: J Jon’s debt written off as bad debt, R200 10 INCREASE: 2014 Provision for bad debts at 5 % of debtors. (17 000 × 5% = ) 11 Insurance claim of e.g. stock stolen: e.g. Stock stolen valued @ R5 000. The Insurance Company is prepared to pay out R4 000 on the claim put forward 12 Trading stock deficit: Trading stock according to stock taking, R67 000. 13 Consumable stores on hand: Closing stock: Packing material, R300 14 Salary of an employee omitted in error: e.g. Gross salary of Joe Soap omitted of R10 000. SARS (PAYE), R1 600 Pension fund R500 and Medical fund R900. The owner contributed to the medical fund and pension fund Rand for Rand basis. on fixed deposit still The degree of difficulty of these adjustments lays in the calculation of the figure but the entry stays the same! So ensure that you memorise the format. due, Ensure that you know how to interpret the adjustments, how to complete the general journal entry and how it affects the ledger accounts and the financial statements © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting chapter 2 companies 17 2 Chapter Adjustments at the end of the Financial year ILLUSTRATION OF THE PROGRESSION OF 14 POSSIBLE YEAR-END ADJUSTMENTS FROM ADJUSTMENT TO INCOME STATEMENT AND TO BALANCE SHEET 1. Prepaid expenses Insurance prepaid, R200 GENERAL LEDGER INCOME STATEMENT Prepaid expenses(CA) B Insurance NOTE 5: TRADE AND OTHER 400 RECEIVABLES Insurance (600 – 200) 2600 BALANCE SHEET Prepaid Expense 200 Insurance (e) N Total b/d 600 Prepaid expenses 200 Profit and loss 600 400 600 2. Accrued expenses: Electricity still due, R2 000. Accrued expenses (CL) B Water and electricity 2 000 Water and electricity (7 000 + 2 000) NOTE 9: TRADE AND OTHER 9 000 PAYABLES Accrued Expenses 2 000 Water and Electricity(e) N Total b/d 7 000 Profit and loss 9 000 Accrued expenses 2 000 9 000 9 000 3. Income received in advance Rent income received in advance, R1 000 Income received advance (CL) B Rent income Rent Income 1 000 (13 000 – 1 000) NOTE 9: TRADE AND OTHER PAYABLES 12 000 Income received in advance Rent income(I) N Income received in advance Profit and loss 1 000 12 000 13 000 Total 13 000 _____ 13 000 1 000 4. Accrued income: Interest on fixed deposit still due, R400 (not capitalized) GENERAL LEDGER INCOME STATEMENT Accrued income(CA) B Plus Interest income (800 + 400) Interest on fixed deposit 400 BALANCE SHEET NOTE 5:TRADE AND OTHER 1 200 RECEIVABLES Accrued Income 400 Interest on fixed deposit (I) N Profit and loss 1200 Total _____ Accrued income 1 200 800 400 1200 © Department of Basic Education 2014 18 chapte r 2 companie s Mind the Gap CAPS Grade 12 Accounting Chapter 2 5. Bank charges The bank statement was received after the pre- adjustment trial balance was drawn up. The following must be included: Bank charges R700 Interest on overdraft, R200 GENERAL LEDGER INCOME STATEMENT Bank(CA) B Balance b/d Balance b/d Bank charges 700 (6 300 +700) Interest on over draft 200 Interest on overdraft ______ Balance c/d 15 000 (200) 15 900 15 900 15 000 15 900 Bank charges BALANCE SHEET NOTE 6: CASH AND OTHER CASH 7 000 EQUIVALENTS 200 Bank (15 900 – 700 – 200) 15 000 Bank charges(e)N Total b/d Bank 6 300 Profit on Loss 7 000 700 7 000 _____ 7 000 Interest on overdraft (e)N Bank 200 Profit on Loss 200 6. RD cheques and discount allowed The bank statement was received after the pre- adjustment trial balance was drawn up. The following must be taken into account; RD cheque of R1000 received from a debtor, B Bam, in settlement of his account of R1100 GENERAL LEDGER INCOME STATEMENT Bank (CA) B Balance b/d Balance b/d NOTE 5: TRADE AND OTHER RECEIVABLES 15 900 Bank charges 700 Discount allowed Interest on over draft200 (1 100 – 100) B Bam (RD) 1 000 ______ Balance c/d 14 000 15 900 14 000 15 900 Debtors Control account (CA)B Bank (RD) 1 000 Trade Debtors 17 000 (16 100 + 1 000 + 100) NOTE 6: CASH AND OTHER CASH EQUIVALENTS Bank (15 900 – 700 – 200 – 1 000) 14 000 2011 Balance b/d BALANCE SHEET 16 100 1 000 Journal debits 100 17 100 Discount allowed account Total b/d 1 100 Debtors control 100 _____ Profit and Loss 1 100 1 000 1 100 © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting chapter 2 companies 19 2 Chapter 7. Interest capitalized. Loan b/d 55 000 (1 Jan 2009) Total payments R15 000 Closing balance of loan R50 000 GENERAL LEDGER INCOME STATEMENT BALANCE SHEET Loan: Crazy Bank (CA) B Bank (10 000+5 000) Balance b/d 15 000 Interest on loan Balance c/d 50 000 65 000 Balance b/d Interest on loan 55 000 (55 000 – 15000 – 10 000 50 000) 65 000 50 000 Loan: Crazy Bank (50 000 – 5 000) 45 000 CURRENT LIABILITIES Interest on loan (I) N Loan: Crazy Bank 10 000 NON-CURRENT LIABILITIES 5 000 Short term loan 10 000 Profit and loss 10 000 The total payments for the year includes the interest charged (R10 000) for the year 8. Depreciation Vehicles: R100 000 Accumulated depreciation:R30 000 Depreciation at cost price: 100 000 × 10/100 = 10 000 GENERAL LEDGER Depreciation (10 000 + 4 450) 14 450 BALANCE SHEET 14 450 NOTE 3: FIXED ASSETS 75 000 100 000 (30 500) (30 000) 44 500 70 000 Depreciation (4 450) (10 000) Carrying value 39 050 60 000 Cost price 75 000 100 000 Accumulated depre (35 950 (40 000) Cost price Accumulated depre. Movements: _______ 14 450 Accumulated Depreciation on Vehicles (–A) B Balance b/d Depreciation Depreciation at carrying value 75 000 – 30 500 = 44 500 × 10/100 = 4 450 Carrying value Accumulated Depreciation on equipment 4 450 14 450 Accumulated. Depreciation: R30 500 INCOME STATEMENT Depreciation (e) N Accumulated Profit on Loss depreciation on Vehicle 10 000 Equipment: R75 000 30 000 10 000 40 000 Accumulated Depreciation on Equipment (–A) B Balance b/d Depreciation 30 500 4 450 34 950 © Department of Basic Education 2014 20 chapte r 2 companie s Mind the Gap CAPS Grade 12 Accounting Chapter 2 9. Bad debts J Jon’s debt written off as bad debt, R200 GENERAL LEDGER INCOME STATEMENT Debtors Control (CA) B Balance b/d 16 100 Bad debts GJ Bank (RD) 200 Bad Debts (1 000 + 200) BALANCE SHEET NOTE 5: TRADE AND OTHER RECEIVABLES 1 200 1 000 (journal credits) Journal debits 100 Balance c/d Balance b/d 17 200 17 000 Trade Debtors 17 000 17 000 (15 100 +1 000+100 – 200) 17 200 Bad debts (e) N Total b/d 1 000 Profit and loss 1 200 Debtors control 200 1200 _____ 1 200 10. INCREASE: INCREASE: Provision for bad debts at 5 % of debtors. (17 000 × 5% = 850) GENERAL LEDGER INCOME STATEMENT Provision for bad debts (–A) B Less operating 2014 expenses Balance b/d 600 Provision for bad debts adjustment Provision for bad debts (850 – 600) adjustment 250 850 BALANCE SHEET NOTE 5: TRADE AND OTHER RECEIVABLES 250 Trade debtors 17 000 Less Provision for bad debts (850) Net Debtors 16 150 Debtors control(CA) B 2014 Balance b/d 17 000 Provision for bad debts adjustment (e) N Provision for bad debts 250 Profit and loss 250 © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting chapter 2 companies 21 2 Chapter See the calculations when Provision for bad debts are created or increases or decreases at the end of a financial year. 10.1 Provision for bad debts CREATE: 2012: provision for bad debts at 5% of debtors GENERAL LEDGER INCOME STATEMENT BALANCE SHEET Debtors control (CA) B Less operating expenses Provision for bad debts adjustment 2012 Balance b/d 1000 Provision for bad debts (–A) B NOTE 5: TRADE AND OTHER RECEIVABLES 50 Trade debtors 1 000 Less Provision for bad debts (50) Net Debtors 950 2012 Provision for bad debts adjustment 50 Provision for bad debts adjustment (e) N Provision for bad debts 50 Profit and loss 50 10.2 INCREASE: 2013 Provision for bad debts from R50 to R70. (1400 × 5%=70) GENERAL LEDGER INCOME STATEMENT Provision for bad debts(-A) B 2013 Balance b/d Less operating expenses 50 Provision for bad debts adjustment (70 – 50 ) Provision for bad debts adjustment 20 70 BALANCE SHEET NOTE 5: TRADE AND OTHER RECEIVABLES 20 Trade debtors Less Provision for bad debts Net Debtors 1 400 (70) 1 330 Debtors control (CA) B 2013 Balance b/d 1400 Provision for bad debts adjustment (e) N Provision for bad debts20 Profit and loss 20 © Department of Basic Education 2014 22 chapte r 2 companie s Mind the Gap CAPS Grade 12 Accounting Chapter 2 10.3 DECREASE: 2014 Provision for bad debts from R70 to R60. GENERAL LEDGER INCOME STATEMENT BALANCE SHEET Provision for bad debts (–A) B Provision for bad debts 2014 adjustment 10 Balance b/d Balance c/d 70 Provision for bad debts __ adjustment (70 – 60) 70 60 60 70 Balance b/d NOTE 5: TRADE AND OTHER RECEIVABLES Plus other operating income Trade debtors 1 200 10 Less Provision for bad debts ( 60) Net Debtors 1 140 Debtors control(CA) B 2014 Balance b/d 1200 Provision for bad debts adjustment (i) N Profit and loss 10 Provision for bad debts 10 11. Insurance claim of e.g. stock stolen. E.g. Stock stolen valued @ R5 000. Insurance is prepared to pay out R4000. GENERAL LEDGER INCOME STATEMENT BALANCE SHEET Trading Stock (CA) B NOTE 4: INVENTORY Loss on stolen stock 74 000 Loss to stolen stock 5 000 (5 000 – 4 000) ______ Balance c/d 69 000 74 000 74 000 Balance b/d 69 000 Balance b/d Trading stock (74 000 – 5000) 69 000 NOTE 6: TRADE AND OTHER RECEIVABLES Insurance claim (CA) B Loss to stolen stock 1 000 Insurance Claim (5 000 – 4 000) 4 000 1 000 Loss to stolen stock (e) N Trading Stock 5 000 Insurance claim 4 000 _____ Profit and Loss 5 000 1 000 5 000 12. Trading stock deficit Balance of the Trading stock account is R69 000. Trading stock according to stock taking, R67 000. GENERAL LEDGER INCOME STATEMENT BALANCE SHEET Trading stock(CA) B Balance b/d Balance b/d Trading stock deficit 74 000 Loss to stolen stock 5 000 (69 000 – 67 000) ______ Trading stock deficit2 000 74 000 Balance c/d 67 000 67 000 74 000 2 000 NOTE 4: INVENTORY Trading stock (69 000 –2000) 67 000 Trading stock deficit (e) N Trading stock 2 000 Profit and loss 2 000 © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting chapter 2 companies 23 2 Chapter 13. Consumable stores on hand; Closing stock: Packing material, R300 GENERAL LEDGER INCOME STATEMENT BALANCE SHEET Consumable stores on hand (CA) B Packing material Packing material 300 900 NOTE 4: INVENTORY (1 200 – 300) Packing material (e N) Total 1 200 Consumable Stores on hand 300 _____ Profit and Loss 1 200 Consumable stores on hand 300 900 1 200 Be careful. Does the wording of the adjustment read? After stock taking the packing material USED Is R900 or after stock taking the STOCK on hand, R300. 14. Salary of an employee omitted in error: e.g. Gross salary of Joe Soap omitted of R10 000. SARS (PAYE), R1600 Pension fund R500 and Medical fund R900. The owner contributed to the medical fund and pension fund on a Rand for Rand basis. (10 000 – 1 600 – 500 – 900 = 7 000) GENERAL LEDGER INCOME STATEMENT BALANCE SHEET Creditors for salaries (CL) B 7 000 Salaries (95 000 +10 000) Pension fund contribution (4 000 + 500) 1 600 Medical fund contribution Salaries GJ SARS (PAYE) (CL) B Salaries GJ (2 700 + 900) Pension Fund (CL)B Salaries GJ 105 000 NOTE 9: TRADE AND OTHER 4 500 PAYABLES 1 600 3 600 SARS (PAYE) Pension fund (500 + 500) 1 000 Medical fund (900 + 900) 1 800 500 Creditors for salaries Pension Fund contribution 500 1 000 7 000 (10 000 – 1 600 – 500 –900) Medical Fund (CL) B Salaries GJ 900 Medical Fund contribution 900 1 800 Salaries (e) N Total b/d 95 000 Profit and Loss 105 000 Gross salaries GJ 10 000 105 000 _______ 105 000 Pension Fund contribution (e) N Total b/d 4 000 Profit and loss 4 500 Pension Fund 500 4 500 _____ 4 500 Medical Fund contribution (e) Total b/d 2 700 NB Profit and loss Medical Fund contribution 900 3 600 3 600 _____ 3 600 PAY SPECIAL ATTENTION NB Do the HINT! following calculation to find the figure for CREDITORS FOR SALARIES while completing Note 9 in the following order: use the gross salary of R10 000 and subtract the – 1 600 SARS (PAY E) – 500 Pension fund – 900 MedicalEGfund - worked examples = 7 000 Creditors for salaries hint e.g. exams 24 chapte r 2 companie s © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting Chapter 2 Calculations: Ensure that you are able to do the following CALCULATIONS when attempting the year-end ADJUSTMENTS. Let’s use Rent Income to illustrate the different calculations for calculating the Rent for the year and to find the amount received in advance or that is still accrued. The end of the financial year is on 28 February. 1 2 Adjustment (low level) E.g. the total rent income received is R26 000. Take into account that one month’s rent was received in advance Calculation 26 000 ÷ 13 = R2 000 per month 2 000 × 12 = 24 000 Therefore R2 000 was received in advance. Effect on the financial statements Income statement Adjustment (medium level) Calculation Balance sheet Rent Income (26 000 ÷ 13 × 12) R24 000 Note 9: Income received in advance R2 000 E.g. the tenant paid his rent one month in advance. Take into account that the rent of R2 000 increased by 10 % from 1 October 2013. Total Rent received, R27 200. Draw a TIME LINE to find the rent for the year and the rent that was received in advance Financial year 1 Mar Apr May June July Aug Sept prepaid 1 Oct Nov Dec Jan Feb 2000 2000 2000 2000 2000 2000 2000 2200 2200 2200 2200 2200 R2000 × 7 = 14 000 Effect on the financial statements Income statement Rent Income (14 000 + 11 000) 2 000 + 10%) + R2 200 × 5 = 11 000 Mar 2200 + R2 200 = R27 200 Balance sheet R25 000 Note 9: Income received in advance R2 200 Number 2 and 3 are almost the same however in no. 3 the Rent per month was not given as in no.2. By using the following method the amounts can still be calculated. © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting chapter 2 companies 25 2 Chapter 3 Adjustment (high level) Calculation E.g. The total amount received during the year, R27 200. Take into account that rent increased by 10% on 1 October 2013 and the tenant paid the rent for March during February 2014. Draw a TIME LINE to find the rent for the year and the rent that was received in advance Financial year 1 Mar Apr May June July Aug Sept prepaid 1 Oct Nov Dec 100% 100% 100% 100% 100% 100% 100% 110% 110% 110% CALCULATION: Jan Feb 110% 110% (100% × 7) + (110% × 5) + (110% × 1) = 27 200 700% + 550% + 110% 1360% (known) = 27 200 = 27 200 (known) MAKE USE OF THE FORMULA: UNKNOWN is the amount prepaid and KNOWN is the total rent received Unknown % Known % 110% × 27 200 = R2 200 received in advance 1360% 1 Or 27 200 – 2 200 = R25 000 rent income for the year. Effect on the financial statements 4 Adjustment (high level) Calculation Income statement Rent Income (27 200 – 2 200) Balance sheet R25 000 Note 9: Income received in advance R2 200 E.g. The total mount received during the year, R22 800. Take into account that the rent increased by 10% on 1 October 2013 and the tenant hasn’t yet paid the rent for February 2014 Draw a TIME LINE to find the rent for the year and the accrued rent. Financial year 1 Mar Apr May June July Aug Sept accrued 1 Oct Nov Dec Jan Feb 100% 100% 100% 100% 100% 100% 100% 110% 110% 110% 110% 110% CALCULATION: Mar 110% (100% × 7) + (110% × 4) = 22 800 700% + 440% = 22 800 1140% = 22 800 MAKE USE OF THE FORMULA: UNKNOWN is the amount accrued and KNOWN is the total rent received Unknown % 110% × 22 800 = R2 200 accrued income 1 Known % 1140% Or 22 800 + 2 200 = R25 000 rent income for the year. Effect on the financial statements Income statement Rent Income (22 800+ 2 200) Balance sheet R25 000 Note 5: Accrued income R2 200 © Department of Basic Education 2014 26 chapte r 2 companie s Mind the Gap CAPS Grade 12 Accounting Chapter 2 5 Adjustment (High level) E.g. The total mount received during the year, R22 800. Take into account that the rent DECREASED BY 10% on 1 October 2013 and the tenant hasn’t yet paid the rent for February 2014 Calculation Draw a TIME LINE to find the rent for the year and the rent that was received in advance Financial year 1 Mar Apr May June July 1 Oct Nov Dec Jan Feb 100% 100% 100% 100% 100% 100% 100% 90% 90% 90% 90% 90% CALCULATION: Aug Sept accrued (100% × 7) + (90% × 4) = 22 800 700% + 360% = 27 200 1060% = 27 200 MAKE USE OF THE FORMULA: Unknown % UNKNOWN is the (%) amount accrued and KNOWN is the total rent received (%) Known % 90% × 22 800 = R2 200 accrued income 1360% 1 Or 22 800 – 2 200 = R25 000 rent income for the year. Effect on the financial statements Income statement Rent Income (22 800 + 2 200) Balance sheet R25 000 Note 5: Accrued Income R2 200 © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting chapter 2 companies 27 2 Chapter HINT! hint Example adapted from November 2011 ncs Exam paper e.g. Worked example 2 EG - worked examples Prepare the Income statement for the year ended 30 June 2011. exams Information 1. ANEESA LTD PRE-ADJUSTMENT TRIAL BALANCE AS AT 30 JUNE 2011 DEBIT Balance Sheet Accounts Section R activity Ordinary share capital Retained income Mortgage loan: Joy Bank 684 460 ACTIVITIES boy and girl-left and right of page 804 500 2 097 000 Vehicles activity 814 000 Equipment 616 000 Accumulated depreciation on vehicles 294 800 Accumulated depreciation on equipment Step by step Consumable stores on hand Bank Petty cash This amount is the provisional tax payment. R 2 820 000 Land and buildings Trading stock CREDIT Debtors' control comment comment 955 000 15 000 313 100 3 300 396 000 Creditors' control SARS (Income tax) 487 300 261 800 Provision for bad debts Fixed deposit: Broad Bank (8% p.a.) 341 000 18 000 495 000 Nominal Accounts Section Remember to subtract debtors’ allowances from sales. Sales Debtors’ allowances Cost of sales 10 500 000 145 200 7 487 000 Rent income 176 880 Interest income (on fixed deposit) 26 630 Bad debts recovered Directors' fees Audit fees Salaries and wages Packing material Marketing expenses This is the interim dividend. DO NOT include on the Income Statement! 2 300 840 000 73 800 660 000 23 100 480 000 Sundry expenses 63 770 Bad debts 12 000 Ordinary share dividends 404 800 16 155 870 16 155 870 © Department of Basic Education 2014 28 chapte r 2 companie s Mind the Gap CAPS Grade 12 Accounting Chapter 2 2. ADJUSTMENTS A. A physical stock-taking on 30 June 2011 revealed the following inventories on hand: Trading stock R902 150 Packing material R4 260 B. Directors' fees of R22 500 are outstanding at the end of the financial period. C. Make provision for outstanding interest on a fixed deposit. This investment has been in existence for the entire year. Interest is not capitalised. D. A debtor who owes us R32 000 has been declared insolvent. His estate paid 40 cents in every rand and this has been correctly recorded. The remaining balance must be written off as irrecoverable. E. Provision for bad debts must be adjusted to 5% of debtors. F. The rent included R14 520 for July 2011. Adjust accordingly. G. Make provision for depreciation as follows: Vehicles at 15% p.a. on cost price Equipment at 10% p.a. on the diminishing balance method. New equipment to the value of R48 000 was purchased on 1 September 2010. This has been correctly recorded. H. The loan statement received from Joy Bank on 30 June 2011 reflected the following: The total interest forms part of the repayment during the year. R Balance at the beginning of the financial year Repayments during the year Interest capitalised Balance at the end of the financial year 1 125 000 458 000 ? Capitalised means the interest is added onto the loan. You need to calculate this figure. 804 500 I. Income tax for the year, R150 285. © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting chapter 2 companies 29 2 Chapter Answer to worked example 2 PAY SPECIAL ATTENTION NByear ended 1. aneesa ltd: income statement for the 30 june 2011 Sales (10 500 0003 – 145 2003 ) 3 Cost of sales (7 487 000) 3 Gross profit hint 164 660 Rent income (176 8803 – 14 52033) Bad debt recovered (2 300) e.g. EG - worked 162examples 360 B A exams (2 392 600) Directors fees (840 0003 + 22 5003) 3 862 500 Audit fees (73 800) 3 73 800 Salaries and wages (660 000) 3 660 000 Packing material (23 1003 – 4 2603) 3 18 840 3 63 770 Sundry expenses (63 770) D Bad debts (12 0003 +19 20033) E Provision for bad debts adjustment (18 840 3– 18 000) G Depreciation V: 122 100 3 E: 4 0003 + 22 700 33 Trading stock deficit activity 33 comment comment 52 850 39 600 679 460 Interest expenses/finance cost 3 (458 000 + 804 500 – 1 125 000) or (1 125 0003 – 458 0003 – 804 5003) Net profit after tax 840 639 860 Interest income3 (26 6303 + 12 9703) Income tax 3 31 200 148 800 (137 500) Profit before tax I and girl-left and right of page Step by step Profit before interest expenses/finance cost3 H Always show your calculation work in brackets for ACTIVITIES boy part marks. activity 480 000 3 Operating profit C This is the total of the operating expenses. REMEMBER to subtract this from gross operating income. 3 032 460 Marketing expenses (480 000) A 2 300 3 Gross operating income Operating expenses It is VERY important to know the format of the Income Statement! 000) 2 867 800 Other operating income F FORMAT 10 354 800 HINT! (7 487 NB 541 960 3 PAY SPECIAL ATTENTION NB FORMAT (150 285) Note where these 3 items appear on the hint Income Statement. 391 675 HINT! The letters in this column refer to the explanations on the next page. e.g. EG - worked examples exams © Department of Basic Education 2014 30 chapte r 2 companie s Mind the Gap CAPS Grade 12 Accounting activity Chapter 2 2. Explanations of each adjustment A. Trading stock: PAY SPECIAL ATTENTION The physical stocktaking of R902 150 is less than NBthe amount in the preadjustment trial balance of R955 000. This means that there is a trading stock deficit of R52 850 (R955 000 – R902 150). Trading stock deficit = expense item on Income Statement Packing material: HINT! The amount on hand is subtracted from the pre-adjustment trial balance amount. hint B. Directors’ fees are outstanding and therefore get added to pre-adjustment figure. e.g. NB All pre-adjust-ment trial balance figures have been entered in bold on the Income Statement before entering the adjustments. EG - worked examples C. Interest on fixed deposit = R495 000 × 8% = R39 600 for the year. The difference must be added to pre-adjustment trial balance figure. D. Calculation of bad debts: The estate paid 40 cents therefore 60 centsexams in every rand must be written off. R32 000 × 0,6 = R19 200. This must be added to the pre-adjustment figure. E. Provision for bad debts adjustments calculation. Calculate final debtors amount taking adjustment D into account: R396 000 – R19 200 = R376 800 5% of R376 800 = R18 840 activity Provision for bad debts must be adjusted to R18 840. It is currently ACTIVITIES boy girl-left and R18 000. The amount of R840 by which it must be adjusted must be shownand right of page in the income statement as an expense. F. Rent was received in advance and therefore must beactivity subtracted from the pre-adjustment figure. G. Depreciation on vehicles: 814 000 × 15% = R122 100 Depreciation on equipment: Step by step New equipment Bought on 1 September. The cost of the new equipment must be subtracted from the equipment balance R616 000 – R48 000 = R568 000 10% of R48 000 × 10 ÷ 12 = R4 000 Old equipment Using the diminishing balance method, subtract the accumulated depreciation from the cost price (excluding the new equipment) to determine carrying value R568 000 – R341 000 = R227 000 10% of R227 000 = R22 700 Depreciation is recorded as an expense in the income statement: R122 100 + R22 700 + R4 000 = R148 800 PLEASE NOTE: Depreciation is normally an involved calculation affecting both vehicles and comment comment equipment. For this reason many marks are awarded for the depreciation figure. Show all your workings so that even if one or two of your figures are wrong, you can still get some marks for calculating correctly. H. To calculate the interest Loan: Joy bank on loan on the Loan Bank CPJ 458 000 Balance b/d1 125 000 Statement: R1 125 000 – R458 000 Balance c/d 804 500 Int. on loan GJ 137 500 – R804 500 1 262 500 1 262 000 = R137 500 Balance b/d 804 500 Interest on loan = 137 500 I. Income tax for the year is subtracted from the net profit before tax © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting chapter 2 companies 31 2 Chapter Use this blank income statement to practice doing the task again on your own. Once you have completed the task, compare your answer to the worked example on the previous pages. Practice task 2 Aneesa ltd: Income Statement for the year ended 30 June 2011 Sales Cost of sales Gross profit Other operating income Gross operating income Operating expenses Operating profit Profit before tax Net profit after tax © Department of Basic Education 2014 32 chapte r 2 companie s Mind the Gap CAPS Grade 12 Accounting HINT! hint Chapter 2 e.g. Worked example 3 EG - worked examples Look at the format you have been given. Do you notice any missing details? Fill them in. THESE ARE EASY MARKS! Balance Sheet and notes exams Use the following steps to prepare a balance sheet from the given information: 1. Enter the figures from the information given onto the answer sheet next to the details. 2. Read the additional information: a) If necessary calculate the adjustment amount. activity b) Decide on which account is to be debited and which account is to be credited. ACTIVITIES boy c) On your answer sheet reflect a (+) a (–)andin respect of each item next to the and or girl-left of page already entered pre-adjustment right figure. 3. When all the additional information has been considered, calculate the final figures activity and write them in the column. Example adapted from November 2009 NCS exam paper Step by step Practice task 3 comment comment You are provided with information relating to Qwando Limited for the financial year ended 30 June 2011. Prepare the Retained income note. (18) Prepare the Balance Sheet on 30 June 2011. (36) Information 1. The following figures were taken from the financial records of the financial year ended 30 June 2011. R Ordinary share capital (see information 2 below) Retained income (on 1 July 2010) 2 400 000 738 000 Shareholders for dividends (see information 4 below) ? Fixed deposit at Supa Bank (see information 5 below) 60 000 Mortgage Bond from Supa Bank (see information 7 below) Fixed/tangible assets ? 3 881 000 Debtors’ control 45 000 Creditors’ control 85 200 Creditors for salaries 12 300 Provision for bad debts (see Information 6 below) SARS (Income tax – provisional tax payments) ? 400 000 SARS (PAYE) 6 650 Expenses payable (accrued) 7 200 Income receivable (accrued) 7 950 Bank (favourable balance) 168 450 Trading stock 129 600 Consumable stores on hand 5 600 © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting chapter 2 companies 33 2 Chapter 2. Shares: There were 700 000 ordinary shares in issue at the beginning of the financial year. On 1 January 2011, 100 000 ordinary shares were issued to the public at R3,80 cents per share. This has been correctly recorded and is included in the figures above. On 1 June 2011, 40 000 were repurchased from a shareholder at R4,50 per share. A direct transfer was put through from the Bank account but no entry has been made in the books. PAY SPECIAL ATTENTION 3. The net profitNB before tax for the year ended 30 June 2011 was NB calculated as R1 250 000. No entry for income tax calculated at a rate of 30% of the net profit has been made. Use the issued shares to 4. Dividends were as follows: calculate the dividends. Interim dividends of 20 cents per share were paid on HINT! 31 December 2010. hint Final dividends of 35 cents per share were declared on 30 June 2011. All shareholders at this date qualify for dividends. 5. One third of the total fixed deposits mature on 31 August 2011. EG - worked examples 6. Provision for bad debts must be adjusted to 5% of debtors. 7. The loan statement from Supa Bank on 30 June 2011 reflects the following: e.g. exams SUPA BANK LOAN STATEMENT ON 30 JUNE 2011 Balance on 1 July 2010 R384 000 Interest charged The monthly capital activity repayments on the loan will remain constant until the loan has been paid in full on 30 June 2019. 57 600 Monthly instalments in terms of the loan agreement (12 × R8 800) ACTIVITIES boymonthly instalments include interest on the (These and girl-left and capital repayments of the loan) right of page Balance on 30 June 2011 activity 105 600 R336 000 Answers to practice task 3 RETAINED INCOME comment Balance on the last day of the previous year Step by step R comment 3738 000 3 Net profit after tax for the period3 (1 250 000 – 30%) 33 875 000 2 Retained income on 40 000 shares repurchased (40 000 × R1,50) 3 3 (60 000) Total dividends (interim and final) are shown here. Ordinary share dividends3 (406 000) 4 Paid3 (interim) (700 00033 shares × 20c3) 140 000 2& 4 Recommended3 (final) (760 0003 shares × 35c3) 266 000 Balance on the last day of the current year 1 147 000 © Department of Basic Education 2014 34 chapte r 2 companie s Mind the Gap CAPS Grade 12 Accounting Chapter 2 Qwando Limited NB Balance Sheet on 30 June 2011 PAY SPECIAL ATTENTION ASSETS NON CURRENT ASSETS Fixed / tangible assets (4 021 000) Financial assets 5 3 921 000 hint Fixed deposit: Supra Bank (60 0003 – 20 0003) HINT!881 000 33 340 000 e.g. EG - worked examples CURRENT ASSETS Inventories (129 6003 + 5 600) exams Trade and other receivables (45 0003 + 7 9503 – 2 2503 + 25 000)3 5 Cash and cash equivalents (168 450 + 20 000 – 120 000- 60 000) EQUITY AND LIABILITIES 3 75 700 activity 8 450 4 140 350 activity CAPITAL AND RESERVES 3 427 000 2 Ordinary share capital (2 400 000 – 120 000) 3 2 280 000 2 Retained income (see note on previous page) 3 1 147 000 Step by step NON-CURRENT LIABILITIES 288 000 Mortgage loan: Supa Bank (336 0003 – 48 0003) 288 000 CURRENT LIABILITIES 425 350 Trade and other payables (85 2003 + 12 300 + 6 6503 + 7 2003) Shareholders for dividends 7 Current portion of loan TOTAL EQUITY AND LIABILITIES It is VERY important to know the format of the Balance Sheet and notes! Fixed assets are always shown at book value on the Balance Sheet. 3 135 200 TOTAL ASSETS 4 FORMAT 219 350 6 7 NB Amount owed by SARS to the business. This implies the business overpaid its taxes to SARS. ACTIVITIES boy and girl-left and right of page If the notes are not required, show all your calculation work in brackets on the Balance Sheet comment comment 3111 350 266 000 3 3 48 000 This is the final dividend declared at the end of the year. 4 140 350 The numbers in this column refer to the explanations on the next page. © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting chapter 2 companies 35 2 Chapter Explanations of each adjustment NB 2. PAY SPECIAL ATTENTION All given figures in information 1 have been entered in bold before HINT! entering the information hint 2 to 7. e.g. 3. EG - worked examples exams 4. activity activity Step by step 5. 6. 7. Shares: NB of shares have been properly recorded. The repurchase The new issue of 40 000 shares at R4,50. The ordinary share capital account must be reduced by the average share price (2 400 000 ÷ 800 000 shares = R3) The retained income account will be reduced by the difference between the buyback price and average price ( R4,50 – R3 = R1,50 × 40 000 shares) Net profit after tax must be calculated by subtracting income tax from net profit before tax. This must be entered in the retained income note. Tax calculation = (R1 250 000 × 30% = R375 000). Net profit after tax = R1 250 000 – R375 000 = R875 000). Dividends: Calculation of interim/paid dividends = 700 000 × 20 cents = R140 000 Calculation of final/declared dividends = 700 000 + 100 000 (issued) – 40 000 (repurchased) = 760 000 shares 760 000 × 35 cents = R266 000 Total dividends = R140 000 + R266 000 = R406 000 ACTIVITIES boy and girl-left and Calculation right of page of short term portion of fixed deposit: The portion of the fixed deposit that will be received within the next 12 months must be subtracted from financial assets and shown under cash and cash equivalents under current assets on the balance sheet. (1/3 of R60 000 = R20 000) Provision for bad debts is calculated at 5% of debtors control: comment 5% of R45 000 = R2 250. Provision for bad debts must be subtracted from trade and other receivables. comment Repayments of the capital amount of the loan that will be made in the next 12 months must be subtracted from the non-current liabilities and shown under current liabilities as a ‘current portion of loan’. R105 600 (total repayments) – R57 600 (interest) = R48 000 (capital portion of repayments for the year. © Department of Basic Education 2014 36 chapte r 2 companie s Mind the Gap CAPS Grade 12 Accounting Chapter 2 Practice task 3 (continued) RETAINED INCOME Photocopy this blank Balance Sheet and use it to practise doing the worked example 3 again on your own. Once you have completed the task, compare your answer to the worked example on the previous page. R Balance on the last day of the previous year Balance on the last day of the current year QWANDO LIMITED BALANCE SHEET ON 30 JUNE 2011 ASSETS NON CURRENT ASSETS Fixed/tangible assets Financial assets Fixed deposit: Supra Bank CURRENT ASSETS TOTAL ASSETS EQUITY AND LIABILITIES CAPITAL AND RESERVES NON-CURRENT LIABILITIES Mortgage loan: Supa Bank CURRENT LIABILITIES TOTAL EQUITY AND LIABILITIES © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting chapter 2 companies 37 2 Chapter Some important notes to the financial statements PAY SPECIAL ATTENTION NB FORMAT It is VERY important to know the format of the notes to the Financial Statements. HINT! Some of them are explained below. hint TANGIBLE/FIXED ASSETS A–B=C Land & Buildings Carrying value at beginning of year Cost Accumulated depreciation Vehicles Total e.g. C C C A A A (B) = exams 0 (B) (B) D D D (E) (E) activity (E) (F) (F) EG - worked examples Movements Additions LAND AND BUILDINGS ARE NOT DEPRECIATED. A zero will always be shown in these blocks. Disposals at carrying value Depreciation (F) = 0 Carrying value at end of year activity J Cost Accumulated depreciation J J H H H (I) = 0 (I) (I) Step by step C+D–E–F=J OR H–I=J The total carrying value gets transferred to the Balance Sheet. TRADE & OTHER RECEIVABLES Net trade debtors M Trade debtors K Provision for bad debts (L) SARS (income tax) N Expenses prepaid O Income accrued (receivable) P Q K–L=M Amount overpaid to SARS. M+N+O+P=Q Transfer Q to the current assets section in the Balance Sheet. © Department of Basic Education 2014 38 chapte r 2 companie s Mind the Gap CAPS Grade 12 Accounting ACTIVITIES boy and girl-left and right of page comment Chapter 2 TRADE & OTHER PAYABLES Trade creditors R Expenses accrued (payable) S Income received in advance T Shareholders for dividends U Dividend declared but not yet paid (final dividend). SARS (income tax) V Amount still owing to SARS. Creditors for salaries W Gross salaries less deductions. Unemployment insurance fund X Deductions + contributions. Pension fund Y Medical aid fund Z AA AA: Total transferred to current liabilities section of the Balance Sheet. © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting chapter 2 companies 39 2 Chapter 2.4 Cash Flow Statements Purpose of a Cash Flow Statement PAY SPECIAL ATTENTION NB NBshows the result of business’ operations (net profit). The Income Statement The Balance Sheet shows the financial position of the business on a specific day (ie how much the business is worth). Neither of them shows where the business gets its funds from or how the funds are used. The emphasis is on the cash aspects/components. The Cash Flow Statement is prepared for this purpose and shows where the funds come from and how they are used. FORMAT It is VERY important to know HINT! the format of the Cash Flow hint Statement and notes! PAY SPECIAL ATTENTION NB e.g. NB Basic concepts and terminology EG - worked examples Concept PAY SPECIAL ATTENTION HINT! NBCash Flow Statements focus hintexams on all aspects Cash inflow Definition NB Money coming into the business. This amount does NOT have brackets. (e.g. sale of shares) Money going out of the business. This amount HAS brackets. (e.g. bought a fixed asset for cash) of CASH surrounding a Cash outflow business. Remember CASH HINT! IS KING for CashEGFlow - worked examples All the information needed for a cash flow statement and notes can be Statements. found on the income statement, balance sheet and notes. e.g. hint activity exams ACTIVITIES boy and girl-left and right of page PAY SPECIAL ATTENTION NB NB e.g. Worked example 4 EG - worked examples activity Preparation of the cash flow statement hint exams activity Step by step Practice task 4 comment Additional information (15) ACTIVITIES boy and girl-left and right of page Extract from balance sheet activity Step by step Ordinary share capital Retained income Fixed deposit Step by (interest step Loan from Beta Bank is not capitalised) Bank Cash float comment comment e.g. ACTIVITIES boy and girl-left and statementright of page Prepare the cash flow (all relevant notes have been done for you).activity activity CertainHINT! figures have been given on the answer sheet (in bold). In order to calculate the missing figures A to L, refer to additional information provided below. EG - worked examples Remember we are looking for the flow of cash. This means you will need to calculate the difference between this year’s and last year’s figures, to exams determine the figures to place on the Cash Flow Statement. comment 2012 2011 R471 600 R410 000 R10 400 R9 000 R28 000 R23 000 comment R74 000 comment R80 000 Flow of cash **see note below This has no effect on a cash flow statement. (R5 000) (Outflow) boy (R6 000) ACTIVITIES (Outflow) and girl-left and activity right of page R35 300 R2 000 R10 040 R25 260 activity R2 000 R0 Inflow No change ** During the year the following transactions took place regarding share capital: 8 000 Shares were issued and the company received R79 600 from shareholders. Repurchased 3 000 shares at 820 cents per share Step by step comment comment © Department of Basic Education 2014 40 chapte r 2 companie s Mind the Gap CAPS Grade 12 Accounting Chapter 2 Notes to the cash flow statement Note 1: Reconciliation between profit before tax and cash generated from operations: R Profit before tax 30 000 Adjustments i.r.o. (in respect of): 21 200 Depreciation 12 000 Interest expense 9 200 Operating profit before changes in working capital 51 200 Changes in working capital 5 000 (Increase)/Decrease in inventory (3 000) (Increase)/Decrease in debtors 5 600 Increase/(Decrease) in creditors 2 400 Cash generated from operations 56 200 NB ATTENTION: Watch your dates! Make sure you are using the figures from the correctHINT! year. hint Net change Cash float Difference between last year’s and this year’s figures. Remember to exclude amounts owed to shareholders, accrued interest and amounts owed to or by SARS for income tax. PAY SPECIAL ATTENTION NB Bank These figures are taken DIRECTLY from the Income Statement and are ADDED to the profit before tax to give you the operating profit before changes in working capital. Also, depreciation is NOT a cash expense. Transfer this figure to the Cash Flow Statement (cash flow from operating activities). Note 2: Cash and cash equivalents Net change is calculated as the difference between last year’s and this year’s figures. Make sure you use the profit before tax from the Income Statement. If profit after tax is given, remember to add back the tax. e.g. 2012 2011 EG - worked examples 25 260 35 300 10 040 0 2 000 exams 2 000 25 260 37 300 12 040 Transfer these figures to the Cash Flow Statement (net change in cash activity and cash equivalents). These amounts come DIRECTLY from cash and cash equivalents on the Balance Sheet. ACTIVITIES boy and girl-left and right of page activity © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting Step by step chapter 2 companies 41 comment comment 2 Chapter The notes for dividends paid and PAY SPECIAL ATTENTION tax paid can beNB done using either the format given below or the ledger account (not required in this question). HINT! hint e.g. This figure is always shown in brackets. (R10 000) exams Amount due at the beginning of the year [dr (cr)] (R4 500) Amount due at the end of the year (final) [(dr) cr] R6 000 (R8 500) Dividends paid activity This is the total amount paid out for dividends this year. This figure is shown in brackets on the Cash Flow Statement (cash activity flow from operating activities) PAY SPECIAL ATTENTION NB SARS can have a debit or credit balance at the beginning of the year and at the end of the year. EG - worked examples Note 3: Dividends paid Total dividends for the year (interim + final) NB Step by step Last year’s shareholders’ for dividends amount. This figure is shown in brackets because it was paid during the year. This year’s shareholders for dividends amount. This figure ACTIVITIESisboy NOT shown in brackets and girl-left and because it is still not paid. right of page comment NB question, ensure that Before you attempt a Cash Flow Statement you can identify the information that is given to you to determine if you have to complete notes or simply show all your working calculations. comment The income tax figure from the Income Statement. This figure is shown in brackets. HINT! hint Note 4: Taxation paid Total tax for the year (R13 500) e.g. (R1 600) EG - worked examples Balance due at the beginning of the year [dr (cr)] Balance due at the end of the year [(dr) cr] R1 200 (R13 900) Tax paid exams activity This is the total amount paid out for tax this year. This figure is shown in brackets on the Cash Flow Statement (cash flow from operating activities) as this was the actual cash that was paid. Last year’s SARS income tax balance. If the figure is under trade and other payables it will have brackets. If the figure is under trade and other receivables it will not have brackets. [dr (cr)] This year’s SARS income tax balance. If the figure is under trade and other payables it will not have brackets. If the figure is under trade and other receivables it will have brackets. [(dr) cr] ACTIVITIES boy and girl-left and right of page activity © Department of Basic Education 2014 42 chapte r 2 companie s Step by step comment comment Mind the Gap CAPS Grade 12 Accounting Chapter 2 Cash Flow Statement for the year ended … NOTES Cash flow from operating activities Cash generated from operations 1 Interest paid R 24 960 A 3 56 200 B (8 840) Dividends paid 3 3 (8 500) C Income tax paid 4 3 (13 900) D Cash flow from investing activities (48 700) E Purchase of fixed assets (48 500) Proceeds from sale of fixed assets 4 800 Increase of investment 33 (5 000) Decrease of investment F Operating activities: The most common source of cash for a company. It not only involves the buying and selling of stock, but also includes paying creditors, receiving money from debtors and paying expenses. Investing activities: The activities that focus on the buying and selling of fixed assets and the increasing and decreasing of investments (e.g. fixed deposits). – Cash flow from financing activities Proceeds from shares issued Repurchase of shares Proceeds from long-term loans 49 000 G 3 79 600 H (24 600) I – Payment of long-term loans 3 (6 000) J Net change in cash and cash equivalents 2 25 260 K Cash and cash equivalents at the beginning of the year 2 3 12 040 L Cash and cash equivalents at the end of the year 2 3 37 300 M Financing activities: How a company is funded through loans and capital: The issuing of shares The repurchase of shares The obtaining of a loan The repayment of a loan To check your answer, see K, L + M: If both balances are favourable you subtract, eg. 37 300 – 12 040 = 25 260. If one of the balances is an overdraft, then you add, eg. M + (L). The letters in this column refer to the explanations in the Table on page 28. An overdraft is shown in brackets ( ). Memorise the following to determine if K is in brackets or not: (K) K L or (L) (M) M © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Accounting chapter 2 companies 43 2 Chapter Explanations of A to L A. Cash generated from operations – interest paid – dividends paid – income tax paid = A R56 200 – R8 840 – R8 500 – R12 900 = R24 960 Inflow (Outflow) (Outflow) (Outflow) Inflow B. Cash generated from operations transferred from Note 1 (under Notes to the Cash Flow Statement). C. Dividends paid transferred from Note 3 (under Notes to the Cash Flow Statement). D. Income tax paid transferred from Note 4 (under Notes to the Cash Flow Statement). E. Purchase of fixed assets – proceeds from sale of fixed assets – increase in investment = E – R48 500 + R4 800 – R5 000 = – R48 700 (Outflow) Inflow (Outflow) (Outflow) F. This figure comes from the Extract from the Balance Sheet and is calculated by finding the difference between this year’s and last year’s figures: R25 000 – R20 000 = R5 000 (Outflow) Increasing the fixed deposit is an outflow as money is moving out of the bank account and into the fixed deposit account. G. Proceeds from shares issued – repurchase of shares - payment of long-term loans = G R79 600 – R24 600 – R6 000 = R49 000 Inflow (Outflow) – (Outflow) H. Issue of new shares: The amount of R79 000 was given (inflow) I. Repurchase of shares: 3 000 × R8,20 = R24 600 (outflow) J. This figure comes from the Extract from the Balance Sheet and is calculated by finding

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