11 ACC All Memos NEW ERA Copy AutoRecovered

NEW ERA
Accounting
Grade 11
Teacher’s Guide
Authors
Diane Woodroffe, Trevor Hall, Pravin Singh
Joe Ramsamy, Hanif Aboobaker
PREFACE
COPYRIGHT
This publication includes images from Corel Print House ™ Magic 4 which are protected by the copyright
laws of the USA, Canada and elsewhere. Used under licence.
Copyright 2012 by New Generation Publishers
New Generation Publishers

P.O. Box 51227, Musgrave, 4062
Tel: 031-2632201
Fax: 031-2632202
Email: [email protected]
All rights reserved. No part of this publication may be copied or reproduced or transmitted in any form or
by any means, electronic or mechanical, including photocopying, recording or any information storage and
retrieval system without the written permission of New Generation Publishers.
ISBN: 978-1-920321-85-7
CONTENTS
Note to Teacher & Weekly Module 3 (Contd): Module 6:

Planner: Task Page Partnership financial
Page (iii) – (ix) 3.23 65 statements
3.24, 3.25 66 Task Page
Module 1: 3.26 67 6.1 - 6.4 133
Ethics 3.27, 3.28 69 6.5, 6.6 134
Task Page 3.29, 3.30 70 6.7 139
1.1 1 3.31 71 6.8 142
1.2 – 1.4 2 3.32, 3.33 72 6.9 144
1.5 3 3.34 73 6.10 147
1.6 4 6.11 148
1.7, 1.8 5 Module 4: 6.12 150
1.9, 1.10 6 Fixed assets 6.13 153
1.11, 1.12 7 Task Page 6.14 155
1.13, 1.14 8 6.15 158
4.1, 4.2 75
1.15, 1.16 9 6.16 159
4.3 76
1.17 10 6.17 163
4.4, 4.5 77
1.18 11 6.18 165
4.6 78
Additional re- 6.19 171
4.7 79
sources 12 6.20 176
4.8 80
6.21 180
4.9 81
Module 2: 6.22 185
4.10, 4.11 82
6.23 188
Internal control 4.12 83
6.24 190
Task Page 4.13, 4.14 84
6.25 193
2.1, 2.2 33 4.15, 4.16 85
2.3 34 4.17 86
4.18 87 Module 7:
2.4 - 2.6 35
4.19 89 Partnerships: Interpreta-
2.7, 2.8 36
2.9, 2.10 37 4.20, 4.21 91 tion of Financial state-
2.11 38 4.22 92 ments
2.12 39 4.23 93 Task Page
2.13, 2.14 40 4.24, 4.25 94 7.1 197
2.15 42 7.2, 7.3 198
2.16 43 Module 5: 7.4 199
2.17 44 Partnerships 7.5, 7.6 200
Task Page 7.7 201
Module 3: 5.1 98 7.8 203
Reconciliation 5.2 99 7.9 204
5.3, 5.4 100 7.10 205
Task Page
5.5 - 5.7 101 7.11 206
3.1 45 7.12 207
3.2 46 5.8, 5.9 102
5.10 103 7.13 208
3.3, 3.4 48 7.14 210
3.5, 3.6 49 5.11 104
5.12 106 7.15, 7.16 211
3.7 50 7.17 212
3.8 51 5.13, 5.14 108
5.15, 5.16 109 7.18 213
3.9 52 7.19 216
3.10 53 5.17 111
5.18 112 7.20 218
3.11 54 7.21 220
3.12 55 5.19 113
5.20 115 7.22 222
3.13, 3.14 57 7.23 224
3.15 58 5.21 116
5.22 117 7.24 229
3.16, 3.17 59 7.25 230
3.18 60 5.23 118
3.19 61 5.24, 5.25 119
3.20 63 5.26 124
3.21, 3.22 64 5.27 128
New Era Accounting: Grade 11 (i) Teacher’s Guide

Module 8: Module 10: Module 13:
Clubs Budgets Revision
Task Page Task Page Task Page
8.1 233 10.1 291 Bank Reconciliation
8.2, 8.3 234 10.2 292 13.1 366
8.4 237 10.3, 10.4 293 13.2 367
8.5, 8.6 238 10.5 294 13.3 368
8.7 239 10.6 295 13.4 369
8.8, 8.9 240 10.7, 10.8 296 Extra Task 1 369
8.10, 8.11 241 10.9 297 Extra Task 2 371
8.12 242 10.10, 10.11 298 Extra Task 3 373
8.13 243 10.12, 10.13 299 Extra Task 4 374
8.14 244 10.14 300 Creditors Reconciliation
Extra Task 1 245 10.15 301 13.5 376
Extra Task 2 247 10.16 302 13.6 377
8.15 - 8.17 248 10.17 303 13.7, 13.8 378
8.18 250 10.18 305 Fixed Assets
8.19 253 10.19 306 13.9 379
8.20 255 10.20 309 13.10 381
8.21 257 10.21 310 13.11 383
8.22 259 10.22 311 13.12 384
Extra Task 3 261 10.23 312 13.13 385
8.23 266 10.24 314 Partnerships
8.24, 8.25 267 10.25 315 13.14 386
8.26 268 13.15 388
8.27, 8.28 269 Module 11: 13.16 395
Inventory 13.17 396
Module 9: 13.18, 13.19 399
Task Page
Cost Accounting 13.20 401
11.1 317 Clubs
Task Page 11.2, 11.3 318 13.21 403
9.1 271 11.4, 11.5 319 13.22, 13.23 406
9.2, 9.3 273 11.6, 11.7 320 13.24 408
9.4 274 11.8 321 Cost Accounting
9.5 275 11.9 322 13.25 409
9.6 277 11.10, 11.11 323 13.26, 13.27 410
9.7 278 11.12 324
13.28 412
9.8 279 11.13 325 Budgets
9.9 281 Extra Task 326
13.29, 13.30 414
9.10 282 11.14 327 13.31 415
9.11, 9.12 283 11.15 334 Inventory systems
9.13 284 11.16 343 13.32 416
9.14 286 11.17 344 13.33 417
9.15 287 11.18 - 11.20 351 13.34 418
9.16, 9.17 288 13.35 422
9.18 289 Module 12: 13.36 423
9.19 290 VAT Vat
Task Page 13.37 423
12.1 355 13.38, 13.39 424
12.2 356 13.40 425
12.3 - 12.5 357 13.41 426
12.6 - 12.8 359 13.42 427
12.9 360 13.43 428
12.10, 12.11 361
12.12, 12.13 362 Module 14:
12.14, 12.15 363 Examination papers
Task Page
Paper 1 431
Paper 2 441
New Era Accounting: Grade 11 (ii) Teacher’s Guide

NOTE TO TEACHER
SELECTING TASKS:
This textbook comprises a variety and an extensive number of Tasks. It is not possible for every learner to
undertake every Task in this book. However, every examination will comprise easy, moderate or difficult
questions. Learners should aim at practice at each level.
Learners, with the help of their teachers, should aim at selecting the appropriate Tasks as follows:
1. Undertake all the Tasks that cover the essential prior knowledge and the basics of the topic.
2. Undertake one or two easy comprehensive Tasks to develop confidence in the topic.
3. Then move on to more difficult Tasks to extend your capabilities.
4. In preparing for examinations, check on the errors you have made in some of the Tasks you have already
done, and also do one or two of the other Tasks that you have not already done.
ICONS USED IN THIS BOOK
In order to assist you in selecting the Tasks, the following icons are provided in each Task:
 Tasks covering essential basics of the topic. These Tasks must be completed by the learners.
Tasks rated as ‘easy’.
Tasks rated as ‘moderate or of medium difficulty’.
Tasks rated as ‘difficult’.
NOTES CONCERNING THE TEACHING PLAN
The attention of teachers is drawn to the official CAPS document. This sets out the recommended time-lines
for covering the curriculum content.
For your convenience, this is summarised in the table below, with reference to the specific relevant pages in
the Learner’s Book.
As stated above, please note that a considerable number of Tasks have been provided in the Learner’s Book
and it is not possible for all these Tasks to be completed in an academic year. Teachers must select the most
appropriate Tasks for incorporation in lessons and for learners’ homework. Teachers should also assist learners
in selecting additional Tasks for revision, remedial, study or extension purposes.
Accounting: Grade 11 (iii) Teacher’s Guide

WEEKLY PLANNER FOR GRADE 11
TERM 1
NOTE:
Learners cannot do all the Tasks in the Learner’s Book – select what is appropriate for your learners out of
the following sections.
OVERALL IMPORTANT ISSUES TO
WEEK SUB-PARTS EXTRA RESOURCES
TOPIC COVER
1 Reconcilia- Bank As so much of banking is cov- Copies of bank state-
tions Reconciliation. ered by internet today, these ments.
Pages 64 – 89 concepts including EFT’s must Newspaper articles on
TASK 3.3 & 3.4 be covered. banking fraud.
& 3.5 Very important to cover inter-
TASKS 3.11, nal control – Bank Reconcilia-
3.12, 3.13, tion is an important internal
3.15, 3.16, 3.17 control tool.
2 Reconciliations Bank Reconcilia- Errors. Copies of bank state-
tion. Pages 89 – Post-dated cheques received ments.
108 TASKS 3.16, and issued. Newspaper articles on
3.17, 3.19, Stale cheques. banking fraud.
3.21, 3.24 Previous month’s reconciliation.
CLASS TASK
3.23
3 Reconciliations Creditors Draw on the knowledge learnt Actual statements is-
Reconciliation. under Bank Reconciliation to sued by shops / busi-
Pages 108 – 120 show that the Creditors’ Rec- nesses.
TASKS 3.27, onciliation follows the same
3.28, 3.29, principle.
3.30, 3.31, 3.32 Very important to cover inter-
nal control.
4 Fixed assets Depreciation and Learners often experience diffi- Use the classified sec-
General Ledger culties with this section. Draw tion of the newspaper
accounts. on their knowledge that when together with car ad-
Sale of an asset trading stock was sold the ac- verts to show how
at the beginning count was credited. Similarly depreciation reduces
of the year. the asset account must be the value of the as-
Pages 121 – 134 credited. However, the compli- sets.
TASK 4.1, 4.2, cation is the accumulated de-
4.3, 4.4, 4.6, preciation account which must
4.7, 4.9 also be cancelled. Use the dia-
gram on page 129 to explain.
5 Fixed assets Sale of an asset Learners need to understand
during or at the the concept of the book value
end of the year. and as the asset is being sold
Pages 134 – 139 after the beginning of the year
TASKS 4.10, they need to depreciate for the
4.11, 4.12, relevant period of time. Make
4.13, 4.14, use of time lines to calculate
4.16, 4.17, the number of extra months.
4.18, 4.19, Learners need to learn and fol-
4.20, 4.21. 4.23 low the 5 steps involved in the
asset disposal process.
Accounting: Grade 11 (iv) Teacher’s Guide

TOPIC COVER
6 Fixed assets Asset disposal The Fixed Asset note was
and the Fixed taught in Grade 10 but now
Asset note to learners need to record the
the financial disposal as well. Make sure
statements. learners realise that the dis-
Pages 140 - 148 posal is recorded at book
value.
The need for internal control
and ethics when staff is us-
ing the assets for private use
is to be discussed throughout
this section.
7 Partnerships Partnership Learners covered sole traders Partnership agree-
ledger accounts in Grade 10, now they just ment.
with particular need to adjust to having more Draw on learner’s
emphasis on the than one owner and the fair personal experience if
current accounts distribution of the profit. they know people
and the appro- who are in a partner-
priation of the ship with particular
profit. emphasis on prob-
Pages 149 - 180 lems experienced.
8 Partnerships Final accounts. Learners have covered the Case studies involving
Pages 181 – 193 Trading and Profit and Loss ac- ethical issues.
TASKS 5.5, 5.8, counts in Grade 10. They
5.9, 5.10, 5.11, need to revise these accounts
5.12, 5.13, now and add the Appropriation
5.14, 5.15, account.
5.16, 5.19, Ethics and internal control
5.20, 5.22, to be discussed continuously.
5.23. 5.24,
9 Partnerships Financial state- Learners must understand and Show actual examples
ments. read the information that is in- if possible.
Pages 194 – 230 cluded in the financial state-
TASKS 6.1, 6.2, ments.
6.4, 6.5, 6.6, This was taught in Grade 10 so
6.7, 6.9, 6.10, the emphasis must be on the
6.11. change to Owners’ Equity.
Make sure learners understand
their GAAP principles and
how they inform the process of
recording transactions.
10 Partnerships Financial state- Learners need constant re-en-
ments. forcement of financial state-
Page 231 – 262. ments and the accompanying
Choose appropri- adjustments. Challenging
ate Tasks. Tasks are included but should
TASKS 6.14, be done by learners who want
6.17, 18, 6.20, extension and who are capable
6.23 ORALLY of taking the challenge other-
wise learners will get disillu-
sioned.
Ethics and internal control
to be discussed continuously.
Accounting: Grade 11 (v) Teacher’s Guide

TERM 2
NOTE:
Learners cannot do all the Tasks in the textbook – select what is appropriate for your learners out of the
following sections.
TOPIC COVER
1 Partnerships Analysis and This topic was already intro- PAGES 272-288
interpretation. duced in Grade 10 so you will FORMULAS
Profitability. need to revise the old ratios
Pages 263 – 273 and then introduce the new ra-
TASKS 7.3, 7.5, tios – in particular the return
7.6, 7.8, 7.10, on owners’ equity.
13, 7.17, 7.19, Try to get learners to under-
7.21 stand what the ratios mean so
that they do not just have to
learn a lot of formulae. This
understanding will go a long
way to helping them when they
have to comment on the ratios.
2 Partnerships Analysis and The return ratio must be com- This would be a good
interpretation. pared to alternative invest- time to expose learn-
Return and li- ments. These rates do differ ers to the role of the
quidity. from bank to bank but also monetary council and
Pages 273 – 284 very importantly they are con- their adjustment of
TASKS 7.24, trolled by the monetary coun- the interest rates in
7.25 cil. the country.
Liquidity is an extremely im-
portant concept for the learn-
ers to understand. However, it
is too simplistic just to focus on
the current ratio and the acid
test ratio. Learners need to
understand the flow of money
by buying goods, selling the
goods, collecting the money
from the debtors and then pay-
ing their creditors.
3 Partnerships Analysis and in- Learners need to make the
terpretation. necessary calculations but also
Solvency. be able to comment on the ra-
Debt : equity. tios and use them to make
Consolidation. meaningful decisions in the
Pages 285 – 316 business.
4
Clubs Difference be- Take note that learners only Use examples from
tween a non- have to cover the ledger ac- the community.
profit making counts and the Receipts Schools are also a
concern and a and Payments Statement very good example of
profit making for clubs. However, they a non-profit making
concern. need to understand the differ- concern.
Subscriptions or ence between the different
Membership Fees forms of operation. Use the
account. learners’ experiences from their
Pages 317 – 327 communities of sports clubs or
other non-profit making con-
cerns.
Accounting: Grade 11 (vi) Teacher’s Guide

TOPIC COVER
5 Clubs Membership This works overlaps with the Use actual examples
fees and other periodic stock system. You in class, e.g. pens or
ledger accounts can integrate that Module now tennis balls to demon-
Pages 328 – 335 if you wish. In view of stock strate how to work
TASKS 8.4, 8.5, valuation in Grade 12 it is vital out the cost of sales
8.6, 8.7, 8.8, that learners understand the
8.9 principles of this stock system.
6 Clubs Receipts and Learners generally do not bat-
Payments tle with this statement as they
Statement. draw on their knowledge of a
Pages 335 – 351 Cash Receipts and Cash Pay-
TASKS 8.10, ments Journal. However, re-
8.11, 8.12, enforce the concept of what
8.13, 8.15, 8.17 entries go in and what does not
as this will help with teaching
Cash Flow in Grade 12.
Ethics and internal control
must be integrated into the
club work.
7 Clubs Revision. TASKS 8.18.2 & 8.18.5
Continuation of
the above.
There are more
Tasks in the Mod-
ule 13.
8 Revision Revise the first Make use of Module 13 and ex-
semester work ample examination papers in
Module 14.
Also make use of past papers.
Accounting: Grade 11 (vii) Teacher’s Guide

TERM 3
NOTE:
following sections.
IMPORTANT ISSUES TO
WEEK OVERALL TOPIC SUB-PARTS EXTRA RESOURCES
COVER
1
Cost ac- Costing
concepts.
It is important that learners un- Allow learners time to
derstand the difference between make fudge, cake, a
counting Page 380 – 386 the different costs as well as the sandwich, or some-
TASKS 9.1, 9.2, calculation and meaning of thing that they have
9.4, 9.5 break-even. to cost.
Of particular importance is the
difference between what cost
items are and what assets are.
2 Cost accounting Introduce the Make sure learners understand
TASKS 9.6, 9.8, General Ledger the flow from raw materials to
9.9. accounts Work-in-progress to the Fin-
Pages 387 – 397 ished Goods Stock accounts.
3 Cost accounting General Ledger Analysis is Grade 12 work but it
TASKS 9.10, accounts. will really help if you allow the
9.11, 9.12, Introduce anal- learners to start engaging with
9.13, 9.14, ysis of produc- the different costs and the
9.15, 9.19 tion costs. movement over the year.
Page 397- 408 Introduce internal control
and ethics throughout.
4 Portfolio Allow learners time to work on
their portfolio/files.
5 Budgeting Introduction and It is important that learners un- Allow learners to draw
Cash Budget of derstand the concept of the up their personal
a cash only busi- cash budget and which items budget.
ness. are included. This is very im- Analyse the state
Pages 409 – 418 portant in that they have to budget, school budget
TASKS 10.1, distinguish between items for or any other budget
10.2, 10.3 the Cash Budget and the Pro- that is relevant to your
jected Income Statement. learners.
6 Budgeting Cash budget or a Introduce the Debtors’ Collec- Allow learners to dis-
business that tion Schedule. Make sure the cuss the national
buys and sells for learners understand the function budget.
cash and on of the Debtors’ Collection Sched-
credit. ule and how important it is in
Pages 418 – 435 making internal control deci-
TASKS 10.5, sions.
10.6, 10.7, Make sure learners understand
10.8, 10.10, the link between the Credi-
10.11, tors’ Payment Schedule and
the Debtors’ Collection Sched-
ule.
7 Budgeting Projected In- It is important that learners can
come State- draw up the Cash Budget and
ment. Projected Income Statement
Pages 435 – 444 simultaneously. This requires a
thorough understanding of the
function of each.
Internal control and ethics is
to be covered throughout.
Accounting: Grade 11 (viii) Teacher’s Guide

IMPORTANT ISSUES TO
WEEK OVERALL TOPIC SUB-PARTS EXTRA RESOURCES
COVER
8
Inventory Periodic stock sys-
tem and the dif-
Overlap this Module with the
learners’ knowledge of the Trad-
Use actual examples
in class, e.g. pens or
systems ference to the ing Stock account and the Peri- tennis balls to demon-
perpetual stock odic Stock system learnt in club strate how to work out
system. accounting. the cost of sales.
Pages 445 - 490
9 and Revision Revise all the Make use of extra Tasks in the TASK 13.27
10 work covered dur- Modules or the Revision Module. PAGE 543 GL
ing the third term. PRODUCTION

TERM 4
NOTE:
following sections.
TOPIC COVER
1
VAT Concepts and cal-
culations.
It is essential that learners can
calculate VAT using the inclu-
Draw on learners’
knowledge of buying
Pages 491 – 497 sive or the exclusive system. items in the shop and
paying VAT.
Also draw on their
knowledge of calcu-
lating cost of sales.
2 VAT Invoice or receipt It is essential that learners un- Make use of current
base. derstand the workings of VAT newspaper articles
Bad debts. and how returns or bad debts concerning VAT and
Fraud. will affect the amounts. VAT fraud.
Pages 497 – 503 Ethics is to be integrated into
this topic.
3 – 10 Revision and ex- Make use of extra Tasks in the
ams different Modules.
Use Modules 13 and 14 for ex-
tra Tasks.
Use past papers.
Accounting: Grade 11 (ix) Teacher’s Guide

MODULE 1
BUSINESS ETHICS
Note to Teacher – How to approach this Module:
Ethics and internal control are the first 2 Modules in this textbook in terms of the CAPS document. It is
recommended that these 2 topics are covered at the beginning of the year so as to serve as an introduction
to the year’s work. However, Teachers are then urged to select Tasks at appropriate times during the year in
such a way that these 2 topics become integrated into the rest of the work.
TASK 1.1  Identifying inclusions in a code of ethics

Each group will be allocated one of the following business scenarios by the Teacher.
Expected responses – Expectations of customers:

Case 1 Guy Boddie
Expectations: Qualifications, good reputation, friendly approach, sense of humour, non-judgmental,
appearance reflects healthy living, ability to fit in with client’s times, genuine interest in client’s well-
being, first-aid training.
Stakeholders other than clients: Bank manager, taxman, his wife, other gym-users.
Case 2 Kitty Katz
Expectations: Qualifications, caring approach, convenient situation of the business, good reputa-
tion, willingness to be called after-hours.
Stakeholders other than clients: Bank manager, taxman, employees, her husband, neighbours.
Case 3 Freddy Fixxit
Expectations: Good reputation, reasonable rates, good workmanship, trustworthy (engenders con-
fidence that he will not con his clients), collection and delivery service, follow-up service.
Stakeholders other than clients: Bank manager, taxman, employees, his wife, neighbours.
Case 4 Flora Flower
Expectations: Good reputation, examples of previous work, ability to fit in with client’s times, sen-
sitive to client’s preferences and budgets, follow-up service, transport (own car).
Stakeholders other than clients: Bank manager, taxman, employees, her husband.
Case 5 Steven Sole Expectations: Reasonable rates, good workmanship, convenient location.
Stakeholders other than clients: Bank manager, taxman, employees, his wife.
Case 6 Peter Poole
Expectations: Qualifications, good reputation, ability to instil discipline, holistic approach (appreci-
ates balanced lifestyle, not win at all costs), good facilities (e.g. heated pool), first-aid training.
Stakeholders other than clients: Bank manager, taxman, his wife.
Case 7 Clemmi Cooke
Expectations: Good reputation, willingness to exceed expectations, sensitive to client’s preferences
and budgets, follow-up service, delivery service, competitive rates, transport (own car).
Stakeholders other than clients: Bank manager, taxman, employees, her husband.
Case 8 Larry Locke
Expectations: Trustworthy, reliable, responsible, willingness to exceed expectations, clean.
Stakeholders other than clients: Bank manager, taxman, his wife (he probably has no immediate
dependents), clients’ neighbours.
Expected responses - Need for a code of ethics: to guide business dealings, to assure customers of quality of
service. Advantage of establishing a code of ethics: to get acceptance from customers and other stake-
holders. How this should be communicated to the stakeholders: Brochure, notice displayed in appropriate
place, web-site and advertisements.
Expected responses - What should be included in the code of ethics: Quality of service, care of customers,
treatment of employees, consideration of the environment.
New Era Accounting: Grade 11 1 Teacher’s Guide

TASK 1.2  The nature of and the need for a code of ethics
1.2.1 What is the advantage for a business to do this?
Customers and other stakeholders are assured that the owners are working towards good business practice.
1.2.2 What effect does this have on business practice?

Likely to encourage more customers to support them.
1.2.3 In what manner should this be communicated to the stakeholders?

Various methods, e.g. advertisements, notice in a prominent place, brochures, websites.
1.2.4 Consider the business principles of Shell provided above. Which principle impresses you
the most? Explain.
Various responses possible – depends on opinion – select from the principles displayed, with reasons.
1.2.5 What are the likely consequences for a business if it does not follow its own code of
ethics or business principles?
Lost customers, decreasing profits, fines for non-compliance with the law (e.g. environmental abuse), im-
prisonment for breaking the law (e.g. failure to pay VAT to SARS).
1.2.6 Search the newspapers, business brochures or the Internet for an example of a code of
ethics or business principles for a South African business. (You might well notice that
many businesses opt for a much more concise code than does Shell – this is a matter of
choice). Present this to the rest of the class.
Responses will depend on the codes chosen. Teachers may direct learners to the Business Report sections
of the newspapers as codes of ethics are often printed with annual financial statements; or they may be
incorporated into advertisements. Learners with access to the Internet will find these on the websites of
large businesses (use a search engine such as Google). If learners have difficulty in accessing this infor-
mation, Teachers can amend the Task to a selection of advertisements which reflect good business practice.
TASK 1.3  Providing good service to customers

1.3.1 In future, if you are the victim of ‘lousy service’, what action would you take?
The value of this Task is in the interaction between the learners and the sharing of opinions. Teachers
should guide learners towards acceptance of the opinion that lousy service simply does not make good
business sense. Another point is that customers should not simply accept poor service – they do have
rights.
1.3.2 What consequences would there be for South Africa if we provide ‘lousy service’?
The country would get a poor reputation. This will affect the economy, e.g. tourists will not visit, which
leads to a loss of foreign exchange and employment opportunities; potential investors from other countries
will place their capital in more efficient countries – this will negatively affect employment, growth and
standard of living in South Africa.
TASK 1.4  Making good decisions

Expected responses:
These will depend on the nature of the argument presented by the learners. The value of this Task is the
interaction between the learners and the sharing of opinions. Teachers may lead learners to understand that
there are stakeholders dependent on a person in both contexts. For example, a decision to become an alco-
holic or drug-user affects others around the decision-maker and can cause unhappiness in the home with
consequences for the family and friends. In a business context, there are stakeholders dependent on the
business for their livelihood, e.g. employees, suppliers.

TASK 1.5  Making good decisions in business
Expected responses:
Teachers must take care not to impose their own personal beliefs on the learners, but to guide learners in
sharing ideas and opinions which will lead them towards responsible citizenship with an understanding of
human rights and dignity.
Case 1 The infected employee has constitutional rights, e.g. privacy, employment. The employer should
guide and educate all employees in accepting this and in understanding the nature of HIV/AIDS.
Failure to accept this could lead to their leaving this business.
Case 2 Mr Robb should be summoned to a disciplinary hearing to determine his guilt or otherwise and to
determine the nature of severity of the offence and the appropriate consequence. Mr Robb must
be given an opportunity to defend himself. However, he could lose his job if he is found to be
guilty. The business could consider legal action against the employee as well, which could lead
to imprisonment.
Case 3 One possible response: The partners should seriously look at ways of improving efficiency and
profitability, and should involve employee representatives in this process. They should explain to
employees that if the business cannot solve its profitability problem, it might well have to be sold
or closed down.
Case 4 One possible response: The farmer should consider the ethical dilemma, i.e. profits as against
environmental issues. Before taking drastic action, he should involve environmental experts in
exploring other options – this is likely to be a problem for other farmers too.
Case 5 One possible response: The gifts are actually bribes. It appears that this might be done without
the knowledge of the ship owners. This is not likely to give the business a good reputation and
could have serious consequences. Although these bribes lead to an inflow of income which is
needed to pay wages of employees, the business owners should look at more ethical ways of
improving income.
Case 6 Miss Steele should be called to a disciplinary hearing to determine her guilt or otherwise and to
determine the nature of severity of the offence and the appropriate consequence. Miss Steele
must be given an opportunity to defend herself. The extenuating circumstances should be taken
into account in determining her sentence. However, she could lose his job if she is found to be
guilty. The business could consider legal action against the employee as well, but a degree of
empathy might be appropriate if the reason is genuine.
Case 7 One possible response: The owners do have a right to move their business to a more suitable
location. They also have a responsibility to their current employees. It appears that 100km is
too far to transport them each day. The owners might well have to offer the employees severance
packages or provide them with notice or assistance in finding alternative employment.
Case 8 One possible response: The doctor has a moral and ethical responsibility to his patients. It
appears this is a problem that is very difficult to solve. If he increases his fees, he will lose
patients. If he does not go on the course, he will not be better able to serve them. He should
try to form an alliance with a doctor who is going on the course to give him feedback from the
course, and he should use local expertise, e.g., from large hospitals in South Africa, to assist him.
Case 9 Affirmative action is an accepted process in South Africa in order to redress inequities of the past
(opportunities in past eras favoured certain race and gender). A thorough and fair interview
process should be held. If one candidate is clearly more suitable than the other, then that person
should be preferred for the post. However, in terms of South African law, an assessment will be
made of the business’ move towards employment equity. A black female person should get the
post if she meets the qualifications, and the business has a shortage of employees from this
particular group.
Case 10 This might well be construed as unfair business practice as it unduly influences the decision-
making process of potential customers. There has been a high profile case of this nature in recent
times in South Africa. Competitors have a right to complain to the competition board and they
can take legal action. If the competitors can prove that they suffered financially as a result of
this practice, they can have a claim to damages.

Case 11 This is clearly fraud in the form of a bribe which unfairly influences the decision of awarding the
contract. Competitors will have the right to take legal action and will have a good expectation of
damages being awarded. The fact that the business has a responsibility to its employees continue
to find business is not a justification for the fraud. If the business cannot justify its existence in
a moral and ethical manner, it should not remain in business.
TASK 1.6  Examples of bad business practices

Expected definitions – examples will depend on learners’ responses:
Theft The act of stealing assets.
Fraud The act of stealing with the intention of misleading.
Negligence Loss caused as a result of not discharging a duty in a reasonable and expected
manner.
Bribery Offering a person a reward in order to influence their decision.
Kick-backs A reward offered to a person after the occurrence of a transaction which has led
to another person’s gain.
Money-laundering The act of introducing illegally gained money into a legitimate system and disguis-
ing the source.
Discrimination Bias and unfairness in the way a person is treated.
Racism Discrimination against a person on the basis of race.
Poor working conditions Untenable state of the workplace, possibly to save money, but which make em-
ployees’ work experience unpleasant.
Employing illegal immi- Employment of persons who have no right to work in the country, i.e. no work
grants permit – this has to be controlled in order to protect jobs for South African citizens.
Trading in illegal goods Buying and selling of illegal goods, e.g. drugs.
Discriminatory wage Favouring certain persons in terms of remuneration when this is not justified by
practices their qualifications or expertise.
Misleading advertising The act of attempting to deceive customers into buying an article by exaggerating
the benefits or qualities of the article.
Abuse of the environ- Disregard for the damage caused to the environment – this is actually a cost which
ment will be borne by someone – the supplier needs to bear this cost as he is benefiting
from the business practice.
Foreign exchange fraud Illegal trading in foreign currencies when this is not as a result of payment for
international trade which has taken place.
Sexual harassment The act of seriously pestering or annoying a fellow worker in a sexual manner.
Abuse of leave privileges The act of taking leave when this is not justified and not in terms of the employ-
ment contract.
Misrepresentation (e.g. The act of pretending to have qualifications or expertise in order to gain unfairly.
qualifications fraud)
Over-charging Charging a price higher than the legitimate price.
Price-fixing The act of colluding with fellow suppliers in agreeing to set prices at a certain level
and not under-cut each other.
Industrial espionage The act of gaining privileged information on a competitor in a clandestine (secret)
and illegal manner.
Insider trading Using privileged information at your disposal in order to protect your financial po-
sition, possibly with the effect of causing loss to someone else.

TASK 1.7  Compiling a newspaper report
Suggested marking grid:
Criteria: Level 1 Level 2 Level 3 Level 4
Good and clear de- Creative, realistic
Description of Poor description of Satisfactory descrip-
scription of the and clear descrip-
three alleged of- the three alleged of- tion of the three al-
three alleged of- tion of the three al-
fences. fences. leged offences.
fences. leged offences.
Satisfactory com- Creative and realis-
Poor comments Realistic comments
ments from the per- tic comments from
from the persons from the persons
sons who are re- the persons who are
Comments from who are responsible who are responsible
sponsible or ac- responsible or ac-
the persons who or accountable and or accountable, and
countable, and par- countable, and full
are responsible little understanding some understanding
tial understanding understanding of
or accountable. of the concept of of the concept of
of the concept of the concept of ac-
accountability is evi- accountability is evi-
accountability is evi- countability is evi-
dent. dent.
dent. dent.
Consequences for Consequences for Consequences for Consequences for
Consequences the business or its the business or its the business or its the business or its
for the business employees are employees are par- employees are employees are com-
or its employees. mostly not realistic tially realistic and mostly realistic and pletely realistic and
or valid. valid. valid. valid.
An eye-catching
A satisfactory head- A good headline
headline and well-
Content: Head- line and satisfactory and good explana-
Poor headline and constructed expla-
line and quality explanations which tions which engage
explanations. nations which en-
of explanations. engage the interest the interest of the
gage the interest of
of the reader. reader.
the reader.
TASK 1.8  Interviewing an unethical businessperson

Depiction of the Good and clear de- Creative, realistic
Poor depiction of Satisfactory depic-
alleged unethical piction of the of- and clear depiction
the alleged offence. tion of the offence.
practice. fence. of the offence.
Satisfactory ques-
Good and realistic Creative and realis-
Poor questions and tions and re-
questions and re- tic questions and re-
Questioning and responses, poor un- sponses, satisfac-
sponses, good un- sponses, full under-
responses from derstanding of the tory understanding
derstanding of the standing of the con-
role-players. concept of account- of the concept of
concept of account- cept of accountabil-
ability is evident. accountability is evi-
ability is evident. ity is evident.
dent.
Consequences for Consequences for Consequences for Consequences for
Consequences for the business or its the business or its the business or its the business or its
the business or employees are employees are par- employees are employees are com-
its employees. mostly not realistic tially realistic and mostly realistic and pletely realistic and
or valid. valid. valid. valid.
The role-play is The role-play is
The role-play is The role-play is very
generally not inter- moderately interest-
Degree of inter- mostly interesting interesting and en-
esting and seldom ing and engages the
est in audience. and generally engages the audience
engages the audi- audience on occa-
gages the audience. at all times.
ence. sions.

TASK 1.9  Corruption in South Africa?
This is a very open-ended Task. Learners are expected to provide a variety of different opinions. The value
of this Task is in getting the learners to appreciate the different perceptions of the learners. Just as the
learners in the class will have certain perceptions on corruption in South Africa, so too will the potential inves-
tors from other countries. If they have negative perceptions, they will not provide an inflow of funds to this
country, which will affect employment and standard of living for all South Africans.
TASK 1.10  Worldcom

Mr Ebbers was held accountable for providing misleading information in the financial statements of WorldCo,
a leading public company in the USA. This should have been identified by the auditors. There will be a variety
of responses from learners on this article in terms of the censure of Mr Ebbers and the effect on stakeholders.
There a number of stakeholders who suffered as a result of this case:
• Thousands of employees lost their jobs when the company closed down.
• Shareholders will have lost a fortune on the shares which became worthless – some of these could
have been pensioners or pension funds and this would have affected their retirement savings and
would have caused hardship to retired people.
• The auditors – they also faced legal action and closure of their business.
• Suppliers – they need to look for alternative business partners.
• Creditors and lenders – they will have received a small portion of the amount owed to them.
• Mr Ebbers’ family – their lives will have been significantly affected by this case.
EXTENDED ACTIVITY FOR TASK 1.10
The other victims of Bernie Ebbers’s Fraud

Date: August
Does Bernie Ebbers deserve to spend the rest of his life It was and is a brutally competitive business, so you ab-
in prison? You decide. But first, consider the full extent solutely had to match WorldCom’s efficiencies.
to which history’s greatest financial fraud affected lives How? By firing people, for starters. AT&T fired tens of
– it’s far greater than most of us realise. In fact, Bernie thousands in the late 1990s as it tried frantically to match
is still costing people money. WorldCom’s infuriatingly low costs. Of course, those em-
ployees didn’t need to be fired (at least not then), but it
Unless his long-shot appeal succeeds, WorldCom’s for- was too late for them once the fraud was revealed.
mer high-living CEO will serve 25 years in a federal prison
without the possibility of parole (though he could get Other telecom players did the same thing, and some did
about four years off for good behaviour). He’s 63, so Jay more. Qwest wound up committing accounting fraud,
Leno’s joke from 2002 – about Ebbers spending his re- and Global Crossing was under investigation and ended
tirement years in a gated community of a different kind up declaring bankruptcy, its value going to zero. Those
– looks prophetic. Just for the record, Ebbers insists that companies had plenty of their own problems, but the re-
underlings committed an $11 billion fraud without his lentless pressure to match a major competitor which
knowing a thing about it. Right, said the jury. couldn’t be legitimately matched – undoubtedly made
matters worse.
Sympathy has focused on the thousands of WorldCom
employees who lost not only jobs and medical insurance That’s some of the damage the fraud caused while
but also 401(k) accounts invested heavily in company WorldCom was flying high. Much more followed once
stock. Next in line for sympathy come the company’s the fraud was revealed and WorldCom filed for bank-
shareholders, including many pension funds, which lost ruptcy. Many suppliers immediately stopped getting
billions. But the truth is, the universe of folks who got paid, which was bad for all and terrible for some – local
whacked by the fraud is far larger. carriers were no longer being paid to complete World-
Com calls, yet it was illegal for those carriers not to com-
Suppose your firm had been competing against World- plete them. For equipment vendors and every other kind
Com between 1999 and 2002. Lots of companies were, of supplier to a company with $35 billion of revenues,
primarily AT&T but also Global Crossing, Qwest, Sprint, the result was more fired people and more clobbered
and a bunch of smaller players. WorldCom was lying shareholders.
about its expenses, but you didn’t know it. All you knew
was that the company seemed to be incredibly efficient, But the effects of the fraud still weren’t complete, for
consistently making money while under-pricing you. WorldCom was eventually allowed to emerge from

bankruptcy – and what sounds like good news actually least triple WorldCom’s debt and all because you were a
caused still more problems. In the alchemy of modern Boy Scout during the great telecom bacchanal and man-
corporate bankruptcy, when a failed company is allowed aged to stay solvent.
to reorganise rather than liquidate, it remains largely
whole while most of its debts disappear. In WorldCom’s WorldCom, now known as MCI, will soon disappear as an
case the effect was especially dramatic. Before bank- independent firm when Verizon buys it. But it perma-
ruptcy, it laboured under a truly mammoth debt of $41 nently, violently reshaped its industry, and its low-capital
billion. After bankruptcy, all but $5.5 billion magically cost advantage will live on to the benefit of its new owner
vaporised. Yet the company retained most of the assets and the bedevilment of its competitors.
it had bought with all that borrowed money.
As for Bernie Ebbers, he’ll disappear too, behind prison
You think competing with a fraudulent WorldCom was walls, probably for the rest of his days. But he needn’t
tough? Now try competing with a totally legal WorldCom wonder if he’ll be remembered. Millions of shareholders,
largely freed of its debt burden. Pre- bankruptcy, the suppliers and former employees – of his own firm and
stock declined to nothing and was delisted; post-bank- many others – will never forget him.
ruptcy, it reopened at $23 a share. If you’re AT&T, Bell-
South, SBC, Sprint, or Verizon, you’re loaded up with at
TASK 1.11  Accountability: The environment

1.11.1 Why are the Non-Governmental Organisations (NGOs) asking for the Government to
become involved in this case?
The alleged abuse by the refinery is affecting not only the environment but the local community as well.
Air pollution will lead to health problems. The community will probably be powerless to force a big company
to rectify the problem, especially if it will take considerable funds to rectify. The NGOs or the community
could take legal action but this will involve considerable legal costs and will take a long time. The refinery
is obviously disobeying local regulations hence the Government can take action. The refinery is providing a
valuable resource to the country’s industries and citizens (fuel) and the Government cannot allow this to
negatively affect the economy.
1.11.2 Briefly explain the negative and positive points relating to the Engen refinery.
Negative: The emissions are poisonous and can cause cancer; the refinery has not taken steps such as
erecting monitoring devices on their fences to assess the potential danger.
Positive: They have shut down the refinery to inspect every aspect of the refinery.
1.11.3 If you were one of the owners (shareholders) of this refinery, would you support the
closure of the refinery? Explain.
Yes / No depending on reasons. Expected responses:
No, because shareholders have invested in the company and will lose financially were it to close, it would
also mean that many employees will lose their jobs, but if it remains open then the poisonous emissions
must be rectified, even if it costs extra for the company to rectify it.
Or Yes
If the costs of rectifying the problem lead to financial losses, the business will not be sustainable. Also:
Fuel prices are regulated by the Government, so Engen might well want to negotiate with the Government
for assistance in covering all its costs including the costs of rectifying the emissions.
TASK 1.12  Accountability & Transparency: Cigarette manu-

facturers
1.12.1 Why are the concepts of Accountability and Transparency particularly relevant to cig-
arette manufacturing companies?
The consumers have a right to know what is included in the product. Cigarettes are dangerous to the health
of the consumer. The dangers must be pointed out to the consumer. If these are not pointed out, con-
sumers could sue the cigarette manufacturers who could be held accountable for deaths if the information
or the dangers are not pointed out.

1.12.2 Why is the Government in Australia trying to pass this new law to have plain packag-
ing on cigarette packets? Do you think that a similar law should be passed in South
Africa? Explain.
The Australian Government is determined to reduce smoking in the country, probably because they feel this
is the right thing to do, and reduction in smoking will lead to reductions in health care costs for the Gov-
ernment. They might also think that less spending on cigarettes by consumers could lead to an increase
investment in savings which will benefit them in their old age.
1.12.3 What do you think that the managing directors of cigarette manufacturing companies
are saying to the Australian Government in response to this proposed new law?
They will not be happy. They will probably argue that their businesses affect a number of developing
countries, that they provide employment and benefit the economies in terms of tobacco exports. The
Australian Government might not regard these as legitimate arguments.
TASK 1.13  Transparency: Bribes

A variety of responses is expected from learners. Teachers should guide learners into accepting that examples
of the kick-backs and bribes exposed in these articles should not be tolerated and, if they continue, will likely
result in a loss of customer goodwill for the company. The resignation by accountable officials is possibly the
only way in which the company can demonstrate that it does not tolerate this sort of practice. Organisations
such as Transparency International play a vital role in exposing this sort of bad business practice.
TASK 1.14  The King Code

A variety of responses from learners is expected. Teachers should guide learners in an understanding of the
nature of the work performed by the King Commission (see learners’ manual for an explanation), the need for
the King Code and the leading position that this has earned for South Africa in the field of international cor-
porate governance. Details of responses on the employee code of conduct can be extracted from the article
provided. Teachers are advised to keep up to date on developments on the King Code, either through the
Business Report in the morning newspapers, or on the Internet – Refer to Independent Online at www.iol.co.za
and refer to Business Report. Other websites such as Moneyweb are also valuable as a reference.
EXTENDED ACTIVITY FOR TASK 1.14

King 2 is not yet the final word on governance
November 7, 2003
Transparency is good. But why is it good? to mouth commitment sometimes in inverse proportion
Surely not as an end in itself. to their compliance.
Rather, like King 1, it is part of an evolution towards
In theory, the timely disclosure of material information ever-improving standards. Consider recent develop-
allows investors to act on it by the purchase or sale of ments in more mature and liquid markets:
shares. In practice, most shares on the JSE (Johannes-
burg Securities Exchange) are so thinly traded that the "Investment professionals worldwide believe the quality
ability of large investors to build or unwind their positions of financial reporting has declined slightly in the past four
is constrained. years Respondents [70 000 members of the Association
for Investment Management & Research] showed the
In theory, comprehensive disclosure allows shareholders greatest dissatisfaction with statements of companies'
to praise or censure corporate actions. On praise there cash flow and shareholders' equity ... More than two-
is no limitation. On censure there is limited purpose, be- thirds said companies' practice of giving authority of
cause it can rarely unravel what boards have already de- shareholders. Boards lead and control companies. And
termined. boards are inclined to perpetuate themselves by the di-
rectors they nominate.
Take, for example, executive remuneration. In practice,
the authority of boards eclipses the shareholders. The
system, as it stands, does not work badly. What should
be asked is whether it can work better. King 2 is not the
final word on corporate governance, enabling companies

The occasions when disaffected shareholders vote their "Leading industrialised countries are proposing to give
own nominees on to a board are isolated and conten- shareholders of listed companies a direct say in fixing the
tious. Take, for illustration, Comparex. In theory, direc- pay and benefits of top executives and board members
tors act exclusively in the best interest of the company as part of their efforts to toughen up their corporate gov-
on whose board they sit. This is a legal requirement. ernance code."
In practice, there are inevitably unspoken conflicts, be- To rebuild investor confidence, Governments of the Or-
cause of the frequency with which directors owe their ganisation for Economic Co-operation and Development
appointments to the influence of a dominant shareholder intend "to encourage greater shareholder activism, in-
whose interests they might be tempted discreetly to ad- cluding ... participation in the nomination and election of
vance earnings guidance increased the likelihood of ma- board members and the approval of remuneration
nipulation of earnings reports." schemes".
TASK 1.15  Transparency: Salaries & remuneration

Note to Teachers:
This Task may be done as suggested in the learners’ manual, or Teachers may convert it into a debate. If
Teachers prefer the debate approach, then groups will focus on only one side of the argument. This Task
may be offered to learners as an alternative to Task 1.16. It is not necessary for learners to do both Tasks
nor is it necessary to investigate both sides of the argument. However, it is advised that learners be exposed
to both Tasks and both sides of the arguments through the report-back or debate process.
There is no stipulation on the content of the responses expected from learners, nor on the conclusions which
they reach. Teachers should ensure that different opinions from learners are tabled in an orderly fashion, and
that learners seriously consider the OPV (‘Other Point of View’) and that they CAF (‘Consider All Factors’), both
of which are concepts promoted in the de Bono Thinking Skills Programme.

Satisfactory con- Good construction Questions and re-
Research of Poor construction of
struction of ques- of questions and responses well con-
opinions from se- questions and re-
tions and responses sponses and mostly structed and coher-
lected business- sponses and poorly
and satisfactorily coherently commu- ently communicated
persons. communicated.
communicated. nicated. at all times.
Several factors con- All factors consid-
All factors con- Few factors consid- Most factors consid-
sidered and oppos- ered and all perti-
sidered, and op- ered and opposing ered and most of
ing points of view nent opposing
posing points of points of view the opposing points
satisfactorily under- points of view well
view considered. poorly understood. of view understood.
stood. understood.
Opinions presented
Poor presentation
Satisfactory presen- Good presentation in a well-organised
of opinions; sel-
Quality of tation of opinions; of opinions; gener- and balanced man-
dom engages inter-
presentation. engages interest of ally engages inter- ner; engages inter-
est of audience at
audience at times. est of audience. est of audience at
times.
all times.
TASK 1.16  Strikes in South Africa

Note to Teachers:
This Task may be done as suggested in the learners’ manual, or Teachers may convert it into a debate. If
Teachers prefer the debate approach, then groups will focus on only one side of the argument. This Task
may be offered to learners as an alternative to Task 1.15. It is not necessary for learners to do both Tasks
nor is it necessary to investigate both sides of the argument. However, it is advised that learners be exposed
to both Tasks and both sides of the arguments through the report-back or debate process.
There is no stipulation on the content of the responses expected from learners, nor on the conclusions which
they reach. Teachers should ensure that different opinions from learners are tabled in an orderly fashion,

and that learners seriously consider the OPV (‘Other Point of View’) and that they CAF (‘Consider All Fac
tors’), both of which are concepts promoted in the de Bono Thinking Skills Programme.

Satisfactory con- Good construction Questions and re-
Poor construction of
Research of opin- struction of ques- of questions and responses well con-
questions and re-
ions from selected tions and responses sponses and mostly structed and coher-
sponses and poorly
businesspersons. and satisfactorily coherently commu- ently communicated
communicated.
communicated. nicated. at all times.
All factors consid- Few factors consid- Most factors consid-
ered, and oppos- ered and opposing ered and most of
ing points of view points of view the opposing points
considered. poorly understood. of view understood.
stood. understood.
Opinions presented
Poor presentation
of opinions; sel-
Quality of presentation of opinions; of opinions; gener- and balanced man-
dom engages inter-
tation. engages interest of ally engages inter- ner; engages inter-
est of audience at
times.
all times.
TASK 1.17  Tender-rigging

1.17.1 In your own words explain the nature of the offences of which the large construction
companies are accused.
They are colluding to take advantage of the tender process and fix prices. The tender process is supposed
to ensure that large contracts are awarded fairly on merit to the company which offers the best price and
the best quality of service. The companies are accused of ‘rigging’ the tenders. The article is not explicit
of how they did this, but there is mention of ‘The Party’ where meetings are held between the bosses of
the companies. This type of offence normally involves the companies inflating their prices and mutually
agreeing on who will submit the lowest tender, thereby manipulating the minimum prices.
1.17.2 Explain why it is important for the Competition Commission to bring the problem un-
der control as soon as possible.
Taxpayers’ money is used to pay for these large contracts. Inflated prices mean that the Government is
not getting the most value from using taxpayers’ money. Also, for large contracts there are not many
companies in the country who can build large structures such as football stadiums. The agreement (or
cartel) between the biggest five companies means that the Government’s finances are being ‘milked’.
Smaller companies might also be disadvantaged because the bigger companies are getting all the contracts.
This is unfair business practice.
1.17.3 What is the Competition Commission planning to do about the companies who are not
co-operating? Do you agree with this? Explain.
The Commission wants to impose the stiffest penalties that they can. They also want the local or national
Government to stop dealing with these companies. The Commission is offering a leniency period for com-
panies to ‘own up’ about their offences so that the problem can be solved. (Learners might agree or
disagree with this strategy; some might think that the companies should be de-registered).

TASK 1.18  Research: Topical cases in the press
A wide variety of responses is expected. Teachers should guide learners into accepting the good business
practice should be followed, but that a variety of opinion exists on specific issues. Teachers should encourage
learners to follow the press in order to remain aware of topical issues.

Good selection of
Selection of exam- Examples well se-
Poor selection of examples well se-
ples illustrates sat- lected in which il-
Examples to illus- examples illustrates lected which illus-
isfactory under- lustrates full under-
trate the topic. poor understanding trates good under-
standing of the standing of the
of the concept. standing of the
concept. concept.
concept.
The possible con-
sequences for the Possible conse- Possible conse- Possible conse-
Possible conse-
business and peo- quences are poorly quences are gener- quences very well
quences are mostly
ple who are ac- well thought out ally well thought thought out and
well thought out
countable if good and generally inva- out and generally are valid at all
and mostly valid.
business practice is lid. valid. times.
not followed.
All factors consid- Few factors consid- Most factors con-
ered, and opposing ered and opposing sidered and most of
points of view con- points of view the opposing points
sidered. poorly understood. of view understood.
stood. understood.
Opinions presented
Poor presentation
of opinions; sel-
Quality of presentation of opinions; of opinions; gener- and balanced man-
dom engages inter-
tation. engages interest of ally engages inter- ner; engages inter-
est of audience at
times.
all times.
CHECKLIST
Yes – profi- Requires more
SKILLS Complete
cient attention
Explain what is meant by the words: ‘ethical’,
‘moral’, ‘dilemma’ and ‘sustainable’.
Understand the concepts of accountability, trans-
parency, fairness, responsible management and
good corporate governance.
Understand and explain why it is necessary for
businesses to establish codes of ethics or important
values and codes of conduct.
Offer opinions on ethical scenarios and cases relat-
ing to a business.
Consider ethical aspects relating to all topics stud-
ied in the Grade 11 curriculum.

ADDITIONAL RESOURCES
The following articles are provided as additional resources if necessary.
TOPIC: Black economic empowerment
This Task focuses on the debate of black economic empowerment. You are provided with an article which
appeared in The Business Report on 18 August 2005.
Required:
• Why was it necessary for the Government to ensure that Black Economic Empowerment (BEE) is adopted
in this country?
• What is your opinion about the BEE concept?
Can Black Empowerment address poverty?

By Geoff Parr August 18, 2005
Black Economic Empowerment (BEE) seeks to give in- poor must convert them into income, to spend on satis-
creased ownership and control over businesses to histor- fying their immediate needs.
ically disadvantaged persons (HDPs) and to increase the
procurement spending going to BEE firms. Indeed, sec- The implication is that an empowerment scheme that
tion 2(f) of the Competition Act states that one of its gives (or sells at a favourable price) shares to poor peo-
purposes is "to promote and maintain competition in or- ple will not necessarily increase the wealth of the recipi-
der to promote a greater spread of ownership, in partic- ents. Sadly, the shares will most likely be sold and
ular to increase the ownership stakes of HDPs". thereby converted into income to be spent on food,
transport, accommodation and clothing.
Certainly, increasing ownership stakes of wealthy and
even middle-income HDPs is easy enough, but the chal- The proceeds of these shares will yield short-term bene-
lenge is to make BEE deals broad based to the extent fits, and arguably the poorest households would benefit
that they empower the masses. But can BEE really ad- the most, if extra income were presumed to be most
dress the problem of poverty that affects so much of beneficial to those with the least of it. But the empow-
South Africa's population? erment exercise will be a one-off shot in the arm, a pov-
erty relief effort rather than empowerment in the sus-
Poverty, or being very poor, indicates a shortage of both tainable sense that was intended by empowerment leg-
wealth and income, where the wealth of a household islation (including the Competition Act).
might be the accumulated stock of assets acquired by
inheritance and by means of spending flows of income. Nor will businesses involved in such transactions be able
to claim the BEE credentials for creating a class of poor
Importantly, wealth can be converted back into income black shareholders: in all likelihood, those already privi-
by selling assets, ideally in later years of life, as older leged will have bought the shares from their original re-
family members retire and, in the absence of any wage cipients.
income, might have to survive by liquidating their stocks
of accumulated wealth as well as relying on savings. There are difficulties in ensuring that the benefits of BEE
transactions are spread widely and to the poorest. That
Unfortunately for the poverty stricken, each day might is surely the reason structures have been devised to hold
be a quest for survival, in which any assets acquired shares on behalf of the ultimate beneficiaries. For exam-
might have to be sold to finance consumption, rather ple, some transactions involve partnership arrange-
than being accumulated as wealth. For households on ments, workers' participation schemes that facilitate em-
or below the poverty line (whatever level of income that powerment or the sale of shares to employee groups or
might be), consumption is equal to income and savings union groups. These difficulties apply not only to the
are therefore zero. In fact, if a household's income is not private sector, but also to the sale of shares in state en-
sufficient to finance consumption in a particular period, terprises.
then it must resort to dis-saving, or selling of any liquid
assets. Naturally, it seems the Government would still prefer to
have control and sustainable ownership in these organi-
Economists refer to a concept known as the "marginal sations passing to HDPs. But for the Government there
propensity to consume". This is the measure of a con- are other options: giving away shares to the public (on
sumer's tendency to spend a certain portion of but the the understanding that those who need the money in-
poor must lead a hand-to-mouth existence and so they stead will resell them); or selling them to the highest
will tend to spend all (100%) of their income - in other bidders and then applying the proceeds to its expendi-
words, their marginal propensity to consume is 1. ture programmes.
When households are given non-cash assets, those with

enough income to provide for their day-to-day needs
might keep those assets as wealth, whereas the

This choice of options should depend on whether the pursue other objectives, such as BEE, in the sale or par-
Government feels it has made sufficient provision for tial sale of state-owned enterprises.
poverty alleviation, in which case it will have space to
BEE footprints finally have a spot in reports

August 21, 2005
By Vuyo Jack
Reporting on black economic empowerment (BEE) initia- The level of reporting is confined to the basic one liners
tives by public companies is slowly becoming a reality that are required by King 2 and they never venture any
that needs to be faced. further information because in reality not much is done
to contribute to BEE. Once the storm of anger settles,
In the current economic climate in South Africa, any the bargaining stage sets in with its principle: "What
company that does not contribute in a substantive man- contribution can we make to BEE that will gain us the
ner to BEE will have its sustainability questioned. When maximum points on the BEE scorecard with minimum ef-
you forecast the cash flow of a company that does not fort?"
contribute to BEE, it would diminish because the under-
lying business of the company would depend on the level This stage sees companies taking action such as unsus-
of contribution to BEE relative to the Department of tainable BEE deals, appointing more black directors in
Trade and Industry or charter targets, and also how far non-executive positions on their boards and creating BEE
ahead of its competitors the company is. subsidiary/joint venture structures that may be fronts.
Stakeholders need to be informed on the level of BEE The key reporting feature of this stage is to describe the
contribution by the company because this would affect legal form of the deals, but not necessarily the economic
the returns on their investment. When one explores the substance of the deal, and also outline the policies and
trends on BEE reporting in annual reports, there has intentions that will be implemented in the future. There
been great improvement from the early 1990s. is little information on the actual state of BEE within the
company at a particular point in time.
In the beginning, the trend was to put all BEE-related
initiatives to the corporate social responsibility section of When the stage of bargaining fizzles because the strate-
the annual report. During this period, BEE was equated gies and plans lack substance, the depression stage
with social responsibility and was not really seen as a clouds the company. This usually occurs after the com-
business imperative. However, we have recently seen panies have gone through a broad-based rating that
BEE being dealt with in the main body of the annual re- evaluates the substance of their initiatives. This is a pe-
port in a prominent position. riod where the lessons of sustainable BEE slowly filter to
the marrow of the company.
The other trend that is good is the separate sustainability
report, which highlights the key sustainability issues a The company is in a reporting limbo as it rehashes its
company faces. BEE is one of the issues that gets cov- intentions to BEE contributions but still no BEE progress
ered within the report. gets reported, or sometimes the level of reporting on BEE
may even be decreased. The final stage is the one of
What is interesting to note is the correlation of the BEE acceptance. This occurs when the company finally em-
stages (based on Elisabeth Kubler-Ross theory) that the braces BEE wholeheartedly. The level of reporting re-
company is in, ranged against the quality of the reports flects congruence between the company's intention, the
produced. policies that are articulated internally and externally, and
the action that is taken to make the company's BEE in-
The first stage that companies go through when they en- tention and policy a living reality.
counter BEE is denial. They genuinely do not believe that
BEE is applicable to them and therefore do nothing to The reports at this stage reflect a refreshing honesty and
contribute to BEE. At this stage there is no reporting on transparency, which in turn give the stakeholders an in-
BEE. dication of the BEE direction the company is taking. This
is a stage where the company's BEE report becomes a
Once the heat of the trickle-down effect of BEE descends record of the footprints it is making in its BEE journey
on them, they move to anger. During this stage, com- over time.
panies feel a lot of resentment and rage, which leads
them to believe that BEE is reverse discrimination and
that it is an unfair process imposed on them.

New skipper to navigate employment equity
July 29, 2005
By Mokgadi Pela
Mzwanele Jimmy Manyi was appointed this week by la- why labour minister Membathisi Mdladlana is introducing
bour minister Membathisi Mdladlana as the new chair- a national roving inspectorate unit and the director-gen-
man of the Commission for Employment Equity. He was eral review system with a clear aim of conducting highly
born in 1964 in Meadowlands, Soweto. He is married to specialised inspections and effective monitoring mecha-
Stella and they have three children aged 19, 17 and nine. nisms.
His education includes both Technikon and graduate What should we expect from your team?
schools of business at Wits University, the University of We will be working closely with the inspectorate. Also,
Cape Town and Harvard. He has over 20 years' experi- the social partners at Nedlac have agreed to support and
ence in the corporate environment, mainly in blue chip implement employment equity in the workplace.
firms and multinationals. His experience spans key sec-
tors of the economy, including banking. He worked for Do you have any mandate from the minister?
seven years at executive level for Barclays plc and the I have his full support. In fact, the terms of reference of
Nedcor Group, where he ran the business banking divi- this commission are stipulated in the Employment Equity
sion, business development, black economic empower- Act. The key issue about this commission is to advise
ment (BEE) and Government relations. the minister on employment equity and the code of good
practice.
Manyi also worked for four years at Toyota South Africa
where he was appointed general manager. For 10 years Has the Department committed any resources to
he worked for Anglo American both as a mining and an the commission, either in terms of human re-
exploration geologist. He says he has just joined the in- source or finance?
formation and communication technology sector, armed The secretariat in the Department will be assisting us.
with a lot of business experience. He is the director of The back-up that I have seen so far is adequate for me
BEE and corporate affairs at IBM. Manyi serves on sev- to deliver. I have also noticed that the turnaround time
eral bodies including Nedlac and the Black Management is quick with staff in the Department responding quickly
Forum and is a director of various companies. to requests from members of the commission.
Why is employment equity important for South Is Government afraid of acting against the private
Africa? sector to enforce the law?
Employment equity is a business imperative. It has to We cannot say that. In the next few weeks the first em-
work hand in hand with skills development. If we suc- ployment equity prosecutions will take place in the Dur-
ceed in growing our economy by 6%, we need to have ban labour court against some Newcastle clothing man-
trained enough black managers. Any company that ufacturers. While Government's role is not to be draco-
wants to succeed in the next 10 to 15 years should have nian, it is incumbent upon employers to comply with the
its demographics in place. law, especially after several corrective measures have
taken place.
What needs to be done to promote understanding
of the Employment Equity Act? Are these cases a foretaste of things to come?
There needs to be a road show to encourage companies It will be sad if business forces Government to have a
and employers in general to comply with the law and heavy hand. The only role Government can have is to
submit their equity reports to the department of labour. regulate and regulate, and we should remember that
Employers should respect the law that they have agreed Government doesn't want to do that. Part of our appeal
to at Nedlac, the forum for business, Government, labour to business is to take employment equity seriously to
and the community. With regard to broad-based Black avoid a situation where we are forced to advise the Min-
Economic Empowerment, we need to ensure that there ister to be tough. Business is first to complain about
is alignment between the codes of good practice on em- crime, and it is lawlessness if business does not comply
ployment equity and what is happening within the De- with legal provisions. We will not allow a situation where
partment of Labour. this country is turned into a banana republic.
What have you inherited in your new role as chair- What is your advice to workers feeling frustrated
man of the Commission for Employment Equity? at the slow pace of employment equity transfor-
I have inherited a lot of information from the outgoing mation?
commission, especially quantitative analysis of the status I would urge them to get out of the victim mentality.
of employment equity within the workplace. I know how People must take responsibility for their development.
many black managers are lacking at middle management Also, people can pick up a phone and contact the inspec-
and executive management levels. Our job is to check torate of the Department of Labour. But that
what the issues are and what needs to be done.
When is the talk going to end and the action going

to start?
The first five years were full of teething problems. The
next five years will be characterised by action. That is

should be the last resort. Development is not solely a What are your views on the financial services
manager's job. You must drive your own development. charter?
But if all else fails, make the call. This mechanism has provided a lot of impetus for trans-
formation in the banking sector. It is still early days to
How does the commission view equity in the see its effects.
workplace?
People should understand that there are three sides to How would you rate the performance of Barclays
the employment equity coin. One side is women, the in the same area?
other people with disabilities, with black males being the I think Barclays has a demonstrable history of embracing
last. When you push, you should push them together. transformation. That is why it heeded the call to disinvest
from South Africa during apartheid. It came back and I
What is the role of black managers in promoting was appointed to assist the bank to develop a transfor-
employment equity? mation policy. When I left at the end of last year, the
As people who are wearing these shoes, they should be bank was doing well in terms of the financial sector char-
the first to be change agents. When they need a statu- ter scorecard.
tory intervention, only then should they come to us.
Black managers should remember that because there is What is your favourite dish?
a big spotlight on them, they should perform to the best I eat almost everything except pork.
of their abilities. Over weekends they must come to-
gether with their brethren and devise strategic plans to What about your favourite holiday destination?
engage their counterparts in the workplace. I am usually controlled by my kids.
What is your view about black executives who Where do you live?
scoff at affirmative action? Sandton.
Black executives need to understand that they are where
they are because of the employment equity law. This What about your hobbies?
whole notion of people not wanting to be called AA can- I play golf or sit at home in my garden and think.
didates is naive. This legislation has delivered for Jimmy
Manyi. They should remember that even when black What is the most useful mistake you have made?
people had the skills and experience, they would not be Getting married at the age of 20, but this turned out to
promoted. This law is the one that brought us be a good thing. I am now 41 and my marriage is
to where we are. I also wish to urge black executives to stronger than ever. By the time I turn 50, my kids will
be developmental and bring others up. Every black ex- have finished university.
ecutive should be coaching at least 10 people.
What keeps you awake at night?
How my children are going to turn out. They are exposed
to such a lot of tempting things.
TOPIC: AFFIRMATIVE ACTION

This Task focuses on the debate of affirmative action.
You are provided with an article which appeared in The Business Report on 19 July 2005.
Required:
• Why was it necessary for the Government to ensure that the EEA was passed by parliament?
• What is your opinion about employment equity and affirmative action?
Employment equity vs Discrimination

By Ivan Israelstam (chief executive of Labour
Law Management Consulting) July 19, 2005
The Employment Equity Act (EEA) has two main func- disadvantage employees. It also prohibits employers
tions. Firstly, it enforces affirmative action. That is, it from discriminating unfairly against applicants for em-
requires employers to recruit and develop black, female ployment. Such unfair discrimination could include, but
and disabled people as a means of correcting the disad- is not limited to, discrimination on arbitrary or subjective
vantages caused by the "old South African dispensation". grounds such as race, gender, family responsibility, reli-
Affirmative action aims to give people from these popu- gion, age, disability, opinion, and trade union affiliation.
lation groups the chance to gain the knowledge, skills
and/or work experience of which history deprived them. However, where discrimination takes place for the pur-
poses of promoting affirmative action, such
However, the biases and discrimination that character-
ised the "old South Africa" have not died out, and still
exist in the hearts and minds of many people. Therefore,
the second function of the EEA is to prohibit unfair dis-
criminatory acts that demean, persecute or otherwise

discrimination would not normally be unfair. In the case The employee was consequently reinstated with retro-
of Coetzer and Others v the Minister of Safety and Secu- spective effect. The employer, disputing this arbitration
rity (2003 2 BLLR 173), the Labour Court again voted award, took the CCMA to Labour Court, which found
against (alleged) racial discrimination despite the fact that:
that it had been perpetrated in the name of affirmative
action. - The employee had admitted to calling a repairman of
a service provider a "Dutchman" and had further ad-
Coetzer and his colleagues were all members of the po- mitted that this was a derogatory term. The employee
lice force's (SAPS) explosives unit. They complained had not, as claimed, been provoked by the repairman
that it was unfair for them to be refused promotions due calling him a "koelie" as this had happened only after
to the fact that they were white males and therefore did the employee had called the repairman a "Dutchman";
not belong to groups designated for affirmative action - The employer's disciplinary code did require two warn-
(black, female or disabled people). ings before dismissal could be implemented.
The SAPS claimed that it was merely carrying out its Em- However, the employer was not required to follow its dis-
ployment Equity Plan (EE Plan) in accordance with the ciplinary code rigidly:
law. The court noted however, that the SAPS had also
undertaken not to erect absolute barriers against ad- - The term "Dutchman" was racist in the sense that it
vancement of employees from non-designated groups. connoted white supremacy. While this might not be
seen as being as serious as terms such as "kaffir", it
Also, while there were no vacant posts for non-desig- was still unacceptable;
nated employees at the time, there were vacant posts - The employer had the right to deviate from its discipli-
for members of designated groups. However, no appli- nary code when circumstances called for this;
cations from members of designated groups had been - The CCMA commissioner had improperly interfered
received. The SAPS was therefore ordered to promote with the employer's right to impose discipline;
the white males. - The dismissal was fair.
In Oerlikon electrodes SA v CCMA and Others (2003 9 From this judgment it is clear that the courts will not al-
BLLR 900), the Labour Court was asked to review an low employers to practice racism unless it is done in the
award made by a CCMA commissioner relating to the dis- name of genuine affirmative action. Even moderate
missal of an employee for using racist language. The forms of racism will not be tolerated in South African
arbitrator had found the dismissal to be unfair partly be- workplaces. Employees may, under certain conditions,
cause the employer's disciplinary code did not provide be fired even if the employer's disciplinary code does not
for dismissal on a first offence of using racist language. provide for dismissal.
TOPIC: E-COMMERCE FRAUD
This Task focuses on the E-commerce fraud. The rise of electronic business has been a feature of the 21 st
century. Regrettably, this has led to further opportunities of business fraud. You are provided with an article
which appeared in the Business Report on 18 July 2005.
Required:
• In your opinion, who is accountable to eliminating this type of fraud?
• Would you purchase goods on the Internet with a credit card? Explain.
E-commerce in the stranglehold of fear

July 18, 2005
Washington - After enjoying phenomenal growth in its have changed the way they behave online as they try to
first 10 years, Internet commerce faces new challenges avoid these problems. Among the other findings of the
as consumers' fears of viruses, spyware and a range of survey:
fraud schemes continue to grow.
• 81% said they stopped opening e-mail attachments
The e-commerce revolution led by companies like eBay unless they are sure these documents are safe;
and Amazon.com, both created a decade ago, has made • 48% have stopped visiting sites that they fear might
the Internet a permanent part of the world of commerce. deposit unwanted programs on their computers;
But even as more consumers join the rush, many are
growing fearful about maintaining their privacy, protect-
ing their personal data and the potential of falling victim
to nefarious elements in cyberspace.
A survey of US Web users by the Pew Internet and

American Life Project released this month shows 91%

• 25% have stopped downloading music or video files Globally, eBay alone is expected to have sales of more
from peer-to-peer networks to avoid things like spy- than $40 billion this year, up by a third over last year.
ware. But Gartner estimates that US banks and credit card is-
suers lost about $1.2 billion last year to phishing
A separate Conference Board survey last month showed schemes. And analysts say the high-tech community
more than half of online consumers say their level of con- needs some kind of system of authenticating e-mail to
cern has grown over the past year and many have ensure that an e-mail actually comes from the person
changed the way they use the Internet, with some scal- who's purporting to send it. “Companies need to take
ing back online purchases. steps quickly to beef up online security," said Avivah
Litan, vice president and research director at Gartner.
Nearly 70% of online users have installed additional se-
curity software on their PCs, and 54% now "opt out" of "We are seeing unprecedented levels in consumer trans-
special offers; 41% are purchasing less online, the sur- actions online. Yet businesses cannot rely on the Internet
vey by the business research firm showed. to lower costs and improve marketing efforts indefinitely
if consumer trust continues to decline."
The research firm Gartner, in its poll of 5 000 US adults,
showed growing concerns about "phishing," in which Pew found 93 million US Internet users, or 68%, cited
fake e-mails are disguised to look like legitimate requests computer trouble in the past year that is consistent with
from banks or credit cards firms, a technique used in problems caused by spyware and viruses, although 60%
identity theft schemes. were not sure where the problem originated.
In the 12 months to May 2005, an estimated 73 million One in four said they found new programs on their com-
US adults who use the Internet said they received an puters that they did not install or new icons that seemed
average of more than 50 phishing e-mails in the past to come out of nowhere, with one in five saying their
year, Gartner said. That was up 28% from a prior survey. starting point, or home page, had inexplicably changed.
Also, some 2.4 million online consumers reported losing "These survey results show that as Internet users gain
money directly because of the phishing attacks, although experience with spyware and adware, they are more
most said this was repaid by banks or credit card issuers, likely to say they are changing their behaviour," said
the Gartner survey indicated. Pew's Susannah Fox.
Online retail sales in the US market, the world's most "But what is more alarming is the larger universe of peo-
developed, amounted to $141.4 billion (R billion) in ple who have struggled with mysterious computer prob-
2004, according to the National Retail Federation. Some lems, but have no idea why. Internet users are increas-
forecasts see that figure hitting $331 billion by 2010. ingly frustrated and frightened that they are not in
charge of their Internet experience." - AFP
TOPIC: SEXUAL HARASSMENT
This Task focuses on harassment.

You are provided with an article which appeared in the Natal Mercury on 15 August 2005.
Required:
• In your opinion, who is accountable to eliminating this type of abuse?
• Why has the Government gazetted regulations in this regard now? Was this sort of abuse not apparent in
previous decades?
No wolf-whistling at work, it’s against the law

By Graeme Hosken Natal Mercury
Pretoria – Wolf-whistlers beware. In terms of the code, nothing confers the authority or
obligation on employers to take disciplinary action
Amendments to the country’s sexual harassment laws against non-employees. But a non-employee who is a
now outlaw wolf-whistling and enable employers to lay victim of sexual harassment may lodge a grievance with
charges of sexual harassment against offenders. the employer of the harasser “where the harassment had
taken place in the workplace or in the course of the har-
The Amendments to the Code of Good Practice on the asser’s employment”.
handling of sexual harassment cases in the workplace
were gazetted on Friday. The guide for employers has According to the code, sexual harassment in the working
as its aim the elimination of sexual harassment in the environment is a form of unfair discrimination. It is,
workplace and provides the appropriate procedures to therefore, prohibited.
deal with the problem and prevent its recurrence.

Wolf-whistling is listed as one of the acts of unwelcome whistling of a sexual nature and sending by electronic
conduct in the code. means or otherwise of sexually explicit text”.
Unwelcome conduct includes physical, verbal or non-ver- Non-verbal conduct includes unwelcome gestures, inde-
bal actions. Physical conduct ranges from touching to cent exposure and the display of or sending by electronic
sexual assault and rape, as well as strip-search by, or in or any other means sexual explicit pictures or objects.
the presence of, the opposite sex.
Jackie Branfield of the Action Desk for Abuse Against
Verbal conduct includes “unwelcome innuendos, sugges- Women and Children said: “This new amendment is one
tions, hints, sexual advances, comments with sexual way of making sure that women are treated with the re-
overtones, sex-related jokes or insults, graphic com- spect and dignity they deserve.”
ments about a person’s body made in their presence or
to them, inappropriate inquiries about a person’s sex life,
TOPIC: TRADING IN ILLEGAL ITEMS
This Task focuses on illegal trading.

You are provided with an article which appeared in the Sunday Tribune on 14 August 2005.
Required:
• In your opinion, who is accountable to eliminating this type of abuse?
• In your opinion, what has caused this sort of abuse to occur in recent times?
• How can this be stopped?
Experts argue over human organs

By Fred Kockott
Sunday Tribune News: August 14 2005
The sale of organs by living donors – one of the greatest avoid exploitation – might be the only way to solve the
medical taboos – is increasing worldwide, yet in South global shortage of human organs and counter the black
Africa debate on the issue has hardly begun. market trade.
Visiting South Africa in 1998 and 1999, University of Cal- They argue that it is futile to try to stop this illegal traf-
ifornia medical anthropology professor Nancy Scheper- ficking of kidneys, that desperate people will not be de-
Hughes warned that the poorest areas of the world were terred by laws and that it would be more sensible to cre-
becoming kidney warehouses of sorts and South Africa a ate an ethical market in organs.
transplant tourism destination.
The only country where the sale of human organs is al-
At one conference, Scheper-Hughes was accused of lying lowed is Iran.
and was shouted down.
Revulsion
But now, South Africa’s most prestigious private health
care group, Netcare, is at the centre of criminal proceed- A bioethics professor at the Open University of England,
ings focused on this spectacularly lucrative trade. Janet Radcliffe-Richardson, further argues that the ob-
jections to the idea of regulated organ sales are based
The proceedings have attracted worldwide publicity and
on an immediate gut reaction of revulsion and horror at
will fuel international debate surrounding the sale of or-
the idea. She also says that objections on the grounds
gans by living donors.
that regulated trade would exploit the poor do not hold
up.
Scheper-Hughes advocates tighter measures to combat
and prohibit the sale of organs, arguing that people who
“They (victims of poverty) have too few choices open to
sell their organs are exploited victims of poverty and des-
them. So why do you go in and reduce their choices
peration.
further, taking away their right to decide for them-
selves?” said Radcliffe-Richardson.
Tragedy
“The division of the world into organ buyers and organ On related arguments that organ donation should be
sellers is a medical, social, and moral tragedy of immense purely altruistic, Radcliffe-Richardson said, “If a father
and not yet fully recognised proportion,” said Scheper- who saves his daughter’s life by giving her a kidney is
Hughes. altruistic, it is difficult to see why his selling a kidney to
pay for some other operation to save her life should be
But, in the UK, a growing number of kidney specialists considered less so.”
who previously condemned the idea of selling organs,
argue that payments to living donors – controlled to

TOPIC: MONOPOLIES & UNFAIR COMPETITION PRACTICES
This Task focuses on the ethical debate surrounding monopolies and their potential to control and fix prices.
You are provided with an article which appeared in the Business Report on 28 June 2005.
Required:
• Why is it necessary for the Government to intrude with regard to monopolies?
• What can the Government do to keep prices under control?
• What is your opinion on the SAA case? Do Comair and Nationwide Airlines have a valid complaint?
• Is paying bonus commissions the same as a bribe? Explain.
State to crack down on monopolies

By Andile Ntingi June 28, 2005
Johannesburg - The Government was poised to crack Complaints have been levelled by downstream manufac-
down on South Africa's monopolies and cartels by raising turers against Sasol and Mittal Steel South Africa for us-
the level of competition, while stimulating development ing the import parity pricing mechanism, which they say
in the downstream industries, trade and industry minis- is responsible for inflating prices.
ter Mandisi Mpahlwa said yesterday.
An import-parity price model is based on a practice of
In a veiled reference to firms such as Telkom, Mittal Steel fixing the price of a domestically produced good to be
South Africa (which dominates the steel industry) and equivalent to that of an imported product. In other
Sasol (the petrochemicals group) Mpahlwa said the Gov- words, shipping costs and import tariffs are added to the
ernment would work towards bringing direct competition price of a home-made product, to make it equal to the
to these local giants to force them to lower the prices price of an imported good.
that they charged their customers.
Mpahlwa said the strategy of reducing costs for manu-
The banking industry, which is dominated by four big facturers would be accompanied by the provision of spe-
lenders, is another sector that is on the radar screens of cific incentives to assist struggling downstream indus-
the competition authorities because of its perceived tries.
steep fees.
Earlier this month, Lumkile Mondi, the chief economist at
"The Government intends sending a strong message to the Industrial Development Corporation, told Business
all sectors and firms in the economy that there must be Report that one of the reasons South Africa failed to at-
increased competition to promote the growth of down- tract meaningful foreign direct investment was the high
stream and value-adding economic activity, which holds barriers to entry in some of the domestic industries.
the key to a sustainable and job-creating economy," said
Mpahlwa. "In particular, the Government is focused on Mondi said a plan that slashed transport, energy and tel-
lowering the costs of key resource-based inputs and tel- ecommunications costs would crowd in investment and
ecommunication prices." boost economic growth and employment.
To prevent the high concentration of pricing power, Increases in the cost of essential inputs such as water,
Mpahlwa said a concerted effort would be made to electricity and telephones often ran above the country's
strengthen competition laws and to eliminate the contro- inflation target of between 3% and 6% a year. In some
versial import-parity pricing model that compelled down- instances, these high costs were responsible for sucking
stream industries to pay exorbitant prices for key inputs the life out of manufacturers already struggling from the
such as steel and chemicals. impact of the strong rand and increased import compe-
tition from Asia's low-cost producers, such as India and
In many respects, the dominance of the steel and chem- China.
ical sectors by a few large companies is responsible for
stifling development in downstream industries such as
construction, plastics, rubber and paint, most of which
are labour intensive.

SAA appeals tribunal ruling
By Adele Shevel 21 August 2005
South African Airways (SAA) lodged an appeal with only preference to those of its rivals and that they were able
a few hours to spare on Friday against the R45-million to influence customer preferences in that regard.
fine imposed by the Competition Tribunal for abusing its
dominant position in the local airline market. Complaints over the incentive scheme were received
from Comair and Nationwide Airlines. The case follows
SAA has appealed both the Tribunal’s finding and pen- a complaint lodged by Nationwide in 2001. According to
alty. The carrier had until close of business on Friday to I-Net this entitles the two affected airlines to proceed
appeal against the ruling, though it had said at the outset with a civil claim against SAA in the High Court – if they
it would appeal. can prove that they suffered damages as a result of the
abuse during the relevant period.
The fine is the biggest ever handed out by the Tribunal.
The appeal from South Africa is all-encompassing, taking
It found that the incentive schemes offered by the airline
on virtually every aspect of significance, from the Tribu-
were unlawful and a prohibited practice. The abuse of
nal’s definition of the market to its finding of abuse and
dominance relates to two incentive schemes for travel
the fine itself.
agents that SAA operated.
Meanwhile, Shan Ramburuth, the acting commissioner at
The first involved a system whereby agents were paid a
the Competitions Commission, says: ‘The commission
bonus commission if they made sales above a certain
will consider cross-appealing the Tribunal’s decision with
specified target. The other involved rewarding travel
respect to the penalty. We would argue that it’s too low.’
agency staff with SAA tickets on the number of airline
The Competition Appeal Court will determine a date on
tickets they sold.
which to hear the appeal.
I-Net reports that the Tribunal found the schemes gave
agents a commercial incentive to sell tickets of SAA in
TOPIC: PRICE FIXING
This Task focuses on the ethical debate surrounding price fixing.

You are provided with an article which appeared in the Business Report on 10 June 2005.
Required:
• What is the nature of the investigation into the car industry?
• Why is the Competition Commission concerned about this?
Car industry group meets competition commission meets By Roy Cokayne

June 10, 2005
Pretoria - National Automobile Dealers' Association "We will co-operate fully [with the commission] and
(Nada) representatives met officials from the competi- should there be any specific allegation against McCarthy
tion commission yesterday, following the release last dealers, these allegations must be substantiated because
week of the findings of the commission's investigation we have no information at our disposal about this," said
into the motor industry. Pretorius.
Gary McCraw, Nada's executive director, declined to Teresita van Gaalen, the managing director of Subaru
comment further until the organisation had received South Africa, said all the company's dealers had received
feedback from its legal advisers. letters from the commission about their referral to the
competition tribunal.
Major dealership groups have also been coy in their re-
action to the commission's findings. She reiterated that Subaru South Africa was "absolutely
unaware" of having being involved in any anti-competi-
Brand Pretorius, the chairman of McCarthy Motor Hold- tive practices and intended to defend itself at the tribunal
ings (MMH), said the company was awaiting guidance hearing.
from its suppliers.
The commission said last week that evidence revealed
Pretorius referred to the consent order agreement that BMW South Africa, DaimlerChrysler South Africa,
reached last year between Toyota South Africa and the General Motors South Africa, Nissan South Africa and
commission, in which Toyota South Africa agreed to pay Volkswagen South Africa and their dealers entered into
an administrative penalty of R12 million and discontinue franchise and dealer agreements that contained a num-
minimum resale price maintenance, a euphemism for ber of restrictions on competition.
price-fixing. He said Toyota South Africa handled this
matter on behalf of its dealers.

A decision in this regard on the Ford Motor Company of
Southern Africa still has to be finalised by the commis-
sion.
Why are cars in South Africa so outrageously overpriced?

June 2, 2005
The price-fixing by car makers is just one aspect of our The second example concerns the Smart car, but it ap-
motor industry that should be investigated, from CB Rog- plies to most other cars in the UK. Some time ago, my
ers, Durban. daughter in the UK considered buying one of these cars.
At the time, the cheapest model was priced at just over
More important would be an investigation into why our £6 000 (R74 495). Just why then are we asked to pay
cars are so outrageously overpriced. To give just two R122 000?
examples: When my nephew emigrated to Australia, he
bought a new car that was imported into Australia from It can't be transport costs, because these apparently
South Africa. He was amazed to find that its price was don't feature in our car exports to Australia. So, is it all
R55 000 less than in South Africa. Government tax or is it simply greed?
One does not have to be an economist to see that there Isn't it about time someone challenged the greedy car
is something fundamentally wrong here. How is it that manufacturers and produced a local "people's car" at an
this car, which is assembled in South Africa from compo- affordable price?
nents manufactured in and transported all the way from
Japan, can be transported back across the world to Aus- CB Rogers, Durban
tralia to be sold at such a vastly cheaper price?
TOPIC: MONEY LAUNDERING
This Task focuses on the abuse of money-laundering.

You are provided with an article which appeared on the Internet on 28 June 2005.
Required:
• What is money-laundering?
• Why is it necessary for countries not to gain a reputation for being open to money-laundering?
• In your opinion, is the US Government justified in banning the banks suspected of money-laundering, or
have they over-reacted? Explain.
US moves to scrub out money-laundering banks

August 25, 2004
Washington - The United States has moved to banish money or engage in similar corruption: we will cut you
from the country two foreign banks suspected of helping off from the US financial system."
the Iraqi regime of Saddam Hussein, before its ouster
last year, launder money siphoned from the UN oil-for- The action against Infobank is seen as an implicit warn-
food program. ing to Belarus President Alexander Lukashenko, who is
reported to have close ties to people running the pri-
The Treasury Department on Tuesday formally desig- vately-owned bank his Government licensed to engage
nated Infobank of Belarus and First Merchant Bank, opin foreign exchange transactions.
erating in Turkish-controlled northern Cyprus, as institu-
tions of "primary money laundering concern," which ef- US officials believe Infobank was at the heart of a
fectively shuts them out of the US financial system. scheme run by Saddam Hussein and his closest associ-
ates to use the oil-for-food program to extract bribes
The designation means the targeted banks cannot main- from foreign contractors, impose illegal surcharges on
tain any correspondent accounts in the United States, a them, and plainly smuggle out oil in violation of UN sanc-
key tool for conducting business in the country. In additions.
tion, US banks have been instructed to keep an eye out
for attempts by the two targeted banks to get access to The former Baghdad regime was able to pocket that way
the American market through intermediaries. $10.1 billion (R67.6 billion) between 1997 and 2002, ac-
cording to US congressional estimates.
"Today's designation alerts the global financial commu-
nity of the threat posed by these entities," Treasury Un-
dersecretary Stuart Levey said in a brief statement.
"It also serves notice to others that there will be signifi-

cant consequences for institutions that launder tainted

Infobank helped the Government of Saddam launder era UN sanctions were hurting more the Iraqi people
these profits through several other foreign banks and than the Saddam Government.
shell corporations, treasury officials said, and then return
them to the Iraqi Government, which used the proceeds It allowed limited UN-supervised sales of Iraqi oil on con-
to purchase weapons or finance military training. dition that the proceeds would be used to purchase food
and medicine for the Iraqi people.
First Merchant Bank has been used as a conduit for the
laundering of fraudulently obtained funds, the officials But the program is now under investigation for allega-
said. tions of massive bribery as Iraqi officials demanded kick-
backs from eager contractors, and UN controllers ap-
In addition, the individuals who own, control, and oper- peared to be looking the other way.
ate it have links with organised crime and apparently
have used First Merchant Bank to launder criminal pro- The US administration - as well as the United Nations -
ceeds, according to US Government data. are under strong pressure from Republicans in the US
Congress, who are successfully pushing through legisla-
US officials declined to say whether the Cyprus-based tion that would withhold 10% of US dues to the world
bank had played any role in the scheme to scam the UN body in the next fiscal year, if the probe does not move
program. forward. – AFP.
The oil-for-food program was launched by the United Na-

tions in late 1996 in response to criticism that Gulf War-
TOPIC: EMPLOYING ILLEGAL IMMIGRANTS
This Task focuses on the debate concerning employing illegal immigrants.

You are provided with an article which appeared in the Business Times on 31 July 2005.
Required:
• Why would a business want to employ illegal immigrants?
• Why does the Government feel it is necessary to control employment of immigrants?
• What is a quota?
• In your opinion, is this a good policy by the Government? Explain.
Employ illegally and go to jail

Government toughens immigration penalties - By Gaenor Vaida 31 July 2005
South African companies employing foreigners need to there is a known shortage of a particular skill.
ensure that they obtain the right working visas – or
heads of companies could find themselves behind bars. Ebrahim says that the amendments to the Immigration
Act have sought to open the door to foreign skilled pro-
Zahida Ebrahim, an associate in the immigration law unit fessionals. “The Government’s objectives in this regard
at Sonnenberg Hoffman Galombik, says that under the are laudable and the changes to the Act are indeed
amended Immigration Act, companies that are first-time promising,’ says Ebrahim.
offenders face a fine or a jail sentence up to a year – for
the individual responsible for running the business. For example, the 2% remuneration penalty is lifted. Em-
ployers previously had to pay it when hiring foreign pro-
Second offenders face a fine or jail sentence up to two fessionals. Now quota permits are a set number of per-
years, while third-time offenders face mandatory jail mits which are issued for specific positions in particular
time of up to three years. market sectors, generally where skills have been identi-
fied as scarce.
The Government has been criticised for the difficulties Article shortened
companies have in bringing in foreign skills, even when
TOPIC: QUALIFICATIONS FRAUD
This Task focuses on the problem of qualifications fraud.

You are provided with an article which appeared in The Business Report on 4 October 2004.
Required:
• Why would people lie about their qualifications?
• Why is it necessary for the Government to intrude in this matter?

• If you were employing a person on the strength of his qualifications, what would you do to be sure of the
person’s qualifications?
Government to weed out qualifications cheats

October 4, 2004
The Government is devising new guidelines to deal with their position with bogus qualifications could be sued by
qualifications and other credential cheats, a seminar on their employers for damages on the basis of misrepre-
qualifications fraud in the workplace heard this week. sentation. In addition, it was relatively easy to dismiss
them following established procedures because they had
Public Service and Administration Department anti-cor- lied about their qualifications. The courts had determined
ruption specialist Maphethang Foolo said plans were well that checking the credentials of a job applicant was per-
advanced for the public service to verify the credentials fectly legal, Dicks said
of all new employees.
Leon Esterhuyse, a forensic document specialist, said
Once implemented, the new guidelines would require all forgeries were widespread and that employers should
Government departments to check all the documentation verify documents' validity.
of incumbents prior to appointments being finalised.
A variety of means were used to tamper with documents,
"At present there is no uniform policy in place which including the use of chemicals to remove the ink from
means that some departments check documentation documents such as degrees and diplomas prior to them
only after an appointment has been made, while some being altered to suit the ends of the forger, Esterhuyse
check ahead of time," she told the seminar organised by said.
credentials verification company Kroll MIE.
Another programme in the pipeline was to link corrupt Kroll MIE marketing manager Elmarie Liebenberg said
employees to the Government's Persal payment system. more than one in ten of all job applicants lied about their
qualifications.
"Once the anti-corruption measure has been imple-
mented, individuals found guilty of corruption will be "There is growing pressure on job applicants to cheat
tracked through the Government's Persal payment sys- because of widespread unemployment." Liebenberg said
tem. It will ensure that everybody within the service is the quality of many forged or fraudulent qualifications
aware of that individual's previous transgressions related was such that it was impossible for a human resources
to bribery and corruption." manager to tell whether it was the real thing or not. –
Sapa
Speaking at the same seminar, DeLoitte legal senior part-
ner Murray Dicks said employees who had secured This article was originally published on page 3 of The
Cape Times on October 04, 2004
TOPIC: MISLEADING ADVERTISING
This Task focuses on the misleading advertising.

You are provided with an article which appeared in The Business Report on 18 July 2005.
Required:
• Why was it necessary for the Consumer Affairs (Unfair Business Practices) Act to be applied in this case?
• Have you had any personal experience of misleading advertising? Explain.
• In your opinion, should penalties be applied to businesses which mislead customers through false adver-
tising, or should the buyers be more vigilant?
Government probes cellphone ads

By Roy Cokayne July 18, 2005
Investigation launched into work-from-home of- into the handset subsidies operators give customers who
fers that target poor consumers sign a long-term contract, which Icasa believes prevent
consumers from switching networks.
Pretoria - The Department of Trade and Industry is in-
vestigating allegations of misleading advertising by cel- Today Icasa is due to release a discussion document for
lular companies related to monthly costs. The investiga- public comment on pricing by cellphone operators.
tion, by the Consumer Affairs Committee, has been
launched in terms of the Consumer Affairs (Unfair Busi- Ebrahim Mohamed, the director of consumer investiga-
ness Practices) Act. tions at the trade and industry department's Consumer
Affairs Committee, said on Friday that the investigation
Cellphone call prices are already under the scrutiny of
the Independent Communications Authority of South Af-
rica (Icasa), and the regulator has launched an inquiry

was partly in response to complaints about the practices
of cellular operators. Ebrahim Mohamed, the director of consumer investiga-
tions at the Consumer Affairs Committee, said on Friday
He said it was difficult to say how long the investigation that the committee had received complaints about work-
would take. Cellular service providers and interested par- from-home opportunities.
ties had been invited to comment, and the committee
would draft a report once they had all commented. "We had done certain specific investigations ... and there
have been one or two prohibitions. “We are calling for
The operators had had "a free rein for far too long", and comment so we can be further informed and take the
it was a good thing that the authorities were "now start- matter from there," said Mohamed. Ray Webber, the
ing to rein them in", said Webber. spokesperson for Communication Users' Association of
South Africa, was not aware of the investigation but wel-
Mthobi Tyamzashe, Vodacom's communications director, comed it.
said the company would respond to the invitation to
comment, but was still trying to formulate its position. He could only assume it involved special deals in which
Ravin Maharaj, MTN's media relations manager, was un- customers were offered a phone at R35 a month but
able to comment. where the price increased after a year and consumers
had to have itemised billing and caller identification. He
An investigation into "work-from-home opportunities" said it was interesting that the Government and Icasa
advertised in newspapers, magazines and other media were "all initiating things to clip the wings of cell opera-
has been launched by the Consumer Affairs Committee tors. "But we've decided to do a general investigation.
at the Trade And Industry Department under the Unfair These work-from-home opportunities occur across the
Business Practices Act. country in all the provinces.
A notice in the Government Gazette said the "opportuni- They affect poor rural consumers who don't have jobs
ties" to be investigated included, but were not confined and are keen to get involved to get a living to sustain
to, typing, addressing envelopes and labels, filling enve- their families but are faced with problems and lose their
lopes, gathering names and addresses, administrative money," he said.
opportunities, compiling data and direct sellers of con-
sumer goods "who did not truthfully identify themselves,
the firm and their products in any advertisements".
TOPIC: STRIKES, REMUNERATION & SALARIES
This Task focuses on the wage gap.

You are provided with an article which appeared in The Business Report.
Required:
• Why was it necessary for the Consumer Affairs (Unfair Business Practices) Act to be applied in this case?
• Have you had any personal experience of misleading advertising? Explain.
• In your opinion, should penalties be applied to businesses which mislead customers through false adver-
tising, or should the buyers be more vigilant?
Why it matters what directors are paid

By Riedwaan Baboo June 13, 2005
Cape Town - The average fee earned by executive direc- information is important for workers as they continue to
tors, excluding gains from share options, increased from challenge the growing wage gap within their workplaces.
an average of R2.6 million in 2003 to R3.7 million last
year. This amounts to a 38% increase. Directors' excessive remuneration should matter to cor-
porations as this elitism is not sustainable in the long run.
In 2003 it took a worker earning the average minimum Despite the importance of wage income for households,
wage 111 years to earn what the average director earns companies insist on keeping wage levels depressed. This
in one year. With the huge increase in executive direc- clearly indicates that not all the interests of its stakehold-
tors' fees last year, it takes that same worker 150 years ers are regarded as equally important.
to earn the average annual fee of a director.
The excessive remuneration of directors should indicate
This emerges in the latest directors' fees survey con- to shareholders that the current notion of corporate gov-
ducted by the Labour Research Service and it is a trend ernance and corporate social responsibility as vehicles
that should be of concern to organised labour, corpora- and mechanisms for corporate transformation is defec-
tions and the Government as well as civil society. tive.
For organised labour, this earnings differential exposes

the huge income inequality within the workplace. This

It has been unable to change corporations into "respon-
sible citizens". There needs to be a serious reappraisal It should matter to the Government because the exces-
of this framework. sive remuneration of directors undermines and delays
the democratic transformation of our society. Corpora-
Telkom chief executive Sizwe Nxasana tripled his remu- tions need to be regulated so that they act in the inter-
neration last year while thousands of workers were re- ests of all stakeholders.
trenched. Why must workers continue to bear the bur-
den of a drive to maintain profit margins? It should be important to the broader civil society be-
cause it reflects that the current economic framework is
Surely, given the context of high unemployment and unable to reign in "crass capitalism", which entrenches
widespread poverty, retaining workers and job creation and exacerbates inequality.
must be a performance criterion for directors. Article shortened
Mittal on thin ice with pay committee

By Renée Bonorchis
June 22, 2005
Johannesburg - While most remuneration committees annual report noted on the remuneration committee's
are typically made up of three to five people, Mittal Steel mandate.
South Africa's committee had just one local director, ac-
cording to its latest annual report. The King 2 Code on corporate governance does not dic-
tate the number of directors who should sit on a remu-
Last year the committee, made up of non-executive di- neration committee.
rectors Khotso Mokhele and Aditya Mittal, held five meet-
ings. Mittal attended none of them. A footnote indicates Charl Kocks, a director of CA-Ratings, the local agency
that Mittal, "with the committee's consent", appointed a that offers corporate governance ratings, said there was
director of the company to participate on his behalf. This no clear answer when it came to how large or small this
director is not named. committee should be.
This flies in the face of the JSE Securities Exchange's list- He said the remuneration team was particularly im-
ings requirements, which call for the names of the remu- portant because "unfortunately, the modern practice is
neration committee members to be disclosed. When for directors' remuneration [and that of senior manage-
asked, Mittal Steel South Africa said Aditya Mittal had ment] to be determined before the shareholders opine
named one of the company's foreign directors, Inder Da- on the directors' remuneration at the annual general
lia, to act on his behalf. Dalia had "mostly" attended meeting".
meetings by telephone.
"[It] makes no logical sense, yet so it is. And it is, in
The JSE further asks for the committee's mandate and labour law terms, difficult to get a refund from someone
the number of meetings held to be disclosed. The who has already spent it on the fourth Rolls-Royce.
company complied with these requirements and indi- The basic problem is that people are potentially deciding
cated that the committee, which was arguably under- on their own salaries using other people's money." Kocks
staffed, had a broad and difficult mandate to fulfil. said that since the remuneration committee needed to
be made up of people considered wise, tough, independ-
"The committee is primarily responsible for assisting the ent, free of bias and more, "the number of people on the
board on human resources and remuneration policies, committee will be equal to or less than the suitably qual-
succession planning and the appointment as well as ified directors available".
terms and conditions of service of the executive direc- Articled shortened
tors, and other members of senior management," the
There's no economic logic behind remuneration

"I can find nothing in economic theory that justifies this development"
By Ann Crotty June 22, 2005
It seems that the market for top retail executives clears You could buy enough of them so that if a few didn't
at a package of about R100 million. And if you were in make the grade in their new executive environment they
the market for a top executive for one of the big banks could be left by the wayside and you'd still be ahead by
you'd have to be offering a package of about R60 million. tens of millions of rands.
Maybe what you could do if you wanted an executive for That's of course assuming that you haven't got one of
a big group of shops or banks is recruit several top ex- those media executives with a Koos Bekker-type remu-
ecutives from the media sector, where they are currently neration package that runs to the hundreds of millions of
on special offer at a fraction of the price, then reskill rands.
them so that they'd be able to deal with irate customers
rather than irate newspaper readers.

As you can probably see, try as I may, I cannot work out assure you that we chief executives of today are not 10
the economic logic behind the dramatic surge in execu- times better than those of 20 years ago."
tive remuneration over the past five years. Should we
assume that previous generations of top executives were I'd suggest that for half of what he is getting, Summers,
grossly underpaid? Or that suddenly the job of top ex- who is an extremely talented, driven and committed ex-
ecutive has become hugely more demanding? Or that in ecutive, would pitch up for work at Pick 'n Pay. As would
recent years the supply of people who could fill these most of the other top corporate executives.
jobs has all but dried up?
It may not be greed that drives top executives to horde
According to those in the know, you can express as much such huge packages so much as the principles of com-
indignation as you like about the multimillion-rand pack- parative economics, better known to us as the economics
ages, but they are here to stay and in fact will inevitably of envy.
increase in line with "market forces". Because we are
told these packages are the result of vigorous investiga- Thus Summers' remuneration committee and the at-
tions of the market for top executives and these are the tendant remuneration consultants believe that he should
sort of remuneration levels at which the supply of exec- be getting at least as much as Basson, who in turn should
utives matches the demand. be getting at least 10% more than ... and around and
around it goes.
But does this mean that if the Shoprite board was to offer
someone an option package worth an extra R27 million, Perhaps the most important consideration is that, by vir-
or 20% more than Whitey Basson's option package, tue of the fact that they effectively control the remuner-
which has a current value of roughly R135 million, that ation-granting process, these guys get large packages ...
Shoprite would be assured of getting 20% more value because they can.
from its top executive? And how would the board meas-
ure that value? Additional earnings growth this year? This is what makes them different from the rest of us.
Next year? Six years hence? A stronger share price this The rest of us may also be greedy but we are largely
year? Next year? ineffectual.
If Basson was given 20% less, would he cut back his For instance, there would be little point in my retaining
efforts by 20%? And would Shoprite's earnings and the local remuneration consultants, "Options R Us", to
share price drop by the same amount? come up with a detailed justification for a million rand
package for me.
It is very possible that in a number of instances - perhaps
Pick 'n Pay's Sean Summers or Edcon's Steve Ross – the It wouldn't get beyond my editor. She would laugh and
share price would take a considerable knock if the top remind me of the vow of poverty we journalists take and
executive departed, as would the profit performance, at not even bother to pass it on to someone who might pass
least initially. it on to one of the lowliest of the members of the Inde-
pendent Newspaper Group's remuneration committee.
This possibility should raise concerns about the need to
make succession planning more public. Mind you, high- By contrast, being effectual and being a chief executive
lighting the existence of replacements would take from means that you don't have to bother with these mundane
the aura of unique ability that is often used to justify the hurdles. And you certainly don't have to worry about
payment of these huge packages. shareholders getting involved.
In my lack of understanding of this gravity-defying re- Given their short-term fixation, these shareholders are
muneration situation I take some comfort from com- only too happy to rubber stamp any remuneration
ments made a few years ago by William McDonough, the cheque and will certainly not bother to look for the un-
former president of the New York Federal Reserve Bank. derlying economic logic that might explain supply and
demand in this particular market.
"I can find nothing in economic theory that justifies this
development. I am old enough to have known the chief
executives of 20 years ago and those of today. I can
Wage gap deepens grievances and weighs on the economy

By Alide Dasnois August 1 2005
Highveld Steel chief executive Andre de Nysschen was

admirably frank last week about his company’s wage pol- But the strong results, De Nysschen said, came from im-
icy. proved market conditions and not worker performance.
“The good numbers obviously belong to the sharehold-
Solidarity and the National Union of Metal Workers of ers,” he said.
South Africa (Numsa) rejected the offer of a 5.5% pay
increase, arguing that with Highveld’s profit for the six
months to June likely to be as much as 78% higher than
last year, the company could well afford the 8% increase
they wanted.

This argument has a certain seductive symmetry. What- Clearly, workers feel cheated when executive pay in-
ever the question, the answer is the same. In a bad creases far outstrip their own and outraged when people
year, well, the shareholders obviously can’t afford who already earn millions of rands a year are awarded
even more millions through share option schemes.
to pay the workers much. In a good year, “obviously”
the good numbers belong to the shareholders. But is moral outrage the only reason for the call to nar-
row the gap between the best-paid and the worst-paid?
But as long as this argument does not apply to directors
too, workers are unlikely to find it convincing. No, says Cosatu’s Neil Coleman. Redistributing income
from executives to workers is an economic imperative.
Directors at Highveld Steel are not outrageously well paid This is because workers spend a bigger proportion of
like some of their counterparts in, say, banking or min- their income than executives do on goods produced in
ing, as the series on executive pay by Ann Crotty and South Africa, stimulating demand, and because, as part
Renèe Bonorchis in Business Report this year has shown. of a training programme, higher wages unleash produc-
And Highveld does have an explicit policy of incentive- tivity.
based rewards “earned through the achievement of de-
manding performance conditions consistent with share- Narrowing the income gap is a social imperative because,
holder interests over the short, medium and long term”, in a country with high unemployment and not much of a
as the annual report explains. social security net, far more people depend on the wages
of each worker than on the salary of each executive. And
But, though R5 million of this was paid through a long- it’s also a moral imperative, he says, because no argu-
term incentive plan rather than as salary, total payments ments about skill or scarcity can justify huge pay packets
to executive directors at Highveld Steel still jumped alongside so much poverty.
about 40% between 2003 and 2004, from R10,7 million
to R15,3 million. So what would be an acceptable differential? A ratio of
something like seven to one, from the top earner to the
Unsurprisingly, this has not escaped the notice of the bottom earner, could be a very long term goal, says Cole-
trade unions. man.
And it’s not only at Highveld Steel that workers are scru- Gasp. Under present conditions that would mean the
tinising executive pay with increasing interest. In the Pick ’n Pay’s Sean Summers would get about R138 040
latest round of wage negotiations from Eskom to Pick ’n a year instead of the roughly R10,7 million he was paid
Pay, the pay packages of the top men (and a few last year.
women) are attracting more and more attention from
their employees.
Pay workers more; they're the primary source of profit

By Terry Bell July 22, 2005
The Pick 'n Pay strike threatened for today has brought number of employees. How much this ratio rises or falls
to the fore important questions of profit, productivity, is the indication of a rise or fall in productivity.
and the wage and welfare gap.
This has a direct bearing on labour relations, and on the
Productivity, in particular, is one term much bandied perceptions of workers and their unions. For here is the
about these days. It is generally said to be the key to root of the growing wage and welfare gap.
affluence. Yet what exactly does it mean, whose afflu-
ence is being talked about and what is the effect on la- Productivity in South Africa has increased fairly rapidly
bour relations? and more wealth has been created nationally. At the
same time, jobs have been shed in record numbers.
Like so many statistical references, productivity can be-
come mired in the verbal mumbo jumbo employed by Fewer workers are producing more profit. Highly profit-
statisticians and economists. able companies have employed more workers, but prof-
its have risen at an even faster rate, with the result that
But in simple terms, it means the level of output of the productivity records arise.
various factors of production: land, labour and capital.
Shareholders and company bosses tend to take a keen
This is usually reduced, since the costs of land and capi- interest in such calculations. So too do trade unions and
tal are usually subtracted, to the level of output per their members.
worker employed. And output, in its turn, is usually
measured by profit accruing. For, as unions argue, with justification, it is workers who
are the primary source of profit and productivity. In this
In other words, for most purposes - and certainly in the they are in accord, not only with Karl Marx, but also with
retail trade - productivity is the measure of how much the great liberal economists such as Adam Smith and Da-
profit each worker produces for any given enterprise - a vid Ricardo from whom Marx took the labour theory of
calculation made by dividing the total profit by the value.

Within the labour movement, there is a perception that operating profit has grown from R734 million to R1.015
the country's low-paid workers are handed relative billion this year, a 38% increase in three years.
crumbs in wage rises, even when profits soar.
This year's annual report reveals that the operating profit
On the other hand, disproportionate portions of profit increased by 22% from the R834 million recorded last
seem to be creamed off into the pockets of directors and year. This means that each of the company's
managers. 32 529 permanent and casual workers was responsible
for more than R31 000 of profit.
What is particularly irking to the unions is that increases
in profit are usually used as justification for further fat- The workers' demand is for a pay rise of R400 a month
tening the annual packages of company directors and across the board. The company has responded with an
managers. offer of R310.
But Business Report has shown bosses are capable of As Mduduze Mbongwe, the South African Commercial
increasing their remuneration even when profits, let Catering and Allied Workers' Union deputy general sec-
alone productivity, fall. However, any fall in profit is al- retary, points out, the improvement in profitability was
most always used as justification for freezing or lowering used to justify a 19% increase in the remuneration of
the wages or wage rises of workers. chief executive Sean Summers.
It is against this background that the threatened strike This seems to bring his annual pay packet up to R12 mil-
of Pick 'n Pay workers should be seen. lion. It also resulted in the company declaring a 20.8%
dividend to shareholders, the bulk of whom are in the
This major retailer has a relatively good reputation in higher-paid, upper reaches of management.
terms of labour relations and has responded to the strike
threat by pointing out, correctly, that it is one of the In contrast, the union's flat rate demand would add only
highest payers in its sector. R3 million more per month to the company's wage bill
than the chief executive's annual package. In fact, the
The company also points out that more than a quarter of total annual cost of the union's flat rate demand would
its 32 089 full-time employees also own shares or have be little more than R156 million.
share options in the company. The higher up the corpo-
rate ladder workers climb, the more their shares and op- Deducted from the operating profit last year, this in-
tions. crease would leave the company with an operating profit
of R858.8 million. Given these facts, the workers and
But this is a low-paid sector and it is one in which Pick 'n their union see their demands as almost too fair.
Pay has made steadily increasing profits. From 2003, the
Pick 'n Pay urged to stand firm

"20 000 workers can't dictate to a population of 44 million"
By Dirk De Vynck July 25, 2005
Cape Town - If Pick 'n Pay gave in to workers' unrealis- "Pick 'n Pay's management had to defend their position
tically high pay demands, it could have a detrimental im- for the benefit of the whole country," Walker stressed.
pact on South Africa's inflation, analysts said on Friday.
If the retail group were to give in to Saccawu's demands,
Members of the South African Commercial, Catering and it could cause a ripple effect with not just other food re-
Allied Workers' Union (Saccawu) went on strike on Fri- tailers, but other industries. Walker said the acceptance
day, affecting about 150 Pick 'n Pay stores. Yesterday of the union's demands would also set a precedent for
there was no sign of an end to the strike. next year's negotiations.
"If it is 12% this year it could just as well be 12% next
The retail chain is offering workers a 7.9%, or R310, a year. This is unrealistic and could lead to the whole coun-
month increase, whichever is greater. But Saccawu is try bearing the brunt of it. Twenty thousand workers
demanding an increase of 12%, or R400, a month, can't dictate to [a population of] 44 million," Walker said.
whichever is greater.
John Loos, a senior economist at Absa, said were Pick 'n
Evan Walker, retail analyst at Andisa Securities, said alt- Pay to give in to a 12% pay hike, there could be two
hough a protracted strike could have a negative impact possible scenarios. For one, the increased labour cost
on Pick 'n Pay's profits, the issue stretched much further. could be passed on straight to the consumer, which could
push up inflation. The other option was for the retailer
"Adhering to the union's wage demands could necessi- to cut back on staff.
tate Pick 'n Pay to pass on the extra cost to consumers,
as management's ultimate job was to make returns for
shareholders," Walker said.
Naturally, higher prices would lead to accelerated infla-

tion, which was to the detriment of all South Africans.

Sean Summers, Pick 'n Pay's chief executive, said Fri- Summers noted that Saccawu had accepted R300 and no
day's disruption by union workers at nine stores, which percentage increase from Edgars, while Shoprite Check-
included attempts to illegally barricade and prevent entry ers had offered R210 against the union's R285 demand.
to these stores, had cost the group R24 million in turno-
ver on the day. Pick 'n Pay shares closed down 0.75% on Friday at
R26.30.
Pick 'n Pay and Saccawu have been in talks for seven
months, during which the union has not moved R1 from The food and drug retail sector closed up at 1.66%.
their starting point, while Pick 'n Pay moved from its ini-
tial mandated offer.
TOPIC: REMUNERATION
This Task focuses on the transparency in determining remuneration policy in a business.

You are provided with an article which appeared in the Business Report on 3 July 2003.
Required:
• In your opinion, are the requirements by the Johannesburg Securities Exchange a step in the right direc-
tion? Explain.
• Why is it necessary for South Africa to ensure that its standards are higher than those of other major
countries?
• What prompted other securities exchanges (bourses) in the rest of the world to follow the JSE in its ap-
proach?
Nowhere to hide for company bosses

By Vernon Wessels July 3, 2003
Johannesburg - Directors on the boards of JSE Securities

Exchange-listed companies could take it for granted that It was necessary to incorporate the code in the listing
new requirements would force disclosure of all payments requirements because South Africa, as an emerging mar-
made to them, Russell Loubser, the chief executive of ket, needed to ensure its standards were higher than
the bourse, said yesterday. those of developed countries to attract more investment,
he said.
The JSE's tougher listing requirements, due to take effect
in September, attempt to close loopholes on disclosure When the JSE introduced its proposals to a major global
for all kinds of emoluments that could be made to non- bourses meeting in July last year, they were met with
executive and executive directors. amusement, but this quickly changed following the col-
lapse of Enron and Accounting scandals at firms such as
This would include share options, directors' fees, basic WorldCom, Loubser said. More stock exchanges are now
salaries, bonuses and performance-based payments, ex- adopting the JSE's approach.
penses, material benefits, contributions and all other
emoluments made from the holding company, subsidiar- "The JSE has an added responsibility as the largest ex-
ies, associates, joint ventures or related entities. change in Africa and the only one on the continent rep-
resented on the World Federation of Exchanges to busi-
The JSE has expanded the listing requirements to en- nesses and the greater African financial community,"
force some of the principles in the King 2 Code on cor- Loubser said.
porate governance, including the splitting of the position
of chief executive and chairman. Firms with a year-end on or after September would need
to comply with the new requirements. William Frater, a
Other requirements will include the appointment of an senior analyst at Frater Asset Management, welcomed
audit and remuneration committee, consisting mostly of the JSE's attempts to align the listing requirements closer
non-executive (and preferably independent) directors as with the principles of King 2.
well as a risk committee, depending on the nature of the
business and board structure. The remuneration policy of a company, however, should
be put to the vote at the annual general meeting so that
No director may trade in the company's shares between payment packages for top executives were approved by
the financial year-end or interim period until the results shareholders prior to payment, he said.
have been made public, or while the company is under a
cautionary.

TOPIC: HIV / AIDS
This Task focuses on the ethical debate surrounding HIV/AIDS.

You are provided with an article which appeared in the Sunday Tribune on 14 August 2005.
Required:
• Should it be a responsibility of businesses to have plans or initiatives for HIV/AIDS?
• What is your opinion on testing for HIV/AIDS in the workplace?
• Is this necessary or is this an invasion of privacy? Explain.
Big firms on the cutting edge of HIV testing and treatment

By James Macharia
Johannesburg – When Martin Vosloo told his colleagues At De Beers, about 10% of staff, or about 1 000 workers,
that he was infected with the virus that causes Aids, are infected with the virus. The Aids project is run in
some spat in his face and threatened to kill him. close collaboration with the miners’ union. “De Beers is
a model in the mining industry. No other company gives
That was about six years ago, soon after Vosloo, 48, ARVs to its workers and their spouses even after they
joined South Africa’s power utility, Eskom. “They spat in leave employment,” says Archie Palane, the National Un-
my face. I was called names and on two occasions I had ion of Mineworkers’ deputy general secretary. “In other
to flee because I was threatened with death,” said companies, when workers are found to have Aids, they
Vosloo, a healthy-looking white South African. become among the first to go when retrenchments
come”.
Social stigma and denial are major challenges in the fight
against the disease in South Africa, the country with the The New York-based Global Business Coalition (GBC),
highest number of people living with HIV/Aids in the which groups 200 international companies fighting the
world. Years on, the hostility is fading for Vosloo, who impact of Aids, says Eskom, De Beers and Anglo are
now leads a support group for HIV-infected work ers at global trendsetters. About 40 South African firms have
Eskom, where about one in 10 of the 30 000 workers is joined the GBC, including Barloworld, Telkom, SABMiller,
infected with the virus. Sappi, FirstRand, Old Mutual and Liberty Group, and
many run similar Aids programmes for their workers.
Several big firms, such as Eskom, De Beers, the world’s
biggest diamond producer, and mining company Anglo “We are not yet doing enough to start winning the war,
American have in the past few years stepped up efforts but Eskom, De Beers and Anglo American are at the very
to test their workers for HIV, and treat infected staff in a front edge of testing and treatment worldwide,” says
bid to save their bottom lines. They say Aids hurts busi- Richard Holbrooke, a former US ambassador to the UN
nesses as workers die, requiring others to be hired and and head of the GBC.
trained. Sickness results in lost working hours. Most
workers who die are in the 30 to 50 age group, when But the biggest challenge is being faced by small firms.
they are at their most economically productive. “Most people in Africa work in businesses that employ
less than 20 people, and these have no real programmes
New figures say more than 6,5 million of South Africa’s to deal with Aids. It’s a complicated problem.”
47 million people may now be HIV positive. Amid rising
anger over a slow response to the disease, the Govern- A recent survey shows most mid-sized South African
ment launched an antiretroviral (ARV) campaign in 2003, firms are turning a blind eye to HIV/Aids despite fore-
the second largest worldwide after Brazil’s. casts that the epidemic is set to ravage the country’s
workforce. Just half of business owners surveyed have
But the drugs haven’t reached many, and companies a formal strategy to tackle Aids and of those, over a third
have had to help battle the disease. Eskom says it pays have no one to oversee that policy, the Grant Thornton
for ARV drugs for its HIV-infected workers and their in- 2005 Business Owners Survey shows. Shane, the owner
fected spouses. De Beers does the same, even after the of a car repair garage and petrol station, says he has few
workers have left employment. resources to tackle Aids amongst his staff of 15.
The power firm, which runs a testing and counselling “I do not know their status and it’s really not my prob-
clinic, ties performance bonuses for its managers on how lem,” says Shane, who declined to give his full name and
many of their staff have visited its testing and counselling the name of his business. “Maybe if one falls ill we will
clinic. know, but we’ve never had testing here,” says Shane.
Holbrooke says he has no immediate answers for small
Anglo says it aims to lift the rate of testing this year to firms. But starting “opt out” testing where workers are
50% from 21% in 2004 for its South African workers. routinely offered HIV tests – is an important step, he
“Testing is key because early detection means loss of says. Those who do not wish to be
man hours due to sickness or death is minimised,” says
Brian Brink, Anglo American’s senior vice-president in
charge of health.

tested can always refuse, Holbrooke adds, citing Bot- guess the fact that I am white has also helped shatter
swana where treatment numbers have jumped since myths, especially among black colleagues, that this is a
2002 after the country launched routine testing. disease for them. “I also prove one does not have to be
skinny and have pimples all over the face to have HIV,”
Challenging the myths about Aids and changing workers’ Vosloo says. - Reuters.
attitudes through education are essential, says Vosloo. “I
TOPIC: CORPORATE RESPONSIBILITY
This Task focuses on Transparency. It also provides an opportunity to integrate your learning in Science and
Geography.
You are provided with an article which appeared in the Business Report on 30 May 2005.
Required:
• Shell has been very transparent in terms of its corporate responsibility. In your opinion, does this create a
good or bad impression of the business? Explain.
• Do you agree with the opinion expressed by the chief executive, Jeroen van der Veer? Explain.
• It appears that the company faces some ethical dilemmas. It acknowledges that it engages in some nega-
tive practices, i.e. certain ‘blots on its report card’. Why would the company knowingly engage in these
practices? Explain their dilemma. Which groups of stakeholders does this affect?
Extended Activity:
Place yourself in the position of the chief executive, Jeroen van der Veer. Using presentations in the form of
a poster or PowerPoint, visually communicate the improvement in corporate responsibility issues to the direc-
tors and shareholders of Shell.
Shell spills less but bribery rises again
By Stephen Voss May 30, 2005
London – Royal/Dutch Shell, Europe’s second-largest oil represents a 5% reduction from 1990. Meeting that goal
company, has reported fewer oil spills and worker ‘will depend on improvements in energy efficiency and,
deaths, no change in greenhouse gas emissions and a for a large part, on further flaring reductions.
rise in bribes in an assessment of its corporate responsi-
bility. Last year 37 people were killed working for Shell, down
from 47 in 2003. Two were staff and 35 were contrac-
The company, which operates in 140 countries, spilled 6 tors. Shell, which employs about 112 000 staff, used
600 tons of liquids in 2004, down from 6 700 tons in armed security in 13 countries, down from 16 countries
2003. US offshore pipelines damaged by Hurricane Ivan in 2003. Six contractors were killed in incidents such as
spilled 1 500 tons alone, making it overshoot a target of kidnappings last year, including five in Nigeria.
6 100 tons.
‘Contractor safety in Nigeria and Russia pose a particular
The growth of the energy companies in the decades challenge,’ the report said. Shell said it had 2.6 injuries
ahead will depend on their ability to operate with integ- per million working hours of employees and contractors
rity and to listen to “society’s expectation,” chief execu- in 2004, the same rate as the previous two years, and
tive Jeroen van der Veer said in the Shell report pub- missing a target on 2.4.
lished yesterday.
More accidents at big construction projects in Nigeria,
The report describes environmental and safety perfor- India and Russia offset fewer injuries at its US lubricants
mance in 2004, a year when high oil prices focused at- business. Shell staff or intermediaries paid or accepted
tention on the world’s reliance on polluting, fossil fuel 16 bribes last year, contravening its policy, the reports
energy sources. said. That was double the number in 2003, and four
times the number for 2002.
The main blot on Shell’s environmental report card was
flaring of natural gas in Nigeria, which the company said Shell, which has a policy of not making political pay-
it would not phase out until 2009, a year later than ments, said it made one mistake in 2004 when it paid a
planned, partly because the Nigerian Government had US industry association that contributed 10% to a politi-
been slow to pay its share in building gas pipelines. Its cal action committee.
operation faced 9.2 million tons of gas, down 100 000
tons from 2003, but it missed a target of 9 million tons. Shell cancelled 64 contracts last year because they could
Shell’s greenhouse gas emissions were unchanged from not match its business principles, most often because of
a year earlier at 112 million tons of carbon dioxide equiv- health, safety and environmental issues. Brazil and the
alent. US had the most contracts cancelled.
The company aims to keep emissions of greenhouse

gases at or below 117 million tons until 2010, which

MODULE 2
OBJECTIVES, RESPONSIBILITIES AND CONTROL OF
BUSINESSES
NOTE TO THE TEACHER:
Ethics and internal control should not be seen as stand-alone topics but should be integrated into all the
different Modules and Tasks. As you work through the Tasks, in the book you will notice that several examples
are used throughout the book. Sometimes, it is a question on its own or other times, it is part of a question.
You are strongly urged to do these Tasks as well, as in the new Accounting curriculum learners are required
to analyse and interpret to a great extent. This means that learners must continually be asking questions in
any Tasks with special emphasis on ethics and internal control. So, for example, when you are covering Bank
Reconciliation, discuss subjects like bank or ATM fraud and the ethics of what is taking place. Also discuss,
what internal control mechanisms should be introduced into a business to prevent unethical situations from
occurring.
Therefore, this Module, devoted to Internal Control should not be done as a full Module in class. The following
is a suggested proposal as to how to integrate the Tasks in this Module into your other topics. Please
remember that the best learning will be something current that the learners are able to relate to, so you are
strongly urged to bring in as many current case studies as you can.
PROPOSED TEACHING OF THIS MODULE
No. Topic Task Relevant Module

1 Purposes and objectives 2.1 and 2.2 Discuss as an introduction at the beginning
of Grade 11. You will be drawing on their
knowledge from Grade 10.
2. Risks 2.3 and 2.4 Discuss as an introduction at the beginning
of Grade 11. You will be drawing on their
knowledge from Grade 10.
3. Internal control 2.5 – 2.7 Discuss at the beginning so that learners
understand the concept and then keep re-
inforcing throughout the year.
4. Internal control of fixed assets 2.8 Do in conjunction with Module 4.
5. Role of independent and internal 2.9 and 2.10 Discuss in conjunction with Modules 5 and 6
auditors on partnerships. Although the external
auditor is only relevant to Companies, it is
important that learners realise the role that
these people play and, therefore, the
influence they have on the internal control
mechanisms.
6 Internal auditors 2.11, 2.12 and Integrate these Tasks into Module 7 when
2.13 you are studying analysis and interpretation
of financial statements.
7 Careers in Accounting and 2.14 – 2.16 These Tasks are for extension purposes and
Auditing should be done at any time during the year.
It is important that the learners are aware of
all the career opportunities that are available
in the accounting and auditing world and not
to see a career in this as just one of sitting
behind a desk doing bookkeeping ope-
rations.

Note to the Teacher:
Teachers are advised to use personal experiences of learner’s in communicating concepts relating to business
objectives.
TASK 2.1  Stakeholders

Possible responses:
No. Stakeholders Main area of interest
The profit made by the business (in return for their investment of cap-
1. The owners (e.g. partners)
ital in the business)
The remuneration earned by employees is fair in relation to the profit
Employees (e.g. trade
2. of the business, and in relation to the highest paid employees in the
unions)
organisation.
The profit is sufficient to finance interest payments, the assets are
3. Long-term lenders sufficient to repay the loans, and that security for the loans is
adequate.
4. Creditors Current assets are sufficient to repay immediate debts.
5. SA Revenue Service (SARS) Profit is correct so that the correct tax can be levied.
6. Potential owners Profit is sustainable and reasonable in relation to the capital invested.
7. Bank (for an overdraft) Assets and profit are sufficient to ensure repayment of an overdraft.
Any other interested
Good business practice is being followed in terms of community or
persons, e.g. the
8. environmental responsibility, e.g. expenditure on waste disposal, AIDS
community or
projects, etc.
environmental groups
TASK 2.2  Revision

2.2.1 What is a Mission Statement?
A published statement which sets out the main and overall purposes for which an organisation exists.
2.2.2 What do you understand by the term ‘Objectives’ in the context of a school or a business
organisation?
Specific aims that an organisation has in order to achieve its mission.
2.2.3 What do you understand by the term ‘Strategies’ in the context of a school or a business
organisation?
Ways in which an organisation will operate in order to achieve its objectives and mission.
2.2.4 Why is it necessary for a school or a business organisation to explicitly state and com-
municate their Mission Statement, Objectives and Strategies to stakeholders?
So that all stakeholders can understand how they can play a role in helping an organisation succeed in its
purposes – a guide to influence the behaviour of all stakeholders.
2.2.5 Why is it not advisable for the owners to draw up their own Mission Statement and
Objectives without consulting stakeholders?
In this case, stakeholders might not accept the mission and objectives as they might feel that their opinions
are not valued.
2.2.6 Who, in a school or business organisation, should be responsible for ensuring that the
organisation attempts to comply with its stated Mission statement, objectives and
strategies?
Every person. However, the Governing body or Board of directors is ultimately accountable for ensuring
that the organisation achieves its mission and objectives.

2.2.7 It has traditionally been accepted that, in a capitalist economy, the making of a profit
is the main objective in a business organisation. Why would most stakeholders support
this objective?
Because they will invest their capital elsewhere if they feel that a reasonable return is not being earned.
2.2.8 Apart from the profit motive, list the other objectives that, in your opinion, are im-
portant for business organisations to adopt for themselves.
Honesty and integrity in business dealings.
Good customer care and support.
Fair treatment of employees.
Environmental concern – no negative impact on the environment.
A variety of other answers possible.
TASK 2.3  Risk and accountability

2.3.1 Why is it important for stakeholders to assess the risks before getting involved in a
business organisation and why is it important for businesspersons to try to minimise
the risks they face?
A variety of responses is expected, e.g.:
There is no point in undertaking the business venture if it is likely to fail.
The business must be sustainable as many stakeholders will rely on it for their livelihood.
It is irresponsible of businesspersons not to minimise their risks – it makes good business sense, and it
leads to benefits for all concerned.
2.3.2
Ways of minimising the
No. Risk Who is responsible or accountable?
risk
Regular checks of electrical
installations. Install fire The maintenance personnel. However, the owners
1. Fire alarms and fire hydrants. are also ultimately accountable for ensuring that
Insurance cover can reduce these employees discharge their responsibilities.
the negative financial effect.
Security guards, alarm
The security personnel. However, the owners are
systems, creation of an
2. Theft also ultimately accountable for ensuring that these
awareness of the potential
employees discharge their responsibilities.
problem.
Good systems of internal
The accounting and internal audit personnel.
control so that one person
3. Fraud Owners accountable for ensuring that these
serves as a check on
employees discharge their responsibilities.
another.
Good safety measures. The supervisors or managers. Owners are
4. Injury Insurance cover can reduce accountable for ensuring that these employees
the negative financial effect. discharge their responsibilities.
Good business planning,
e.g. putting aside financial
Economic reserves to cater for difficult
5. The owners and senior managers.
downturn times. Good service and
advertising to boost the
number of customers.
Natural disasters,
e.g. flood, Drills to minimise damage,
6. The owners and senior managers.
earthquakes, secure structures.
tsunami
7. A variety of other valid responses is expected and is not limited to the above.

TASK 2.4 Role-play
Validity and The scenario has The complaint or The complaint or The complaint or
realism, and major flaws, is misjudgment is misjudgment is misjudgment is
quality of generally not partly interesting, generally very interesting,
presentation related to the topic valid, realistic and interesting, valid, valid, realistic and
and is not satisfactorily realistic and well depicted and
interesting depicted and generally well well communicated
communicated with depicted and in the role-play
several communicated with
shortcomings some shortcomings
Concept of Little or no Understanding of Understanding of Clear understanding
accountability by understanding of accountability partly accountability of accountability
the person accountability comes through in generally comes comes through in
responsible is comes through in the presentation through in the the presentation
depicted in the the presentation presentation
role-play
The solution of The solution of the The solution of the The solution of the The solution of the
the problem problem is lacking problem is valid but problem is valid and problem is valid,
in validity and one- simplistic with little realistic but realistic and
dimensional creativity creativity is lacking creative – several
options considered
TASK 2.5  Types of control
TYPE OF
DESCRIPTION
CONTROL
1 C
2 A
3 D
4 B
TASK 2.6  Accounting controls

•Division of duties
Division of duties – allocating duties to different employees so that one serves as a check on another.
•Proper documentation
Proper documentation – ensuring that the evidence of each transaction is properly recorded.
•Proper authorisation
Proper authorisation – ensuring that only certain responsible people are given the right to permit
transactions to occur.
•Proper recording and follow-up

Proper recording and follow-up – ensuring that the transactions are properly entered in the books so that
reliable financial information is provided for decision-making.

TASK 2.7 Fraud
2.7.1 If you were Dee, list the ways in which you could defraud this business.
Variety of responses possible, e.g.:
Do not record certain cash sales, and pocket the cash when a customer pays.
Take stock for personal use and alter the stock count sheets.
Create fictitious employees and ‘pay’ them out of petty cash.
Retain cash paid by a debtor and write off the account as a bad debt or issue a credit note to reduce the
account.
2.7.2 If you were Jock, list the ways in which you could prevent Dee from defrauding this
business.
Allocate some of Dee’s duties to a part-time employee, e.g. depositing of cash, checking arrival of stock.
Jock should do monthly checks of stock, debtors and cash.
Use an auditor to cross-check documents, e.g. cash slips to deposit slips.
Calculate financial indicators from the financial statements (e.g. mark-up %) to identify problem areas.
2.7.3 Your Teacher will get suggestions at random from the class. If you have not thought
of certain points, add these to your lists.
Write the different suggestions on the white/black board.
TASK 2.8 Business objectives

2.8.1 Decide on the two main objectives you will have for each business.
Variety of responses possible, e.g. profit per year of at least 20% of capital invested, variety of flavours to
engage customers, support of local suppliers, etc.
2.8.2 What items will you spend your initial capital on in each business, and what assets will
need to be safeguarded in each business to achieve your objectives?
Display cabinets/fridges, security systems, furniture, cash registers, initial stock, set-up expenses, e.g.
advertising / insurance.
2.8.3 What procedures will you establish in these businesses in order to ensure that you
achieve your objectives? Allocate these procedures to Aboo Baker and to the sales
assistants.
Aboo Baker:
He must supervise the conduct of the assistants (check that they adhere to working hours).
He must check cleanliness of the kiosks.
He must check cash received to the sales documents.
He must ensure that the cash is deposited in the bank.
He must alert the owners to any problems.
He must ensure that the assistants are paid on due date.
He must ensure that the appropriate stocks are ordered.
Sales assistants:
They must treat customers with courtesy, they must ensure cash is properly documented.
They must arrive at work on time.
They must take care of business assets and stock.
They must ensure that the kiosk is clean and well-maintained.
2.8.4 How would you check that the procedures are being carried out and that the assets are
safeguarded in your absence?
Variety of responses possible, e.g. random checks, employ an internal auditor.

Sustainability is very important in modern day business world and it is something that the learners need to
appreciate now and not only when they study companies in Grade 12. Therefore you are urged to discuss
this topic on an on-going basis and to draw attention to any articles in the news or press relating to sustaina-
bility and the projects that the various companies are involved in.
TASK 2.9  Article on consumer interest

2.9.1 In your opinion, why is the use of corn seen as good substitute for petroleum?
Petroleum comes from oil which is going to run out sometime in the future.
Oil is associated with pollution both in the mining of the resource and the burning of it.
Corn, on the other hand, can be broken down (biodegradable) and will not pollute the environment; also it
is renewable (can be replanted).
Learners to come up with their own interpretations.
2.9.2 Why then, in your opinion, and based on information given are the environmental
groups opposed to the manufacturing process? Discuss fully.
The corn used in the process is not grown but is genetically manufactured.
This probably means that it has not been fully tested and what side-effects it brings and what is going into
the manufacturing process.
They are also upset as the consumers have not been informed that the corn is genetically engineered.
2.9.3 Do you believe that Cargill Dow is acting in an ethical manner? Why? Discuss fully.
No, as they are not correctly informing the consumers.
They are exploiting the consumers by misleading them i to believing they are buying environmentally friendly
products.
2.9.4 In your opinion, do you think Cargill Dow is sustainable? Why?

No.
The side-effects of the products could be disastrous.
The fact that they are not being honest will probably mean that the business will be closed down in the
foreseeable future.
Businesses that are involved in unethical behavior will not be sustainable.

Although internal auditing is a Grade 12 Assessment standard, the purpose of looking at their role in Grade 11
is for the learners to appreciate firstly, the role of the internal auditor and, secondly, how this role will then
impact on the role of the external auditor. If learners realise that the internal auditor will be accountable to
the external auditor, they will realise a further important aspect of their position.
TASK 2.10 Independent auditor’s report

2.10.1 Summarise the contents of the independent auditor’s report, i.e. what is the opinion
expressed – is it positive, negative or qualified?
Response depends on the audit report selected – it will usually be positive, but there will probably be some
explanation on issues that the report does not cover
2.10.2 If you were a stakeholder in the business organisation, how does this auditor’s opinion
affect your opinion of the business?
It would reassure me that the financial information is reliable or unreliable, and will provide me with an
indication as to whether my investment in the business is secure
2.10.3 Does the independent auditor express an opinion on whether or not fraud has oc-
curred in this business? If not, explain why the independent auditor has not done so.
No – the independent auditor does not check every transaction – he merely gets an overall opinion on
reliability and that the accounting systems are in place.

2.10.4 What procedures would you expect the independent auditor to carry out before ex-
pressing an opinion on the financial statements?
He should check all types of transactions on a random basis.
He should check the values of all items in the Balance Sheet (e.g. stock, fixed assets, etc.)
2.10.5 Why is it important for an independent auditor to be well-qualified?

His opinion is relied upon by the general public and prospective investors – they could suffer financial loss
if his opinion is incorrect or negligent.
2.10.6 What would you regard as an acceptable qualification for an independent auditor?
Explain how to obtain this qualification.
Chartered Accountant – CA (SA)
University degree, e.g. B Com
Post-graduate study, e.g. Diploma in Accounting
CA Board exam – for entry into the profession
2.10.7 If the independent auditor is negligent in carrying out his duties and expressing his
opinion, what consequences should the auditor face?
Various opinions possible, e.g. damage claims (if error or negligence), imprisonment (if fraud involved), de-
registration from the profession and withdrawal of his qualification.
2.10.8 Why is it not compulsory for sole traders and partnerships to have their financial
statements audited by an independent auditor?
They can check their own books themselves if they wish to do so.
2.10.9 An independent auditor must not be an employee of the business organisation on

whose financial statements the opinion is expressed. Why is this important?
He can be seen to be independent and that no-one has influenced his opinion – if a salary is paid to him he
might be suspected of impartiality.
2.10.10 The independent auditor charges the business a fee for the service of auditing the
books and the financial statements. This fee is based on the time spent in the au-
diting process by the independent auditor and his team. In your opinion, does this
affect the reliability of the audit report and the opinion expressed therein? Explain.
Possibly – the auditor could lose his appointment the following year if the owners or directors do not like
his opinion.
However, he is expected to rise above this concern and apply his mind ethically and responsibly to his task
of expressing an opinion on which others can rely.
TASK 2.11 Advertisements – Vacant posts

2.11.1 Briefly explain the main differences between the three examples of posts advertised.
Various responses possible: Example 1 requires a highly qualified practitioner – CA (SA).
The other two examples appear are lower paid and do not require a CA qualification – it appears that the
internal auditor envisaged in Example 2 and the investigator envisaged in Example 3 will be given specific
job descriptions in discharging their duties and they will have less freedom in making decisions about their
tasks.
2.11.2 In your opinion, why does example 1 reflect a negotiable salary, whereas the other
two posts reflect a definite salary? What is meant by a negotiable salary? What ap-
proximate salary would you estimate for Example 1?
Negotiable.
This will be determined by agreement between the employer and the employee; they are obviously looking
for the best person possible and will be prepared to increase their offer depending on the qualities of the
applicant they want to secure; a CA is a professional – one of the hallmarks of a professional is that he/she
earns what he/she is ‘worth’, i.e. in line with the quality of contribution to the organisation; expected salary
anywhere between R400 000 and R600 000, possibly more.

2.11.3 In your opinion, which of the three examples reflects the most demanding or difficult
job to perform, and which example reflects the highest qualifications required? Com-
ment.
Example 1 - the salary is negotiable and the requirements are very general and all-encompassing; in the
other two examples the requirements are very specific – this implies there is a definite list of skills needed.
TASK 2.12  Analysing auditor’s comments

Various answers are possible.
2.12.1 Operating profit on sales has decreased from 12% (in 20.7) to 5% (in 20.8).
Opinion: Yes
Reasons:
Decrease in operating profit is due to a decreased gross profit; decrease in sales; increase in cost of sales
or an increase in operating expenses.
2.12.2 The debtors’ collection period for 20.8 is 45 days (the figure for the previous year
was 30 days).
Opinion: Yes
Reasons:
Debtors are taking longer to pay.
This has a negative effect on the cash flow of the business – encourage debtors to pay quicker.
2.12.3 The creditors’ payment period has changed from 29 days (in 20.7) to 30 days in 20.8.
Opinion: Yes / No
Reasons:
This is more or less the same.
Need to check that cash is being received from debtors before paying creditors.
2.12.4 In comparison to the previous year, the stock turnover rate has decreased from 6
times to 3 times.
Opinion: No
Reasons:
If stock turnover rate has decreased it means stock is being sold quicker.
2.12.5 Gross profit on cost of sales was 50% in 20.7, but it is 40% in 20.8.
Opinion: Yes
Reasons:
A lower mark-up will result in lower net profit.
2.12.6 Interest as a percentage of fixed deposits has decreased from 8% in 20.7 to 5% in

20.8.
Opinion: Yes
Reasons:
The less the percentage the less the income and, therefore, the lower the profit.
This might be due to a bank decrease in rates – try to look for the most favourable investment rates.
Interest rates are externally controlled.
Ensure that you have the best investment options available.
2.12.7 Motor vehicle expenses have increased by 6% over the past year.
Opinion: Yes
Reasons:
An increase in motor expenses means higher expenses and less profit.
Investigate the reasons for this.
It could be that the vehicle is getting old and needs to be replaced.

2.12.8 Rent income has increased by 20% over the past year.
Opinion: No
Reasons:
The higher the income the higher the profit, but we need to know why?
Is it because of better control? This is good.
Rent income normally increases annually.
2.12.9 The telephone expenses have increased by 25% from 20.7 to 20.8.
Opinion: Yes
Reasons:
Increase in telephone costs means less profit.
Private calls need to be controlled.
2.12.10 Debtors allowances as a percentage of gross sales was 1% in 20.7, but this has in-
creased to 2% in 20.8.
Opinion: Yes
Reasons:
Need to investigate why more goods are being returned.
Could indicate a quality problem which will result in bad publicity for the business.
TASK 2.13  Investigation of financial statements

Inspect the financial statements. If you were the internal auditor for this business, what would
you want to investigate? Explain briefly.
Various answers possible:
• Less mark-up in 20.5 (60% decreased to 56.6%).
• Therefore, slightly less gross profit as a percentage of sales despite sales increasing.
• Decrease in income from services rendered.
• Expenses increased by R38 100 (21%) – mainly salaries and wages; motor vehicle expenses and sundry
expenses.
• Much higher stock (R41 000 last year and R74 000 this year).
• Decrease in cash from R15 400 to R3 700.
• Increase in trade and other payables from R41 700 to R50 000.
• Etc.
TASK 2.14  Internal auditor: Checklists

List the checks you would expect the Internal Auditor to perform in order to check that cash
Member A
sales and VAT in each department are properly recorded and accounted for.
Assess the internal control system with regard to sales – which employee is handling which task.
At random:
- Check that cash receipts are in numerical sequence and all are accounted for.
- Check that cash received is checked by a person other than the cashier and checked against the bank
deposit slip.
- Check that stock records are amended for each randomly selected cash slip.
- Check recording of selected cash slips in the CRJ.
- Check posting of CRJ to ledger, including VAT accounts.
- Check that the VAT accounts balanced off at the end of the month when payments are made.
- Check arithmetical accuracy of ledger accounts dealing with Sales and VAT.

List the checks you would expect the Internal Auditor to perform in order to check that debtors
Member B
are properly recorded and accounted for.
Assess the internal control system with regard to debtors – which employee is handling which task.
At random:
- Check that invoices and credit notes are in numerical sequence and all are accounted for.
- Check that invoices are recorded on debtors statements.
- Check that cash received from debtors is checked by a person other than the cashier and checked against
the bank deposit slip.
- Check that stock records are amended for each randomly selected invoice and credit note.
- Check that credit notes and general journal vouchers are properly authorised by a designated person and
entered properly in the journals (especially bad debts).
- Check recording of selected invoices and credit notes in the DJ and DAJ.
- Check posting of DJ, DAJ and GJ to general ledger and debtors ledger.
- Check that statements are posted to each debtor.
- Check that money collected from debtors is properly receipted and entered in the CRJ, GL and DL.
- Check the process of dishonoured cheques – entry in CPJ with proper posting to GL and DL.
- Check that the Debtors listing is prepared each month and that this is cross-checked to the balance on
the Debtors control account.
- Check arithmetical accuracy of ledger accounts and listings.
List the checks you would expect the Internal Auditor to perform in order to check that pur-
Member C
chases of stock in each department are properly valued, recorded, and accounted for.
Assess the internal control system with regard to stock – which employee is handling which task.
At random:
- Check that orders are made only by designated authorised personnel.
- Check that the order form agrees with the goods received note and the invoice.
- Check that goods are counted by a separate person when they enter the premises.
- Check that returns are entered on a goods return note and that this agrees with the credit note received
from the supplier.
- Check that the invoices and credit notes are properly recorded in the CJ and CAJ.
- Check posting of CJ and CAJ to GL and CL.
- Check creditors listing agrees with control account.
- Check that the cost of sales is correctly calculated and entered on each sales transaction selected.
- Check that stock counts are done regularly and that these agree with the stock sheets and the balances
on the Trading stock account.
- Check that stock deficits/surpluses are properly investigated by responsible personnel.
- Check that write-offs in the GJ are properly authorised by a designated person.
- Check arithmetical accuracy of Trading stock account and stock records.
List the checks you would expect the Internal Auditor to perform in order to check that fixed
Member D
assets in each department are properly valued, recorded and accounted for.
Assess the internal control system with regard to fixed assets – which employee is handling which task.
At random:
- Check that orders for fixed assets are made only by designated authorised personnel.
- Check that assets are counted by a separate person.
- Check that the order form agrees with the goods received note and the invoice when they enter the
premises.
- Check that returns are entered on a goods return note and that this agrees with the credit note received
from the supplier.
- Check that the invoices and credit notes are properly recorded in the CJ and CAJ.
- Check posting of CJ and CAJ to GL and CL.
- Check that fixed asset counts are done regularly and that these agree with the Fixed Asset Register and
the balances on the fixed asset accounts.
- Check that depreciation, disposals and write-offs of fixed assets are properly authorised by responsible
personnel and are properly entered in the GJ, GL and Fixed Asset Register.

List the checks you would expect the Internal Auditor to perform in order to check that salaries
Member E
and wages in each department are properly valued, recorded and accounted for.
Assess the internal control system with regard to salaries and wages – which employee is handling which
task.
At random:
- Check letters of employment and employment contracts to the SJ and WJ.
- Check clock cards for wage earners to the WJ to ensure correct calculation of normal time and overtime.
- Check time rates to business policies.
- Perform a head-count of employees – identify them to ID documents and trace to entries in SJ and WJ.
- Check arithmentical accuracy in SJ and WJ including gross and net remuneration, PAYE, Medical Aid,
Pension, UIF, etc.
- Check posting to GL.
- Check net payments to employees as recorded in the CPJ.
- Check acknowledgement of receipt of cash by wage earners (signature) or check bank transfers to
employees’ bank accounts.
- Check PAYE, Medical Aid, Pension, UIF, etc.
- Check employee assessment policies and assess whether consequences for under-performance are carried
out.
- Check leave policies to assess whether employees are complying.
TASK 2.15  Case study

Level 1 Level 2 Level 3 Level 4
Quality of Poor questioning, Questioning, Good questions Questions well
questioning, presentation and presentation and asked, responses thought out,
presentation of communication communication presented and responses extremely
responses, and done in a communicated in well presented and
communication satisfactory a logical and communicated in a
manner, with some engaging way logical, professional
deficiencies in logic and engaging manner
or engagement
(1 mark) (2 marks) (3 marks) (4 marks)
Assessment of the Different aspects Different aspects of Different aspects Different aspects of
nature of the job, of the job poorly the job identified of the job the job very well
including enjoyable identified and and expressed in a identified and identified and clearly
aspects and poorly expressed satisfactory manner well expressed and well expressed
frustrations
Assessment of skills, Personal aspects Personal aspects Personal aspects Personal aspects and
values & attitudes: and attributes and attributes and attributes attributes required in
personal attributes poorly identified required in the job required in the the job very well
and characteristics and poorly identified and job identified and identified and clearly
required in the expressed expressed in a well expressed and well expressed
career satisfactory manner
Identification of Qualifications Qualifications and Qualifications Qualifications and
qualifications and and remuneration and remuneration
remuneration remuneration identified with remuneration correctly identified in
poorly identified some identified and all respects and
and poorly shortcomings, and well expressed clearly and well
expressed expressed in a expressed
satisfactory manner
Total available marks 16

Use the following assessment rating scale to report the learner’s results:
Rank 7 6 5 4 3 2 1
Outstand- Not
Meritorious Substantial Adequate Moderate Elementary
ing achieved
% 80 – 100% 70 – 79% 60 – 69% 50 – 59% 40 – 49% 30 – 39% 0-29%
Mark 14 - 16 12 - 13 10 - 11 9 7-8 6 0-5

Encourage the learners to analyse their results and identify their problem areas. They should rewrite those
sections to get practice so that they will eventually master the skill that is inhibiting their progress.
This does not only apply to learners who achieved a 4 or lower but also applies to those learners who achieved
a 5 or 6. With more effort, they could achieve a 7.
TASK 2.16 Job descriptions

Responses depend on advertisements selected – refer to Task 2.11 for examples. Further examples are
presented below.

Comparison of Poor comparison Satisfactory Comparison of all Comparison of all
qualifications with major comparison, with four jobs is good, four jobs very well
deficiencies in limitations in the good research and researched and
research methods quality of research accurate accurate
Poor comparison Satisfactory Comparison of all Comparison of all
Comparison of with major comparison, with four jobs is good, four jobs very well
job descriptions deficiencies in limitations in the good research and researched and
Comparison of Poor comparison Satisfactory Comparison of all Comparison of all
salaries with major comparison, with four jobs is good, four jobs very well
deficiencies in limitations in the good research and researched and
Presentation of Poor presentation Satisfactory Interesting and , Interesting, clear,
findings presentation with clear presentation concise
limitations which interests the presentation which
listeners interests and
engages the
listeners
Total available marks 16
Use the following assessment rating scale to report the learner’s results:
Rank 7 6 5 4 3 2 1
Outstand- Not
Meritorious Substantial Adequate Moderate Elementary
ing achieved
% 80 – 100% 70 – 79% 60 – 69% 50 – 59% 40 – 49% 30 – 39% 0-29%
Mark 14 - 16 12 - 13 10 - 11 9 7-8 6 0-5

Encourage the learners to analyse their results and identify where they did not achieve. They should rewrite
those sections to get practice so that they will eventually master the skill that is inhibiting their progress.
This does not only apply to learners who achieved a 4 or lower but also applies to those learners who achieved
a 5 or 6. With more effort, they could achieve a 7.

FURTHER EXAMPLES OF ADVERTISEMENTS:
Business Times Careers Business Times Careers Business Times Careers

Aug 21 2005 Aug 21 2005 Aug 21 2005
PAG (Professional Assignments PAG (Professional Assignments PAG (Professional
Group) Group) Assignments Group)
www.pag.co.za www.pag.co.za www.pag.co.za
FINANCIAL MANAGER MANAGER CORORATE FINANCE COST ACCOUNTANT R204K
R450 K R380K Pretoria. M/A, pension, 13th
Germiston. B Com (Hons) with man- Pretoria. B Com (Hons) / CA(SA) / MBA cheque, B Com / Diploma + 3 yrs
ufacturing exp. and strong costing with min 8 years exp. in financial exp. in manufacturing. Full
background. Financial manage- services. Full financial man-agement costing function. JIT and TRIM,
agement reporting, treasury, com- function including cash flow, budgets, sales & material cost information,
mercial support, business planning management reports, year-end audit, variance analysis, stock re-
and corporate governance. Strong asset register, tax returns and valuations, BOM, standard cos-
leadership skills and proven risk management of staff. Report to FD. ting, MIDP claims, standard
management control experience. SAP advantageous. labour costs, forecasts and
Contact details omitted. Contact details omitted. month-end reports. MFG Pro.
Contact details omitted.
Business Times Careers Highway Mail

Aug 21 2005 Aug 19 2005
INDUSTRIAL DEVELOPMENT CORPORATION OF ACCOUNTS ADMINISTRATORS /
SOUTH AFRICA LIMITED BOOKKEEPERS
IT AUDITOR Durban North, Berea and Pinetown based clients
Applications are invited from persons in possession of a B seek:
Com degree or equivalent underpinned by internal audit Position 1. General administrator with relevant
article experience of at least two years and at least one exp (Quickbooks and Impact essential). Salary neg.
year’s IT audit experience. A diploma in IT auditing and a Position 2. Bookkeeper to B/Sheet (Quickbooks or
CISA qualification will be an advantage. Reporting to the Pastel essential). Salary R70 000 p.a.
Head: Internal Audit, the successful candidate will be Contact details omitted.
expected to prepare comprehensive audit programmes for Business Times Careers
assigned IT audits following COBIT to assess risk, required July 31 2005
controls and significance of non-adherence, perform audits THE PERSONNEL CONCEPT
assigned, evaluate the adequacy and effectiveness of www.thepc.co.za
internal controls in the IT environment, draft audit reports CFO: PRIVATELY OWNED COMPANY
and discuss the reports with relevant managers, and make R850k – R705K + bonuses + share options
recommendations to management to correct unsatisfactory CA (SA) with max 8 years senior financial mgmt exp
controls, improve operations and reduce costs. The consider joining this highly successful com-pany
Corporation offers competitive remuneration packages, formed from a mgmt buyout, seeking to appoint a
including excellent fringe benefits and career development new CFO. Run the full financial function whilst
opportunities. playing an active role on the board.
Contact details omitted. Contact details omitted.
TASK 2.17 Research: Commercial courses

Responses should include the major courses such as B Com, B Acc, MBA, and diploma and post-graduate
courses.
CHECKLIST
Requires
Yes – pro-
SKILLS more at- Complete
ficient
tention
To appreciate the value of setting objectives.
Understand the risks associated with running a business.
To understand the concept ‘internal control’.
Understand the difference between fraud and error.
To appreciate the need for internal control.
Devise systems for internal control.
Understand the role of independent and internal auditors.
To explore career opportunities in Accounting and Auditing.

MODULE 3
RECONCILIATION
It is important that learners understand and are able to draw up cash journals and post to the bank account
in the General Ledger. This should have been covered adequately in Grade 10. The following three Tasks
may be used to assess the competency level of your learners. If your learners are sufficiently competent with
these skills proceed to Task 4.
TASK 3.1 Ashley: Revision - Case study

3.1.1 Explain how Ashley benefits from operating a current banking account.
Safety – he does not have to keep large amounts of cash as the cheque account allows for daily depositing.
Cheques are reasonably safe and convenient means of payment.
Any other valid reason may apply.
3.1.2 Calculate Ashley’s bank balance on 30 June.

2 500 – 1 800 + 1 960 = R2 660
3.1.3 Will Ashley’s bank balance be the same as that of the bank statement? Explain.
No.
The bank has already deducted the charges from Ashley’s account.
Ashley’s books will not have reflected the charges.
3.1.4 If not, what would the balance in the bank statement be?
2 660 – 124 = R2 536
3.1.5 Ashley’s financial records would have to be updated with the charges appearing on the
bank statement. In which journal would he record this?
CPJ
3.1.6 After updating his financial records, will Ashley’s bank account balance be the same as
that of his account at the Bank? Explain.
Yes.
His bank account balance of R2 660 will decrease by R124 thus giving him a balance of R2 536.

TASK 3.2 BB Traders: Revision Task on cash journals
CASH RECEIPTS JOURNAL OF BB TRADERS FOR JANUARY 20.5 CRJ
Doc. Analysis of Cost of Sundry accounts
D Details Fol Bank Sales
no. receipts sales Amount Fol Details
R001 1 B. Ben 500 000 500 000 Capital
R002 4 Alpha Insurance Association 500 000 500 000 Loan: Alpha Ins. Assoc.
R003 9 Namaqua Butchery 13 500 13 500 13 500 Rent income
R004 15 B. Ben 120 000 120 000 Capital
CRT 17 Sales 53 980 53 980 53 980 29 940
CRT 23 Sales 43 870 43 870 43 870 24 370
CRT 30 Sales 49 450 49 450 49 450 27 470
EFT Sandveld Trust 110 110 Interest on fixed deposit
1 280 910 147 300 81 780 1 133 610

CASH PAYMENTS JOURNAL OF BB TRADERS FOR JANUARY 20.5 CPJ
Doc. Trading Sundry accounts
D Details Fol Bank Stationery
no. stock Amount Fol Details
001 2 Cash 1 500 1 500 Petty cash
002 Cash 2 000 2 000 Cash float
003 5 AK Agents 300 000 300 000 Premises/Land & Buildings
004 6 FFS Shopfitters 53 575 53 575 Equipment
005 7 ABC Wholesalers 19 645 19 645
006 Office Suppliers Ltd. 12 250 12 250 Equipment/Furniture
007 8 Witbank Municipality 1 500 1 500 Licence
008 9 Hawk Insurance Brokers 6 000 6 000 Insurance
009 11 Office Suppliers Ltd 24 000 24 000 Equipment
010 12 Hawk Insurance Brokers 12 000 12 000 Insurance
011 13 Afghan Stationers 575 575
012 14 B. Ben/Cash 2 500 2 500 Drawings
013 16 Cash 500 500 Petty cash
014 TJ Traders 22 168 22 168
015 Sandveld Trust 50 000 50 000 Fixed deposit: Sandveld Trust
016 17 Fast Carriers 1 250 1 250
017 20 Municipality/Electricity Dept. 3 950 3 950 Water and electricity
018 21 FM Stationers 600 600
019 22 B. Ben/Cash 850 850 Drawings
020 23 SA Transport Services 2 850 2 850
021 25 Alpha Insurance Association 37 560 25 000 Loan: Alpha Ins. Assoc.
12 560 Interest on loan
022 26 NM Stationers 3 045 3 045
023 27 City Treasurer 6 850 6 850 Rates and taxes
024 Witbank Wholesalers 16 510 15 998 512 Consumable stores
025 30 L. Lane 17 200 17 200 Salaries
026 M. Michael 17 500 17 500 Salaries
027 Cash 1 840 1 840 Petty cash
B/S Memela Bank 412 412 Bank charges
618 630 4 220 61 911 552 499

TASK 3.3  Baseline assessment
COLUMN A COLUMN B COLUMN A COLUMN B
A 13 M 3
B 11 N 22
C 9 O 4
D 10 P 6
E 14 Q 8
F 15 R 2
G 17 S 20
H 18 T 1
I 21 U 7
J 19 V 12
K 23 W 5
L 16
TASK 3.4  Joe Duffy: Bank Statement and cash journals

3.4.1 Calculate the bank balance in the books of Joe Duffy. Indicate whether the bank balance
is favourable or unfavourable.
Total deposits R19 400
Total cheque payments 2 900
Favourable bank balance R16 500
3.4.2 Calculate the bank balance as per the bank statement. Indicate whether the bank bal-
ance is favourable or unfavourable.
Total deposits R19 400
Total cheque payments 2 900
Favourable B/S balance R16 500
3.4.3 From Joe Duffy’s point of view, is the bank balance an asset or a liability?
Asset
3.4.4 From the bank’s point of view, is the bank balance an asset or a liability?
Liability
3.4.5 Compare the bank balances in 3.4.1 and 3.4.2 above. What conclusion can you draw
from these?
Both balances are equal – all deposits appear on the bank statement and all cheques issued have been pre-
sented to the bank.
3.4.6 Refer to the payment of R1 500 in the CPJ on 06-05. This amount also appears on the
bank statement. What does this imply?
The cheque has been presented to the bank for payment.
3.4.7 Refer to the payment of R1 500 in the CPJ on 06-05. This amount appears on the bank
statement on 10-05. Explain the difference in the dates.
Joe Duffy issued the cheque on the 06th; the payee presented the cheque on the 10th.
The payee can present the cheque to the bank at any time after he has received the cheque.
The cheque is no longer valid after six months when the cheque becomes stale.
3.4.8 Does Joe Duffy make daily deposits? Explain.

No.
He makes deposits periodically.
He probably wants to save on bank charges – deposits attract a fee called cash deposit fees.

3.4.9 Joe Duffy made three cheque payments during May. For what reasons could these
cheques have been issued? Give four examples.
To buy stock; to pay a supplier; to purchase consumables; to pay for repairs; etc.
3.4.10 Assume that the deposit of R5 400 does not appear on the May bank statement. What
would this imply?
The books of Joe Duffy and the bank would not be in balance.
3.4.11 Give a possible reason for the deposit of R5 400 not appearing on the bank statement.
The deposit is late – the amount was deposited after the bank statement had been completed.
3.4.12 Assume that the cheque for R600 does not appear on the May bank statement. What
would this imply?
The books of Joe Duffy and the bank would not be in balance.
3.4.13 Give a possible reason for the cheque for R600 not appearing on the bank statement.
The payee has not yet presented the cheque to the bank for payment.
TASK 3.5  Bank Statement

BANK STATEMENT (Extract)
Details Date Debits Credits Balance
Balance 01-11 6 142
Deposit 03-11 1 500 7 642
Cheque 781 05-11 1 122 6 520
Deposit 06-11 1 761 8 281
Deposit 10-11 2 344 10 625
Cheque 780 15-11 138 10 487
Cheque 784 18-11 669 9 818
Deposit 21-11 1 800 11 618
Cheque 783 25-11 467 11 151
Deposit 26-11 2 315 13 466
Deposit 28-11 1 966 15 432
TASK 3.6 Case study on Internet fraud

3.6.1 What do you understand by “spyware”? Explain to the person sitting next to you how
you think the hackers use this spyware.
Learners to discuss with their fellow pupils from their own experience.
It is not so much the full understanding of how the equipment works, but the realisation that this is taking
place and therefore, internet users have to be extra vigilant.
Spyware is used by hackers to read the customer’s data.
This can take the form of reading your profile on the internet or at an ATM.
By some sophisticated mechanism, they can ‘hack’ into your system and read the keystrokes to obtain your
PIN code, etc.
In most cases, the customer has to allow them in by accepting their email.

3.6.2 This article was written a few years ago. Do you think that this type of fraud has been
eliminated today? Why? Discuss using examples from your own experience or from what
you have read.
Learners to give their own opinions.
Fraud and hacking on the internet is still taking place, so therefore, the authorities have not been able to stop
it completely.
As soon as they stop one process, the hackers develop something else.
3.6.3 What, in your opinion, makes a person engage in fraud of any sort? Do you believe they
are justified in their opinion?
Learners to give their own opinions.
Suggestions:
It is unethical and unlawful.
People are often driven to this type of crime due to greed or due to their personal circumstances, e.g. hunger,
etc.
However, it does entail a degree of intelligence to be involved in this type of crime – can they not put these
skills to better use?
Perhaps it is so lucrative and the sentences are not very high.
3.6.4 How can customers making use of the internet banking facility assist the banks in reduc-
ing the amount of fraud? Discuss as many measures as you can.
Do not give out your pin or banking details.
Do not let anybody else work on your internet banking.
Log off when you are finished.
Do not respond to emails that ask for private details and pin codes.
Do not accept email from people you do not know.
Be vigilant at all times.
Etc.
3.6.5 In your opinion what is the effect of fraud of this nature on the economy of the country.
Even if the clients are insured, somebody is losing and this has a negative effect.
This results in higher premiums which causes hardships to people.
So much money is spent on security that could be better spent elsewhere.
Has a negative effect on tourism and investment in the country.
TASK 3.7 On-line banking

LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4
A thorough re-
Some attempt to Adequate research Excellent research
search is evident
conduct a research is evident in order which ensures that
Research so that a meaning-
but little valuable to complete the re- an in-depth report
ful report can be
evidence. port. can be produced.
produced.
Some attempt to Thorough interpre- Excellent interpre-
Interpreting in- Adequate interpre-
adequately inter- tation of data so tation of data en-
formation tation based on re-
pret the infor- that a meaningful suring an in-depth
search.
mation. report is produced. report.
Thorough explana- Excellent explana-
Explanations Some attempt to Adequate explanations ensuring an
tions ensuring a
give explanations. tions given. in-depth report.
meaningful report.

TASK 3.8  Bank Statement
FIRSTBANK GROUP FirstBank of South Africa Limited

Registered Bank
PIETERMARITZBURG NORTH Reg. No. 19433/24356560
PO Box 3211 PIETERMARITZBURG 3200 VAT Reg. No. 41500209871
23 March 20.6
MR G. VAN ROVER
PO BOX 991
PIETERMARITZBURG
3200
PIETERMARITZBURG NORTH 7925 Statement No. 231

MONTHLY MAIL Page 1 of 1
BANK STATEMENT / TAX INVOICE
Masterplan Cheque Account Account Number: 05 114 006 7

Service
Details Debits Credits Date Balance
fees
BALANCE BROUGHT FORWARD 03.01 238.91
AUTOBANK CASH WITHDRAWAL AT CASCADES .
11H01 460098 11.80 1 000.00 03.02 -761.09
INTEREST ON OVERDRAFT 42.45 03.14 -803.54
CHEQUE 423 3.40 120.00 03.14 -923.54
ELECTRONIC BANKING PAYMENT:
SALARY 324 4.73 14 000.48 03.20 13 076.94
INTERNET PAYMENT TO TELMOK 460098 5.19 555.66 03.20 12 521.28
MCHOICE SERVICE AGREEMENT 1017989 8.59 579.00 03.21 11 942.28
QW MEDICAL AID 12345 5.19 789.00 03.21 11 153.28
OLD MUTUAL INSURANCE PREMIUM 34446 5.19 1 210.00 03.22 9 943.28
CHEQUE 425 2.80 6 578.99 03.22 3 364.29
ELECTRONIC TRANSFER:
R. JACKSON 21311 2.80 300.75 03.22 3 665.04
SERVICE FEE 49.69 03.22 3 615.35
These fees are inclusive of VAT at 14.00%.

Please verify all transactions reflected on this statement and notify any discrepancies to the
bank as soon as possible.
3.8.1 State three reasons which indicate that this bank statement refers to a private individual
and not a business concern.
• It is addressed to a private individual and not to a business.
• The Autobank cash withdrawal at Cascades.
• Electronic banking payment in respect of salary.
• A business would make deposits more regularly.
• Etc.
3.8.2 Complete the missing details marked ‘*’. Indicate overdrawn amounts with a ‘-’. E.g. -
R19
Refer to the bank statement.
3.8.3 Mr G. Van Rover made a deposit of R250 on 24 March 20.6. Give one possible reason why
this deposit does not appear on the bank statement.
The bank statement is dated 23rd while the deposit was made on the 24th.

3.8.4 Cheque no. 424 for R2 500 was issued during March 20.6. Give one possible reason why
this cheque does not appear on the bank statement.
The payee has not presented the cheque to the bank.
3.8.5 Which transaction indicates that Mr G. Van Rover does internet banking?
Internet payment to Telmok.
3.8.6 Are electronic payments/transfers safer than writing out cheques? Explain.
Yes.
Cheques can fall in the wrong hands.
Cheques can be lost or stolen.
Electronic payments are cleared quicker than cheques.
Etc.
TASK 3.9  Introduction to Bank Reconciliation

3.9.1 Calculate the bank balance in the books of G. van Rover on the 23 March 20.6.
CRJ total: R14 551.23
CPJ total: R10 754.65
Bank balance: 238.91 + 14 551.23 – 10 754.65 = R4 035.49
3.9.2 Compare the balance in the bank account to the balance you calculated on the bank
statement in the previous Task.
Bank statement balance is R3 615.35 while the bank account balance is R4 035.49.
3.9.3 Discuss potential problem areas and why the balances do not agree.
R250 commission which was deposited on the 23rd does not appear on the bank statement.
Cheque no. 424 for R2 500 in respect of rates and taxes does not appear on the bank statement.
R42.45, R579, R789, R1 210 and R49.69 appear on the bank statement but do not appear in the CPJ.
3.9.4 Process entries that you deem are necessary in order to correct the situation above. You
are required to give an explanation as to why you are processing the entries.
R250: Record in the Bank Reconciliation Statement (credit side) as an outstanding deposit. The deposit
appears in the CRJ but not on the bank statement.
R2 500: Record in the Bank Reconciliation Statement (debit side) as an outstanding cheque. The cheque
appears in the CPJ but not on the bank statement.
R42.45: Record in the CPJ as interest on overdraft. The interest appears on the bank statement but not in
the CPJ.
R579: Debit/stop order – record in the CPJ.
R789: Debit/stop order – record in the CPJ.
R1 210: Debit/stop order – record in the CPJ.
R49.69: Bank charges – record in the CPJ.
Updated CPJ total: 10 754.65 + 42.45 + 579 + 789 + 1 210 + 49.69 = R13 424.79
Updated bank balance: 238.91 + 14 551.23 – 13 424.79 = R1 365.35
BANK RECONCILIATION STATEMENT ON 31 MARCH 20.6

Debit Credit
Balance as per bank statement 3 615.35
Outstanding deposit 250.00
Outstanding cheques: No. 424 2 500.00
Balance as per bank account 1 365.35
3 865.35 3 865.35

CASH RECEIPTS JOURNAL FOR MARCH 20.6 CRJ
Doc D Details Bank Sundry Details of sundry
Transfer 20 Salary 14 000.48 14 000.48 Salary
Transfer 22 R. Jackson 300.75 300.75 Rent
Rec 100 23 B. Beki 250.00 250.00 Commission
14 551.23 14 551.23
CASH PAYMENTS JOURNAL FOR MARCH 20.6 CPJ

Doc D Details Bank Sundry Details of sundry
ATM 2 Cash 1 000.00 1 000.00 Sundry expenses
C423 14 Mnet 120.00 120.00 TV fees
C424 16 City Treasurer 2 500.00 2 500.00 Rates and taxes
Internet 20 Telmok 555.66 555.66 Telephone
C425 22 Wakefields 6 578.99 6 578.99 Rent
B/S 23 Firstbank Group 42.45 42.45 Interest on o/draft
B/S Mchoice 579.00 579.00 Subscriptions
B/S QW Medical Aid 789.00 789.00 Medical aid
B/S Old Mutual 1 210.00 1 210.00 Insurance
B/S Firstbank Group 49.69 49.69 Bank charges
13 424.79 13 424.79
3.9.5 Report back to the class and share your ideas.

Note to Teacher:
Allow learners time to share their ideas and explore their own opinion.
Ensure that they justify their opinion and ideas with sound, logical reasoning.
Suggestion: Allow students who are struggling with this concept to draw their own diagram using
drawings, pictures from magazines or the internet to demonstrate this concept.
Suggestion: Groups can work on a poster to show in picture format the journey of a cheque or a
dishonoured cheque or a credit card purchase and pin them up on your classroom wall.
TASK 3.10  Sarah: Discussion on ethics

Learners are to discuss and give their own opinions.
Suggestions:
•Do you agree with Sarah?
It is unethical and unlawful to issue cheques when you do not have the money in the account.
•Why?
You will give yourself a bad name and could end up been blacklisted. This could have a negative result next
time you apply for credit.
•Explain to her what the consequences are of her approach to writing out cheques when she
does not have the money in the account.
Even if people owe you money, it is not an excuse to write out cheques without having the money in the
account.
•Share your feelings with the person sitting next to you.

The bank levies heavy bank charges on all R/D cheques.

TASK 3.11 Khan Stores: Bank Reconciliation
3.11.2
KHAN STORES
CASH RECEIPTS JOURNAL FOR MAY 20.8 CRJ
Debtors control Sundry accounts
Doc. Cost of
D Details Fol Bank Sales Discount
No. sales Receipts Amount Fol Details
allowed
31 Totals b/f 2 937 2 101 1 401 836 44
B/S Glow Flora 875 875 Rent income
3 812 2 101 1 401 836 44 875
B
CASH PAYMENTS JOURNAL FOR MAY 20.8 CPJ
Creditors control Sundry accounts
Station- Creditors Trading
Doc. No. D Details Fol Bank Discount
ery for wages Payments stock Amount Fol Details
received
31 Totals b/f 6 019 207 2 000 496 18 2 025 1 291
B/S J. Sewak (r/d) 416 416 Debtors control
B/S QuikBank 454 167 Bank Charges
287 Interest on o/d
B/S Olive Insurers 750 650 Insurance
100 Drawings
B/S J. Khan 1 500 1 500 Drawings
9 139 207 2 000 496 18 2 025 4 411
B
3.11.3 GENERAL LEDGER OF KHAN STORES
BALANCE SHEET ACCOUNTS SECTION
Dr BANK B Cr
20.8 20.8
May 31 Total Receipts CRJ 3 812 May 1 Balance b/d 930
Balance c/d 6 257 31 Total Payments CPJ 9 139
10 069 10 069
June 1 Balance b/d 6 257

3.11.4 BANK RECONCILIATION STATEMENT AS AT 31 MAY 20.8
Debit Credit
Balance as per bank statement 5 506
Outstanding deposit 530
Outstanding cheques: No. 753 499
No. 755 782
Balance as per bank account 6 257
6 787 6 787
Note to Teachers:
The one column method can also be used.
3.11.4 BANK RECONCILIATION STATEMENT AS AT 31 MAY 20.8

Balance as per bank statement (5 506)
Outstanding cheques: No. 753 (499)
No. 755 (782)
TASK 3.12 Tripco: Bank Reconciliation

3.12.2 CASH RECEIPTS JOURNAL OF TRIPCO FOR FEBRUARY 20.8 CRJ
Doc. Cost of
D Details Fol Bank Sales Discount
No. sales Receipts Amount Fol Details
allowed
28 Totals b/f 37 460 33 500 25 125 1 960 40 2 000
B/S ZipBank 300 300 Interest income
B/S B. Bugbear 2 100 2 100 -
B/S N. Fellow 420 420 Bad debts recovered
B/S Municipality 670 670 Water & electricity
40 950 33 500 25 125 4 060 40 3 390
B

CASH PAYMENTS JOURNAL FOR FEBRUARY 20.8 CPJ
Creditors control Sundry accounts
Consuma- Trading
Doc. No. D Details Fol Bank Discount
ble stores stock Payments Amount Fol Details
received
28 Totals b/f 22 980 1 230 13 360 1 900 190 6 490
B/S H. Flier (r/d) 1 960 1 960 Debtors control
B/S ZipBank 819 503 Bank charges
316 Interest on o/d
B/S Cash Co. Ltd. 2 960 2 960 Loan: Cash Co. Ltd.
B/S Rob Morse 2 500 2 500 Salary
31 219 1 230 1 900 190 13 360 14 729
B
3.12.3 GENERAL LEDGER OF TRIPCO

Dr BANK B Cr
20.8 20.8
Feb 28 Sundry accounts CRJ 40 950 Feb 1 Balance b/d 3 780
28 Sundry accounts CPJ 31 219
Balance c/d 5 951
40 950 40 950
Mar 1 Balance b/d 5 951
3.12.4 BANK RECONCILIATION STATEMENT AS AT 28 FEBRUARY 20.8

(or make use of the 1 column method)
Debit Credit
Outstanding deposit 6 800
Outstanding cheques: No. 095 3 950
No. 096 5 990
No. 097 550
16 441 16 441
Note: Cheque no. 087 was outstanding in the previous month, i.e. January. This cheque has been presented for payment in the current period, i.e. February. The
cheque will not be recorded – it will be ticked off in the January Bank Reconciliation Statement.

TASK 3.13  Bank Reconciliation
Bank Reconciliation
Cash Journal
No. Item Statement
CRJ CPJ DEBIT CREDIT
1. Bank charges as per B/S. X
2. Cheques not yet presented for payment. X
3. R/D cheques. X
4. Interest on overdraft. X
5. Rent deposited into banking account by tenant. X
Direct payment made by debtor into banking X
6.
account of the business.
7. Interest earned on current banking account. X
8. Debit orders as reflected in the B/S. X
9. Deposit not yet credited by the bank. X
10. Credit card levies as reflected in the B/S. X
TASK 3.14  Ben: Internal control

No. Problem Solution
Try to employ somebody else or do the job yourself to
1. Mary is responsible for too many jobs.
ensure division of duties.
Mary receives the cash and banks the
2. Try to get somebody else to check Mary. ROTATE
money.
Receipts must always be completed to act as proof that
3. Mary does not always complete a receipt.
the transaction has taken place.
Either Mary must deposit the cash daily or somebody
4. Mary does not deposit cash regularly.
else must assist her.
There are large outstanding deposits at All deposits must be made before the bank
5.
the end of the month. reconciliation is completed at the end of the month.
Somebody else must complete the bank reconciliation
6. Mary is drawing up the bank reconciliation.
process. division of duties

TASK 3.15  Scoop Dealers: Bank Reconciliation
3.15.1 SCOOP DEALERS
Doc. Cost of
D Details Fol Bank Discount Sales
No. Receipts sales Amount Fol Details
allowed
31 Totals b/f 7 801* 2 409 120 3 988 2 650 1 404
B/S H. Appleton 1 300 1 300 -
B/S Mr Doodle 2 500 2 500 Rent income
11 601 3 709 120 3 988 2 650 3 904
B
• 2 409 + 3 988 + 1 404

Trad- Creditors control Sundry accounts
Doc. Debtors
D Details Fol Bank ing Discount F
No. Payments control Amount Details
stock received ol
Totals b/f 9 375* 4 444 1 908 110 1 345 1 678
3
B/S 1 FirstBank 259 181 Bank charges
78 Interest on o/d
191 QR Stores 1 250 1 250 -
C. Springer
B/S (r/d cheq) 451 451
B/S Multisat 350 350 Drawings
Allsure Insur-
B/S ers 450 450 Insurance
12 135 4 444 3 158 110 1 796 2 737
B
*4 444 + 1 908 + 1 345 + 1 678

3.15.2 GENERAL LEDGER OF SCOOP DEALERS
Dr BANK B Cr
20.9 20.9 L+
Mar 31 Total Receipts CRJ 11 601 Mar 1 Balance b/d 250
Balance c/d 784 31 Total Payments CPJ 12 135
12 385 12 385
April 1 Balance b/d 784
L+
3.15.3 BANK RECONCILIATION STATEMENT AT 31 MARCH 20.9

Debit Credit
CREDIT Balance as per bank statement 3 156
CREDIT Outstanding deposit 800
DEBIT Outstanding cheques: No. 191 1 250
No. 201 280
No. 220 2 450
No. 223 760
CREDIT Balance as per bank account 784
4 740 4 740
3.15. All businesses should prepare bank reconciliation statements regularly. Provide two rea-
4 sons for this.
• Confirms the accuracy of all transactions recorded in the cash journals and the balance in the bank account.
• Keeps track of outstanding cheques, deposits, r/d cheques, bank charges, debit orders, etc.
• Identifies errors/omissions in the cash journals.
• Identifies errors/omissions in the bank statement.
TASK 3.16 Completion of table: Cash journals

Provisional totals
Bank charges
(amounts re-
R/d cheques
Debit orders
(before receipt of
Interest on
Final totals
Electronic
the bank state-

overdraft
transfers
No. ment)
ceived)
CRJ CPJ CRJ CPJ
1. 500 230 50 120 0 12 0 620 292

2. 1 444 1 983 234 896 220 54 72 2 340 2 563
3. 7 320 3 337 1 389 455 1 444 68 0 7 775 6 238
4. 6 528 7 002 612 0 989 119 345 6 528 9 067
5. 1 535 4 650 2 000 1 652 350 130 386 3 187 7 516
TASK 3.17 Bank Reconciliation

3.17.1
Balance as per Bank Balance as per Bank
No. account (indicate if Outstanding deposit Outstanding cheque Statement (indicate
debit or credit) if debit or credit)
1. 2 000 Dr 3 450 2 450 1 000 Cr
2. 520 Cr 150 0 670 Dr
3. 15 Cr 98 89 24 Dr
4. 5 612 Dr 12 277 2 344 4 321 Dr
5. 909 Dr 1 245 444 108 Cr

3.17.2 BANK RECONCILIATION STATEMENT
Debit Credit
Balance as per bank account 520
Outstanding cheques 0
Balance as per bank statement 670
670 670
Skill check!
• If learners have not mastered this skill encourage them to prepare the Bank Reconciliation
Statement for numbers 3 and 5.
3. BANK RECONCILIATION STATEMENT

Debit Credit
113 113
5. BANK RECONCILIATION STATEMENT

Debit Credit
1 353 1 353
Note to Teacher:
Learners need to understand the difference between receiving a post-dated cheque and paying a post-dated
cheque. When a post-dated cheque is received, it cannot be deposited until the due date. This causes a
problem as the cheque can be lost or mislaid if it is not put in a safe place and that you remember to deposit
it on the date of the cheque.
When a business issues a post-dated cheque, they regard it as if the amount has already been taken out of
the bank and therefore it is recorded in the Cash Payments Journal immediately. The date written on the
cheque is not relevant.
TASK 3.18  Ntuli Traders: Bank Reconciliation

3.18.1 NTULI TRADERS
CASH RECEIPTS JOURNAL FOR OCTOBER 20.9 CRJ
Doc. Sundry accounts
D Details Fol Bank
no. Amount Fol Details
31 Totals b/f 12 300 12 300
B/S M. Milligan 2 500 2 500 Rent income
14 800 14 800
B
NOTE:
The cheque for R800 received from H. Reubens is not recorded as the cheque is post-dated.

CASH PAYMENTS JOURNAL FOR OCTOBER 20.9 CPJ
D Details Fol Bank
31 Totals b/f 8 425 8 425
B/S Credit Bank 240 240 Bank charges
B/S 135 135 Interest on overdraft
B/S Midas Insurance Co. 3 100 2 100 Insurance
1 000 Drawings
B/S M. Fysh (r/d) 390 390 Debtors control
51 Care Hugo & Co. 1 230 1 230 Creditors control
13 520 13 520
B
NOTE:
Even though cheque no. 51 is post-dated, it must be entered in the CPJ and treated as outstanding in the
Bank Reconciliation Statement.
3.18.2 GENERAL LEDGER OF NTULI TRADERS

Dr BANK B Cr
20.9 20.9
Oct 31 Total Receipts CRJ 14 800 Oct 1 Balance b/d 1 700
Balance c/d 420 31 Total Payments CPJ 13 520
15 220 15 220
Nov 1 Balance b/d 420
3.18.3 BANK RECONCILIATION STATEMENT AT 31 OCTOBER 20.9

Debit Credit +
Debit Balance as per bank statement 1 620
Credit Outstanding deposit 4 600
Debit Outstanding cheques: No. 34 1 870
No. 45 300
No. 51 1 230
Credit Balance as per bank account 420
5 020 5 020
TASK 3.19 Ciara Stores: Bank Reconciliation

3.19.1 Refer to no. 1. Is this balance required for reconciliation purposes? Explain why.
No.
This is the opening balance for March brought forward from the previous month’s (February) bank statement.
This balance would have been used for reconciliation in February.
3.19.2 Refer to no. 5. Who made this error? Explain how this error is corrected.
The error was made by the bank.
The error is corrected in the Bank Reconciliation Statement.
The bank would have credited Ciara Stores with the deposit IN ERROR.
A debit entry is, therefore, needed to correct the error. In B REC DR INCORRECT CREDIT ENTRY
3.19.3 Why is it necessary to process an entry for no. 5? Why can one not just keep quiet about
it? Discuss.
Firstly you would not have a credit entry or account for this amount – unless a fictitious one was made.
This is unethical.
Allow the learners to discuss this answer – guide them on the ethics and the right and wrong in this situation.

3.19.4 Refer to no’s. 6, 7 and 8. Suggest a system which Ciara Stores can implement to prevent
a recurrence (repetition) of such errors.
No. 6 and 7:
Cheque stubs should be filled in correctly and completely.
A check with the invoice/statement/order can be made to verify the payment.
Before casting the journal a check should be made of all payments, preferably by another person in the busi-
ness.
No. 8:
Details on cheques should be carefully scrutinised.
The cashier or the person responsible for collections should check the following:
- The cheque must be completely filled.
- Amounts in words and figures agree.
- No alterations appear.
- The date is correctly filled in – a post-dated cheque should be kept away in a safe place and only deposited
on the date stipulated on the cheque.
- Post-dated cheque payments need to be pre-authorised by the owner or a senior person in the business.
- Any other suitable answer.
3.19.5 Errors 6, 7 and 8

Effect on bank
No
No. Journal Account debit Account credit Amount balance
entry
+ - 0
6. CPJ Trading stock Bank R99 -
7. CRJ Bank Consumables R900 +
8. X
Note to Teacher:
Error no. 8:
The error was discovered immediately by the teller. He/she did not process the deposit. The deposit has
however been recorded in the CRJ. This deposit will have to be deleted and the figures adjusted accordingly.
3.19.6 BANK RECONCILIATION STATEMENT ON 31 MARCH 20.2

Debit Credit
Outstanding cheques 4 561
Amount wrongly credited 1 996
24 590 24 590
3.19.7 Show how the bank balance of R18 033 was arrived at.
Opening bank balance 17 232
Amount understated [99]
Amount overstated 900
Bank balance 18 033

TASK 3.20  Amelia Retailers: Bank Reconciliation
3.20.1 CASH RECEIPTS JOURNAL OF AMELIA RETAILERS FOR AUGUST 20.3 CRJ
D Details Fol Bank
31 Totals b/f 14 110 14 110
337 LifeLine Centre (stale) 500 500 Donation
B/S Khumalo Development 1 500 1 500 Rent income
921 Avery Stats (overstated) 540 540 Stationery
16 650 16 650
B
CASH PAYMENTS JOURNAL FOR AUGUST 20.3 CPJ

D Details Fol Bank
31 Totals b/f 13 610 13 610
930 LifeLine Centre 1 000 1 000 Donation
B/S Fedbank 550 370 Bank charges
180 Interest on o/d
B/S SureFed Brokers 1 780 1 780 Insurance
B/S Upton CC (r/d) 340 340 Debtors control
B/S Mr Suttler (r/d) 3 190 3 190 Debtors control
925 Ayanda’s Bazaar (understated) 270 270 Trading stock
20 740 20 740
B
3.20.2 GENERAL LEDGER OF AMELIA RETAILERS

Dr BANK B Cr
20.3 20.3
Aug 1 Balance b/d 8 910 Aug 31 Sundry accounts CPJ 20 740
31 Sundry accounts CRJ 16 650 Balance c/d 4 820
25 560 25 560
Sep 1 Balance b/d 4 820
3.20.3 BANK RECONCILIATION STATEMENT AT 31 AUGUST 20.3

Debit Credit
No. 935 2 220
8 040 8 040
3.20.4 Explain the significance of a bank reconciliation statement.

• It confirms the accuracy of all transactions recorded in the cash journals and the balance in the bank
account.
• It also keeps track of outstanding cheques, deposits, r/d cheques, bank charges.
• The reconciliation procedure also enables the trader to identify errors/omissions in the cash journals and
errors/omissions in the bank statement.

3.20.5 Refer to No. 6 below. How would you treat cheque no. 935 at the end of the financial
year? Supply reason(s).
The amount has not yet been deducted from Amelia’s current banking account.
This means that the account has not yet been paid.
On the Balance Sheet date, all post-dated cheques are reversed:
Add to Bank; Add to Creditors control.
TASK 3.21  Cosmos Stores: Bank Reconciliation

3.21.1 3.21.2
CRJ CPJ
54 210 49 210
529 254
2 900 788
2 500 4 562
500 327
1 344
3 500
60 639 59 985
3.21.3 GENERAL LEDGER OF COSMOS STORES

Dr BANK B Cr
20.8 20.8
Oct 31 Sundry accounts CRJ 60 639 Oct 1 Balance[1] b/d 8 924
Balance c/d 8 270 31 Sundry accounts CPJ 59 985
68 909 68 909
Nov 1 Balance b/d 8 270
[1]
14 320 + 500 + 1 548 + 996 – 8 440
3.21.4 BANK RECONCILIATION STATEMENT AT 31 OCTOBER 20.8

Debit Credit
No. 236 1 999
No. 248 3 500
10 831 10 831
TASK 3.22  Tyron Traders: Bank Reconciliation

3.22.1 TYRON TRADERS
CASH RECEIPTS JOURNAL FOR SEPTEMBER 20.4 CRJ
D Details Fol Bank
30 Totals b/f 33 220 33 220
512 TT Tennis Club (cancelled) 150 150 Donation
767 Arrow Adverts (overstated) 270 270 Advertising
B/S EBSE Bank 10 200 10 000 Fixed deposit
200 Interest income
43 840 43 840
B

CASH PAYMENTS JOURNAL FOR SEPTEMBER 20.4 CPJ
D Details Fol Bank
30 Totals b/f 40 921 40 921
B/S ConBank 608 175 Interest on o/d
433 Bank charges
781 Mike Motors (understated) 18 18 Repairs
B/S Z. Shezi (r/d cheque) 310 310 Debtors control
B/S D. Side (r/d cheque) 545 545 Debtors control
B/S ID Insurance Brokers 755 510 Insurance
245 Drawings
43 157 43 157
B
3.22.2 GENERAL LEDGER OF TYRON TRADERS

Dr BANK B Cr
20.4 20.4
Sep 30 Sundry accounts CRJ 43 840 Sep 1 Balance[1] b/d 1 178
Balance c/d 495 30 Sundry accounts CPJ 43 157
44 335 44 335
Oct 1 Balance b/d 495
[1`]
150 + 2 700 + 630 – 962 – 1 340
3.22.3 BANK RECONCILIATION STATEMENT AT 30 SEPTEMBER 20.4

Debit Credit
Credit Balance as per bank statement 5 465
Credit Outstanding deposit 900
Debit Outstanding cheques: No. 766 2 700
No. 786 1 360
No. 802 2 800
Credit Balance as per bank account 495
6 860 6 860
TASK 3.23  True or False

No. True/False Reason
1. True
2. False Negative bank balance is on the Dr side of the bank statement.
3. False Concept of materiality stipulates that interest on overdraft must be kept sepa-
rate from bank charges.
4. False Bank only transfers money as and when it is needed.
5. False A cheque is only cancelled when it is 6 months old.
6. True
7. False The entry must be made on the Dr side to reduce the bank balance.
8. False The bank will not hold post-dated cheques. These will be dishonoured and
returned to the accountholder.
9. True
10. True

TASK 3.24 Sokhela Enterprises: Bank Reconciliation; Analy-
sis
3.24.1
Bank account Bank Reconciliation Statement
No entry
No. Debit Credit Debit Credit
E.g. (a) 1 000
E.g. (b) 1 240
1. 3 579
2. 345
3. 196
4. 1 190
5. 219
6. 29
7. 323
8. X
9. 3 422
10. 830 1 660 1 660
11. 9
3.24.2 Calculate the bank balance on 31 May 20.8.

[1 240 + 219 + 323 + 830] – [1 000 + 345 + 196 + 29 + 3 422 + 1 660 + 9]
2 612 – 6 661 = (R4 049) (credit – unfavourable)
Alternate:
3 579 + 1 660 – 1 190 = (R4 049) (credit – unfavourable)
3.24.3 BANK RECONCILIATION STATEMENT AT 31 MAY 20.8

Debit Credit
Outstanding cheque (No. 154) 1 660
5 239 5 239
TASK 3.25 Article on FICA

3.25.1 What do you understand by the term ‘money laundering’?
Money generated by criminal activities.
3.25.2 Why do you think it was necessary to introduce these regulations?

To prevent criminal activities such as money laundering.
3.25.3 What evidence do the banks require their clients to produce when opening an account
or confirming their identity on existing accounts?
Personal particulars: identity document; utility bill to serve as proof of residence.
3.25.4 Why is this a problem to people living in informal settlements?

They cannot easily be contacted telephonically or by mail.

3.25.5 What implications have these regulations had for the banking world in order to comply
with the regulations?
FICA aims to bring international standards for combating money laundering and other unlawful activities.
3.25.6 What is going to happen to the bank accounts of clients who have not been verified?
Banks may freeze accounts.
TASK 3.26  Ethics and Internal control

3.26.1 The balance on the bank statement at the end of each month is always greater than
R50 000.
Problem:
The bank balance should not be so high on a consistent basis – this means that the business is losing out on
the potential earning of interest.
Solution:
Arrange with the bank for, say, R40 000 to be invested in a daily call account which can be utilised at one
day’s notice in the event of an emergency.
This will generate further interest income.
3.26.2 The bookkeeper, I.M. Idle, has not prepared a Bank Reconciliation Statement for the
past two months. She says she has been too busy.
Problem:
The preparation of a bank reconciliation statement is an important part of the work of a bookkeeper as it
ensures that the figures in the books are correct, and it aids internal control.
Solution:
Speak to the bookkeeper and get her to acknowledge how important this Task is.
Warn her that she faces dismissal if she does not carry out this duty.
3.26.3 You notice that the bank statement reflects a dishonoured cheque of R5 500. This is in
respect of a cash customer who paid by cheque for goods bought on a sale. This cus-
tomer cannot be contacted. He has provided a false phone number on the back of the
cheque.
Problem:
The sales assistant should not have accepted a cheque for a large amount such as this.
Cheques should not be accepted from unknown customers.
Solution:
Institute a policy in the business which precludes sales assistants from accepting cheques.
Get assistance from the bank in tracing this customer, and refer it to the police if necessary (this is a fraud
case).
3.26.4 The bank statement reflects a deposit of R10 000 made into the account of Bestbuy
Stationers. You have no knowledge of the person who has deposited this amount.
Problem:
This money might not belong to Bestbuy Stationers.
This money must not be used until the source is checked as it will have to be repaid if an error is detected in
future.
Solution:
Contact the bank – ask them to check the source and report back to Bestbuy Stationers.
3.26.5 A cheque was made out to a creditor, R. Dummer, for R5 000 six months ago. This
cheque has never been recorded in any bank statement for the past six months.
Problem:
It appears that R. Dummer has never received this cheque or he has lost it and has forgotten about the amount
Bestbuy Stationers owed him.
Solution:
Contact R. Dummer – offer to cancel the cheque and issue him with a new one as the old cheque is stale.

3.26.6 The cashier, I. Steele, is responsible for filling out the deposit slips every month. At the
end of each month, you notice that there are always large outstanding deposits exceed-
ing R15 000 appearing in the Bank Reconciliation Statement, even though some of
these amounts were received a few days before date on the bank statement.
Problem:
It appears that I. Steele is deliberately understating the deposits each month.
It appears that she has taken a large amount of money for her own use and replaces this each month with
new funds received near the end of each month (this is called ‘rolling’ of cash – this is fraud).
Solution:
Near the end of the month, allocate a senior person or the auditor to check I. Steele’s process of depositing
cash.
It will probably be noticed that she will be short of cash to account for all receipts issued to date.
Disciplinary action should follow – she has the right to a fair hearing.
If fraud has occurred, a criminal charge should be laid at the police station. She could face dismissal.
3.26.7 The bank statement reflects a direct transfer to TV Supplies for R12 000. On further
investigation, you find that these were for assets ordered by a senior manager, B.A.
Crooke.
Problem:
This could be an unauthorised payment.
Solution:
Check who authorised the payment, check that the asset is recorded in the fixed assets register, and check
that the asset is physically on the property.
If fraud is detected, B.A. Crooke should be placed through a disciplinary hearing and he should be charged
with fraud. He could face dismissal.
3.26.8 A customer, Ivor Kwerry, asks why his payment last week for R1 000 was not deducted
from the balance on his latest account. He produces receipt number 10245 to prove his
payment. You investigate and you find that all the receipt numbers for the past month
have been numbered in the sequence 367 to 488.
Problem:
It appears that I. Kwerry has been issued with a false receipt, and that someone in the business has pocketed
the cash.
Solution:
Ask I. Kwerry to identify the person to whom he paid the cash.
If fraud is suspected, the employee should be placed through a disciplinary hearing and charged with fraud.
The employee faces dismissal.
As a gesture of goodwill, Kwerry’s account should be adjusted so that he is not disadvantaged.
3.26.9 A stop-order for R6 000 in favour of Nastee Rentals appears in the bank statements 13
times over the last 12 months. The business rents its property from Nastee Rentals.
Problem:
It appears Nastee Rentals has processed an additional stop-order incorrectly.
Solution:
Ask them for a refund.
If they fail to do this, then instruct the bank not to honour the next payment to Nastee Rentals.
3.26.10 The bank charges on the bank statements for 20.5 were R4 100. For 20.6 the total
was R8 400.
Problem:
It appears that bank charges might be increasing unreasonably.
Solution:
Make an appointment to see the bank manager.
Query the calculation of the charges with the bank.
If the rates have been increased by the bank, the business has the right to choose another bank.

CREDITORS RECONCILIATION

Learners will have been exposed to completing Creditors Control accounts in Grade 10, as well as, posting to
the Creditors Ledger. Similar to Bank Reconciliations, as part of internal control, it is essential that businesses
control these accounts to ensure that they pay the correct amounts to the correct creditors. It is customary
for the creditors to send out statements once a month. The onus is then on the business to check their records
against those on the statement. If there are differences, these will have to be investigated and the appropriate
corrections made.
Therefore the principle of the Creditors Reconciliation is very similar to that of the Bank, and this is one of the
reasons why this section has now been included into Grade 11 (it was in Grade 12 under the NCS). However,
you are urged to discuss internal control at each step with the learners as you work through these Tasks.
TASK 3.27  Mary Dealers: Revision on Creditors control

3.27.1 GENERAL LEDGER OF MARY DEALERS
Dr CREDITORS CONTROL B Cr
20.4 20.4
Sep 30 Bank CPJ 70 992 Sep 1 Balance b/d 82 345
Discount received CPJ 3 214 30 Bank (R/D) CRJ 2 450
Sundry accounts CAJ 5 766 Sundry accounts CJ 35 479
Balance c/d 41 270 Sundry accounts GJ 968
[920 + 18 + 30]
121 242 121 242
Oct 1 Balance b/d 41 270
3.27.2 Answer the following questions:

(a) What type of account is Creditors Control? Why?
Liability.
We (the business) owe them money.
(b) Discuss two methods that the bookkeeper could use to check the accuracy of the
information.
1. Check that the balance on the Creditors Control account agrees with the total on the Creditors List.
2. Check the business’s records with the statements received from the supplier.
TASK 3.28  Revision on theory relating to creditors

NO. LETTER
1. E
2. A
3. C
4. B
5. F
6. D

CREDITORS RECONCILIATION STATEMENT

It is important for the learners to understand the concept that while I buy from my creditor and therefore owe
him money, he also keeps records of what I owe him. However, in his books I am a debtor.
It will be a good idea, at this stage to role-play this concept. Have 2 learners, one the buyer and one the
seller and let them make the respective entries for transactions that take place. In this way you can demon-
strate the role of one being the Debtor and the other the Creditor.
TASK 3.29  Berg Traders: Creditors Reconciliation

Note:
Before undertaking this Task, the Teacher should ask learners to identify and describe the entries that are on
the statement and in the ledger account. The Teacher should ensure that learners understand the ‘mirror
image’ of the one in relation to the other.
3.29.1 GENERAL JOURNAL OF BERG TRADERS FOR JUNE 20.8 GJ

Debtors con- Creditors con-
No. D Details Fol Debit Credit trol trol
Debit Credit Debit Credit
30 Trading stock 1 800
Acme Manufacturers 1 800 1 800
Correction of invoice no. 2460
Trading stock 250
Acme Manufacturers 250 250
Correction of debit note no. 35
CORRECT BALANCE IN THE CREDITORS LEDGER ON 30 JUNE 20.8

Balance as per Creditors Ledger R9 225
Invoice no. 2 460 [5 300 – 3 500] 1 800
Credit note no. 126 [750 – 500] 250
Correct balance as per ledger account R11 275
3.29.2 CREDITORS RECONCILIATION AS AT 30 JUNE 20.8

Balance as per Acme statement R17 075
Discount not reflected on 7 June (300)
Payment not reflected on 27 June (5 000)
Discount not reflected on 27 June (500)
Balance as per ledger account R11 275
TASK 3.30 Village Mall Retailers: Creditors Reconciliation

Note:
Before undertaking this Task, the Teacher should ask learners to identify and describe the entries that are on
the statement and in the ledger account. The Teacher should ensure that learners understand the ‘mirror
image’ of the one in relation to the other.

3.30.1 GENERAL JOURNAL OF VILLAGE MALL RETAILERS FOR AUGUST 20.9 GJ
Debtors con- Creditors con-
No. D Details Fol Debit Credit trol trol
31 Umgeni Shoes 500 500
Discount received 500
Discount not entered on 31 July
Discount received 1 100
Umgeni Stores 1 100 1 100
Correction of discount on 12 Aug.
Umgeni Shoes 1 800 1 800
Trading stock 1 800
Correction of Invoice no. 458
Trading stock 410
Umgeni Shoes 410 410
Delivery charges not entered
Umgeni Shoes 9 800 9 800
Tugela Manufacturers 9 800 9 800
Correction of Invoice no. 24338
CORRECT BALANCE IN THE CREDITORS LEDGER ON 31 AUGUST 20.9

Discount on 30 June (500)
Correction of discount on 12 August 1 100
Invoice no. 458 (1 800)
Delivery charges 410
Invoice no. 24338 (9 800)
Correct balance as per ledger account R15 440
3.30.2 CREDITORS RECONCILIATION AS AT 31 AUGUST 20.9

Balance as per statement of Umgeni Shoes R20 540
Correction of C/N no. 432 360
Invoice no.477 wrongly reflected ( 2 560)
Invoice no. 562 not on statement 5 900
Cheque no. 34622 not on statement (8 000)
Discount not on statement (800)
TASK 3.31 W & D Dealers: Creditors Reconciliation

3.31.2 CREDITORS RECONCILIATION STATEMENT ON 31 MAY 20.2
Dr Cr
Dr balance as per statement of account 3 675
Cr discount not recorded on 4th May 275
Cr error on Statement (Invoice no. 1182) 500
Dr Invoice no. 1296 not recorded on statement 600
Cr payment not yet recorded (Cheque no. 1335) 2 900
Cr balance as per Creditors Ledger 600
4 275 4 275

OR
Dr balance as per statement of account 3 675
Cr discount not recorded on 4th May (275)
Cr error on Statement (Invoice No. 1182) (500)
Dr Invoice no. 1296 not recorded on statement 600
Cr payment not yet recorded (Cheque no. 1335) (2 900)
Cr balance as per Creditors Ledger 600
TASK 3.32 Noni: Creditors Reconciliation

RECONCILATION BETWEEN THE CREDITORS LEDGER AND THE STATEMENT OF ACCOUNT
CREDITORS STATEMENT OF
DETAILS
LEDGER ACCOUNT
Balance 30 710 31 440
Trade discount (1 560)
Discount allowed (150)
Debit note no. 56 (2 400)
Invoice no. 48 (2 600)
Outstanding cheque (4 400)
Outstanding discount (440)
Outstanding invoice 2 900
CORRECT BALANCE 26 750 26 750
TASK 3.33 Geoff Hadebe: Scenarios

Scenario 1:
3.33.1 Identify the problem area/s in this business.
His debtors take 30 days to pay him while he is paying cash for his stocks – this may be putting a strain on
working capital.
It is possible that working capital is not properly managed.
Any other appropriate answer.
3.33.2 Suggest ways in which the liquidity situation can be improved.

Encourage debtors to pay back sooner – offer discounts or any other incentives.
Negotiate credit facilities with suppliers.
Any other appropriate answer.
Scenario 2:
3.33.3 What are the implications of the actions of the clerk and cashier? Also indicate why the
books will not be in balance.
They are stealing money from the business – this could result in a loss of profits.
Payments to creditors are reflected incorrectly in the Creditors Ledger as the discount is not shown.
Cheque payments are not matched with total payments in the CPJ.
3.33.4 What control measures can you put in place to rectify this situation?
Verify cheques with the amounts shown on the statement and the ledger.
Get a third person to check entries in the CPJ and posting from the CPJ.
3.33.5 What action do you intend taking against the clerk and the cashier?
Lay criminal charges against them.
Reprimand them.
Dismiss them (provided all legal requirements have been met).

TASK 3.34 Umkhele Uniforms: Ethics & internal control re-
lating to purchases and creditors
3.34.1 This is an internal control matter. He should make best use of his cash resources by taking advantage
of the credit terms offered. It will take time for the stock to be sold, and his suppliers are aware of
that. If he pays them too early he will experience cash flow problems.
3.34.2 This is unethical. Harry should be made aware of this. Jennifer will earn the business a poor repu-
tation, which will not be good for his business in the long run.
3.34.3 This is unethical. Harry’s business relies on the support of the community. He should not cause
them to travel far distances to get their uniforms. The primary school children will eventually be in
a high school. It makes good business sense for him to encourage their parents to support his
business even if it does not make him much profit at this stage.
3.34.4 This reflects poor internal control. Harry is being naïve to think that Jennifer is doing this job properly.
Although errors can be made in the counting of stock, which could lead to a big shortage in one
month and a surplus in the next, it is unlikely that surpluses will occur regularly. Harry should
supervise the stock count and he should rotate his staff on this task to ensure that there is no
opportunity for fraud.
3.34.5 This is unethical of Harry. The supplier is doing the right thing by passing on the saving to the
retailer. However, they would expect that this saving be passed on to the customer as well. When
information on the cost reductions reaches the public, Harry will get a poor reputation for not placing
the interests of his customers first, which will affect the sustainability of his business.
3.34.6 This is unethical and may be considered as a bribe. Harry should support the suppliers who have
helped him grow his business over the past decade. Harry has no idea at this stage what Bennie’s
prices will be (they might well be more than 20% higher than the prices of his existing suppliers),
and the quality of Bennie’s stock is still to be verified. He could stock a limited supply of Bennie’s
uniforms to assess if the public approves. However, he must realise that he should not discard
suppliers who have supported him for a very long time.
3.34.7 This reflects poor internal control. There is opportunity for Jennifer to commit fraud without anyone
detecting this, as she handles all aspects of the buying, receiving and paying for stock. One obvious
example is that she could order stock that is not necessary and take this home. Harry’s business
would then be paying for stock that was never sold. In view of Jennifer’s financial difficulties, it does
not make sense to rely on her honesty.

CHECKLIST
Requires
Yes – profi-
Skills more atten- Complete
cient
tion
Updating of cash journals.
Posting to the Bank account.
Preparation of a Bank Reconciliation Statement.
Identify and explain why some entries do not appear in the
Bank statement.
Identify and explain why some entries do not appear in the
Cash receipts and cash payments journals.
Process entries for post-dated cheques received and issued.
Process a bank reconciliation statement taking last month’s
bank reconciliation into consideration.
Process entries for stale cheques.
Correct errors in the business’ books.
Correct errors made by the bank on the bank statement.
Appreciate the need for completing a bank reconciliation
statement.
The impact of internet on the banking world.
Completion of general journal entries to record errors or items
left out of the Creditors Control.
Completion of the Creditors Reconciliation Statement.
Understand the need for internal control mechanisms in Cred-
itors control and Bank Reconciliation.
Identify unethical behaviour in relation to Creditors and bank-
ing.

MODULE 4
FIXED ASSETS
Depreciation was covered in Grade 10. However, as it is very important in Asset disposal we are going to
revise some of the concepts at the beginning. You are requested to choose what Tasks and to what degree
you think your class needs this revision, before moving to the disposal of the assets.
This Module, therefore, focuses on the sale of fixed assets. Learners are required to process the sale entries,
including pro-rata depreciation, making use of alternative methods of depreciation, by completing an Asset
disposal account in order to calculate the profit or loss on the sale of the asset. This is generally a section
that learners experience difficulties with. We have attempted to explain the method visually as well, in order
to help learners to understand the why and how. We suggest you take time working through Asset disposal
because, besides getting a question on its own, it often becomes an adjustment in financial statements.
Lastly, the Module will look at the recording of the fixed assets in the Balance Sheet. Again, this was covered
in Grade 10 but now learners have to incorporate the sale (disposal) of the asset. Confusion often appears in
the learners’ minds over the different figures, i.e. cost, book value and selling price. Take time to explain each
and reinforce that the disposal of the fixed asset is shown in the note to the Balance Sheet at book value.
This is because fixed assets are reported in a Balance Sheet at book value.
Of great importance in any discussion on Fixed Assets are the following 2 topics:
• Internal control mechanisms put into place to ensure adequate control of your assets.
• Ethical issues relating to fixed assets.
Tasks have been included on these 2 topics. Some are questions on their own, i.e. Task 4.24 and 4.25 but
the topics have also been integrated into the other tasks. You are urged to spend time discussing these two
very important topics throughout this Module and as far as possible to bring in relevant situations in your
particular context.
TASK 4.1 Super Shoes: Ethical considerations

There is no right or wrong answer to this question. The purpose is to allow the learners’ time to consider the
implications of motor vehicles on the profits of the business and also to debate the ethical issues that surround
management and labour, wages and perks. This is a very topical debate in the country and is apparent in the
number of strikes and wage disputes in which the barrier between management and labour is evident.
Suggested topics for discussion:
1. The cost of each vehicle, i.e. the Jeep costs a lot more than the Polo.
2. The maintenance and running costs of each vehicle.
3. The borrowing costs of each vehicle.
4. The status (image) that the business wants to create, e.g. the expensive car creates the impression
of a prosperous business.
5. Ethical issues around large amounts of money been spent on senior management versus the wages
paid to workers.
6. Any other feasible suggestion.
TASK 4.2  Testing prior knowledge

Use the following Task to ensure whether the learners have the basic knowledge regarding the double entries
for purchasing vehicles. Identify those learners who are experiencing barriers with this work and ensure that
they are given the necessary support; otherwise, they will experience even more difficulties with the rest of
the Module.

4.2.1 What is the double entry when a vehicle is bought on credit?
Dr Vehicles; Cr Creditors control
4.2.2 What is the effect on the Accounting equation when the vehicle is bought on credit?
Asset: +; Liabilities: +; Owners’ Equity: 0
4.2.3 What is the double entry when the creditor is paid for the vehicle?
Dr Creditors control, Cr Bank
4.2.4 What type of asset is vehicle? Why?

Fixed asset – it has a lifespan of more than one year.
4.2.5 Are the following statements true or false? Give a reason for your decision.
(a) Servicing of the vehicle is debited to the vehicles account.
False – Dr Vehicle expenses (expense).
(b) A CD player installed in the vehicle is debited to the vehicles account.

True – it is a fixture and adds value to the vehicle.
(c) Vehicles increase in value over the years.

False – generally they decrease although some vintage cars might increase.
DIFFERENT METHODS OF DEPRECIATON:

Take time to explain the impact of the 2 different types of depreciation.
Fixed instalment (Cost) method:

Simple to use and is in line with the SARS regulations. It, therefore, has tax benefits as a larger amount is
written off as depreciation, which increases costs and thus decreases profits. However, after a period of time
the asset will be written off and, thereafter, there is no more depreciation. Explain to the learners that it is
customary to reduce the asset to R1 and not R0.
The fixed cost method, however, is not realistic. Assets generally lose their greatest value at the outset and
then it diminishes. You are urged to refer to the SARS wear and tear allowances to indicate how SARS controls
the maximum amount that can be written off in a particular year.
Diminishing balance method:

This method results in a more realistic value of the asset. Generally, assets lose the greatest amount in the
early years. Under this method, the asset will also never get to a value of R0 – it can however become
fractions of a Rand but not R0.
Allow learners to debate which method is more suitable for a business but re-enforce to them the concept of
consistency, in that, once they have adopted a particular method they cannot change.
TASK 4.3  Revision: Fixed Instalment/cost method

Rate of de- Accumulated Carrying
Year Cost price Depreciation
preciation depreciation (book) value
28:02:20.4 65 000 15% on cost 4 875* 4 875 60 125
28:02:20.5 65 000 15% on cost 9 750 14 625 50 375
28:02:20.6 65 000 15% on cost 9 750 24 375 40 625
28:02:20.7 65 000 15% on cost 9 750 34 125 30 875
*Note: They only had the vehicle for 6 months.

TASK 4.4  Revision: Diminishing Balance method of depre-
ciation
Rate of de- Accumulated Carrying
Year Cost price Depreciation
preciation depreciation (book) value
28:02:20.2 220 000 20% 22 000* 22 000 198 000
28:02:20.3 220 000 20% 39 600 61 600 158 400
28:02:20.4 220 000 20% 31 680 93 280 126 720
28:02:20.5 220 000 20% 25 344 118 624 101 376
28:02:20.6 220 000 20% 20 275 138 899 81 101
*Note: The vehicle was only 6 months old.
TASK 4.5  Bumper Super Stores: Revision on recording de-

preciation
4.5.1 GENERAL LEDGER OF BUMPER SUPER STORES
Dr ACCUMULATED DEPRECIATION ON VEHICLES B7 Cr
20.7 20.6
Feb 28 Balance c/d 144 531 Mar 1 Balance b/d 109 375
20.7
Feb 28 Depreciation GJ 35 156
144 531 144 531
ACCUMULATED DEPRECIATION ON EQUIPMENT B8

20.7 20.6
20.7
66 000 66 000
NOMINAL ACCOUNTS SECTION

DEPRECIATION N19
20.7
Feb 28 Accumulated depreci-
ation on vehicles GJ1 35 156
Accumulated depreci-
ation on equipment GJ1 22 000
4.5.2 What effect does depreciation have on the Accounting equation?
Assets = Owner’s equity + Liabilities

-35 156 -35 156 0
-22 000 -22 000 0

TASK 4.6 LCT Logistics: Ledger accounts
4.6.1 Calculate the depreciation on vehicles and equipment.
Vehicles:
150 000 – 64 000 x 25% = R21 500
140 000 x 25% x 2/12 = R 5 833
21 500 + 5 833 = R27 333
Equipment:
80 000 x 20% = R16 000
15 800 x 20% for 11/12 = R 2 897
2 000 x 20% for 9/12 = R 300
16 000 + 2 897 + 300 = R19 197
4.6.2 GENERAL LEDGER OF LCT LOGISTICS

Dr VEHICLES B4 Cr
20.4 20.5
Mar 1 Balance b/d 150 000 Feb 28 Balance c/d 290 000
Dec 31 Creditors control CJ 140 000
290 000 290 000
20.5
EQUIPMENT B5
20.4 20.5
31 Bank CPJ 15 800
June 1 Creditors control CJ 2 000
97 800 97 800
20.5
ACCUMULATED DEPRECIATION ON VEHICLES B6

20.5 20.4
20.5
91 333 91 333
20.5

Dr ACCUMULATED DEPRECIATION ON EQUIPMENT B7 Cr
20.5 20.4
20.5
59 297 59 297
20.5
TASK 4.7 Alexis Traders: Ledger accounts

GENERAL LEDGER OF ALEXIS TRADERS
Dr VEHICLES B4 Cr
20.6 20.7
Mar 1 Bank CPJ 250 000 Feb 28 Balance c/d 400 000
20.7
Feb 28 Creditors control CJ 150 000
400 000 400 000
20.7 20.8
Aug 31 Bank CPJ 140 000
540 000 540 000
20.8
EQUIPMENT B5
20.6 20.7
Sept 1 Bank CPJ 110 000 Feb 28 Balance c/d 110 000
110 000 110 000
20.7 20.8
June 30 Bank CPJ 20 000
20.8
Feb 28 Bank CPJ 12 000
142 000 142 000
20.8

20.7
20.8
(84 375[1] + 17 500[2])
20.9
Feb 28 Depreciation[3] GJ 93 906

Dr ACCUMULATED DEPRECIATION ON EQUIPMENT B7 Cr
20.7
20.8
(16 500[5] + 2 000[6])
20.9
[1]
400 000 – 62 500 = 337 500 x 25% [4]
110 000 x 15% x 6/12
[2]
140 000 x 25% x 6/12 [5]
110 000 x 15%
[3]
540 000 – (62 500 + 101 875) x 25% [6]
20 000 x 15% x 8/12
540 000 – 164 375 = 375 625 x 25% [7]
142 000 x 15%

Dr DEPRECIATION N12 Cr
20.7
Feb 28 Acc dep on vehicles GJ 62 500
Acc dep on equip. GJ 8 250
20.8
Feb 28 Acc dep on vehi- GJ 101 875
cles
Acc dep on equip- GJ 18 500
ment
20.9
Feb 28 Acc dep on vehi- GJ 93 906
cles
Note:
• The depreciation rate was not given so it has to be worked out as follows:
Vehicle: diminishing balance method is us. But for the first year, it is the same as the cost method:
62 500
/250 000 x 100 = 25% p.a.
• Equipment: on cost. But the equipment was only bought half way through the year, therefore, the depre-
ciation figure given of R8 250 is for half year. Double the depreciation to find what it would have been for
the year i.e. 16 500/110 000 x 100 = 15% p.a. An alternative way would have been to calculate R8 250 as a
percentage of R110 000 and then double that. Learners must realise that percentages are quoted per
annum, so there must be a doubling of the 6 months depreciation written off.
TASK 4.8 Broomsticks: Advice on depreciation

This Task could be used for peer assessment. Each member of the group assesses each other.
Suggested assessment for this Task (Group/Peer assessment):

CRITERIA YES NO
Understands why vehicles and equipment are depreciated but not land and buildings.
Understands the difference between the 2 methods of writing off depreciation.
Can express an opinion on which method to use based on sound reasoning.
Understands the effect of depreciation on the financial statements.
Understands the principle of writing off depreciation over a period of time as laid
down by SARS.

TASK 4.9  Hugo Cash Solutions: Sale of fixed asset
4.9.1 Explain the entry of R75 000 on the debit side of the Vehicles account.
Cost price of the vehicles – price at which they were bought for.
4.9.2 Explain the entry of R30 000 on the credit side of the Accumulated depreciation on
vehicles account.
Total depreciation written off the vehicle from the time of purchase up to 1 January 20.5.
4.9.3 What is the book value of the vehicle on the 1 January 20.5?
BV = CP – ACC DEP R45 000 = (R75 000 – R30 000)
4.9.4 If you were going to sell the vehicle would the original cost or the book value guide you
in setting the selling price? Why?
Book value.
Vehicles lose value, so you are unlikely to sell at the original cost price. The book value is a guide as to
what price you could sell it for.
4.9.5 Assume that Hugo Cash Solutions decide to sell the vehicle on 1 January 20.5, what
entry(ies) would have to be made? (Hint: When you sold trading stock what entry
would you have put through the ledger?) Make the necessary entry(ies).
Allow the learners time to debate and discuss.
You are hoping they will realise that it is not only the vehicle at cost that needs to be credited but that
entries must also be made in the Accumulated depreciation account.
4.9.6 Hugo sells the vehicle for R50 000 for cash. Make the necessary entries.
There are various options at this stage.
Allow them to experiment and not give them the Asset disposal account at this stage – rather let them
reason out possible methods and double entries.
4.9.7 Explain why you think Hugo sold the vehicle for more than the book value.
Various options – good condition, low mileage, extra features, e.g. radio, mag wheels, supply and demand,
etc.
4.9.8 What entries would you need to make to record this?

Let the learners come up with their own suggestions.
Hopefully, they will work out entries to record the profit.
Suggestion:
Photostat the following diagram, enlarging it to A3 size and pin it up on your classroom wall or let a group of
learners design their own poster.

MOTOR VEHICLES
20.5 Jan 1 20.5 Jan 1
Asset disposal R75 000
Balance R75 000
ASSET DISPOSAL
20.5 Jan 1 20.5 Jan 1
Accumulated Dep on Vehicles
20.5 Jan 1 20.5 Jan 1
Balance R30 000 Asset disposal
Motor Vehicle R75 000
R30 000
Asset disposal
R30 000
TASK 4.10 Asset disposal account

4.10.1 What has happened to the vehicles account? Why?
It has been credited (reduced). ASSET - The vehicle has been sold so the account must reflect this.
4.10.2 What has happened to the Accumulated depreciation account? Why?

It has been debited (reduced).CONTRA ASSET - The vehicle has been sold so the account must reflect this.
4.10.3 What is the function of the Asset Disposal account? Why is it better to open this sep-
arate account?
It brings together all the entries to do with the vehicle and the sale thereof – matching principle. It is then
easier to work out if a profit or loss has been made on the sale. Need CP, ACC DEP, SP in ONE A/C. ☺
4.10.4 According to your books, do you still own the vehicle?

No.
4.10.5 If you sell the vehicle for R50 000 cash, what entries are necessary?
Dr Bank and Cr Asset disposal
TASK 4.11 Asset disposal

4.11.1 What has happened to the Asset disposal account? Why?
Closed off by calculating the profit on the sale of the asset. CLOSED OFF. “DISPOSED OF!” Never
has a balance b/d.
4.11.2 What does the R5 000 mean?

You made a profit – sold the asset for R5 000 more than the book value.
[R75 000 – 30 000] = R45 000 [CV]< R50 000 [SP] SP > CV = PROFIT ☺
4.11.3 Why do we have to show the R5 000 in the books?
In order to balance / close off the books and to reflect that you made a profit.

4.11.4 Why is the R5 000 recorded on the credit side of the Profit on disposal of asset ac-
count?
Profit on disposal is an income account – hence it gets reflected on the credit side.
4.11.5 What entries are in your books after completing the sale entries in connection with
the vehicle?
Only the profit on sale has a balance. The vehicle and accumulated depreciation have been closed off.
4.11.6 What would happen to the Profit on disposal of asset account in the financial state-
ments?
Closed off to the Profit and Loss account at the end of the financial year.
TASK 4.12  Asset disposal

4.12.1 Why was only R40 000 credited to the Vehicles account?
Only the cost price of the vehicle sold must be credited to the Vehicles account.
4.12.2 Why was only R24 000 debited to the Accumulated depreciation account?
Only the Accumulated depreciation on the vehicle sold must be debited to the account.
4.12.3 What was the book value of the Toyota on 1 January 20.5?
R16 000 (R40 000 – R24 000).
4.12.4 What does the entry for R4 000 mean?

A loss on the sale was made – the asset was sold for R4 000 less than the book value.
4.12.5 What would happen to the Loss on disposal of asset account?

Closed off to the Profit and Loss account at the financial year end.
4.12.6 What would happen to the Vehicles and Accumulated depreciation accounts?
Balanced off to show the balance of the vehicles still remaining.
4.12.7 Why are these two accounts not closed off?

There is still another vehicle in the business.
4.12.8 Why was the entry for the selling price not recorded in the General Journal?
It was sold for cash; therefore it was recorded in the CRJ.

TASK 4.13  Max (1): Asset disposal
This Task enables learners to distinguish between the different values. Make sure that they understand the
differences.
DETAILS AMOUNT
Vehicle:
Cost price of vehicle sold R30 000
Accumulated depreciation on vehicle sold 21 000
Book value of vehicle sold 9 000
Selling price of vehicle sold 12 000
Profit / Loss on sale of the vehicle sold 3 000 Profit
Equipment:
Cost price of the equipment sold 8 000
Accumulated depreciation on equipment sold 3 000
Book value of equipment sold 5 000
Selling price of equipment sold 3 500
Profit / Loss on sale of equipment sold 1 500 Loss
TASK 4.14  Moses Traders: Asset disposal

GENERAL LEDGER OF MOSES TRADERS
Dr VEHICLES B Cr
20.1 20.4 “TRANSFER CP”
Mar 1 Bank CPJ 125 000 Mar 1 Asset disposal GJ 125 000
ACCUMULATED DEPRECIATION ON VEHICLES B

20.4 “TRANSFER ACC DEPT” 20.4
Mar 1 Asset disposal GJ 61 000 Mar 1 Balance b/d 61 000

ASSET DISPOSAL N
20.4 20.4
Mar 1 Vehicles GJ 125 000 Mar 1 Acc dep on vehicles GJ 61 000
Profit on disposal of GJ 10 000 Bank CRJ 74 000
asset
135 000 135 000
Dr PROFIT ON DISPOSAL OF ASSET N Cr

20.4
Mar 1 Asset disposal GJ 10 000
CASH RECEIPTS JOURNAL OF MOSES TRADERS – MARCH 20.4 CRJ

Sundry accounts
Doc D Details Bank
Amount Fol Details
X4058 1 P. Mara 74 000 74 000 N Asset disposal

GENERAL JOURNAL OF MOSES TRADERS – MARCH 20.4 GJ
Debtors control Creditors control
No D Details Fol Debit Credit
1 1 Asset disposal N 125 000
Vehicles B 125 000
Transfer of cost price of vehicle
sold
Acc depreciation on vehicles B 61 000
Asset disposal N 61 000
Transfer of accumulated depre-
ciation
Profit on sale of asset N 10 000
Profit made on sale of asset
FIXED ASSET REGISTER

ASSET Vehicle DATE OF PURCHASE 1 March 20.1
COST PRICE R125 000 DEPRECIATION 20% p.a. (dimin-
RATE ishing balance
method)
RECORD OF DEPRECIATION
Accumulated depre-
Date Depreciation Book value
ciation
28 Feb 20.2 R25 000 R25 000 R100 000
28 Feb 20.3 20 000 45 000 80 000
28 Feb 20.4 16 000 61 000 64 000
TASK 4.15 Max (2): Asset disposal

Different answers are possible as learners will be using their own figures depending on the month during the
year that they choose to demonstrate their answer. However, if the asset was sold during the year, a portion
of the year’s depreciation will be added to the accumulated depreciation. As a result, if they still sell the
vehicle for R12 000, the loss on the sale of this vehicle will be less.
TASK 4.16  Mboni Distributors (2): Asset disposal

Date of sale Amount of deprecia-
Profit on disposal Loss on disposal
(20.5) tion for 20.5
1 January Nil R4 000
1 July R3 000 R1 000
31 March R1 500 R2 500
[40 000 x 15% x 3/12] [40 000 – 25 500 =
14 500 – 12 000]
1 October R4 500 R500
[40 000 x 15% x 9/12] [40 000 – 28 500 = 11 500]
[12 000 – 11 500]
1 May R2 000 R2 000
[40 000 x 15% x 4/12] [40 000 – 26 000 =
14 000 – 12 000]
1 November R5 000 R1 000
[40 000 x 15% x 10/12] [40 000 – 29 000 = 11 000]
[12 000 - 11 000]

TASK 4.17  BG Plumbers: Asset disposal
GENERAL LEDGER OF BG PLUMBERS
Dr VEHICLES B Cr
20.2 20.5 COST PRICE 1
Mar 1 Bank CPJ 132 500 Feb 28 Asset disposal GJ 132 500
ACCUMULATED DEPRECIATION ON MOTOR VEHICLE B

20.5 20.4
Feb 28 Asset disposal 3 GJ 64 660 Mar 1 Balance b/d 47 700
20.5
Feb 28 Depreciation 2 GJ 16 960
64 660 64 660

ASSET DISPOSAL N
20.5 COST PRICE 1 20.5 ACC DEP SP
Feb 28 Vehicles GJ 132 500 Feb 28 Acc dep on vehicles 3 GJ 64 660
Debtors control 4 GJ 65 000
Loss on disposal of
asset 5 GJ 2 840
132 500 132 500
LOSS ON DISPOSAL OF ASSET N

20.5 20.5
Feb 28 Asset disposal GJ 2 840 Feb 28 PROFIT & LOSS GJ 2 840
DEPRECIATION N
20.5 2
Feb 28 Acc dep on vehicle GJ 16 960 PROFIT & LOSS GJ 16 960
GENERAL JOURNAL OF BG PLUMBERS – FEBRUARY 20.5 GJ

1 28 Depreciation N 16 960
Depreciation written off for 12
months @ 20% pa at CV
Vehicles B 132 500
Transfer of cost price of vehi-
cles
Transfer of accumulated
depreciation

GENERAL JOURNAL OF BG PLUMBERS – FEBRUARY 20.5 (Continued)
J. Morgan DL 65 000 65 000
Vehicle sold on credit
Loss on disposal of asset N 2 840
Loss made on sale of asset
FIXED ASSET REGISTER

ASSET Ford NC 4568 DATE OF PURCHASE 1 March 20.2
COST PRICE R132 500 DEPRECIATION 20% p.a. (dimin-
RATE ishing balance
method)
Accumulated depre-
ciation
28 Feb 20.3 R26 500 R26 500 R106 000
28 Feb 20.4 21 200 47 700 84 800
28 Feb 20.5 16 960 64 660 67 840
TASK 4.18 SE Traders: Asset disposal

GENERAL LEDGER OF SE TRADERS
Dr EQUIPMENT B Cr
20.1 20.2
Mar 1 Balance b/d 49 600 Feb 28 Asset disposal GJ 6 000
Balance c/d 43 600
49 600 49 600
ACCUMULATED DEPRECIATION ON OFFICE EQUIPMENT B

20.2 20.1
Feb 28 Asset disposal* (2) GJ 4 000 Mar 1 Balance b/d 13 840
Balance c/d 19 760 20.2
Feb 28 Depreciation* (1) GJ 1 200
Depreciation* (3) GJ 8 720
23 760 23 760
*Can be combined.

Dr ASSET DISPOSAL N Cr
20.2 20.2
Feb 28 Equipment GJ 6 000 Feb 28 Acc dep on equip. GJ 4 000
Debtors control GJ 1 700
Loss on disposal of GJ 300
asset
6 000 6 000
LOSS ON DISPOSAL OF ASSET N

20.2 20.2
Feb 28 Asset disposal GJ 300 Feb 28 Profit and Loss a/c GJ 300
DEPRECIATION N
20.2 20.2
Feb 28 Acc dep on equip. GJ 1 200 Feb 28 Profit and Loss a/c GJ 9 920
9 920 9 920
GENERAL JOURNAL OF SE TRADERS – FEBRUARY 20.2 GJ

1 28 Depreciation[1] N 1 200
Acc dep on equipment B 1 200
Depreciation written off
Equipment B 6 000
Transfer of cost price of equip-
ment sold
Acc dep on equipment[2] B 4 000
Transfer of accumulated depre-
ciation
J. Jakili (Debtors control) DL 1 700 1 700
Equipment sold on credit
Loss on disposal of asset N 300
Asset disposal N 300
Depreciation[3] N 8 720
Depreciation written off on the
balance of the equipment
[1]
6 000 x 20% [2]
2 800 + 1 200 [3]
49 600 – 6 000 = 43 600 x 20%

GENERAL JOURNAL OF SE TRADERS – FEBRUARY 20.2 (Contd)
28 Closing Transfer
Profit and Loss account 10 220
Depreciation N 9 920
Loss on disposal of asset N 300
Transfer entry
TASK 4.19 Duncan Stores: Asset disposal

GENERAL LEDGER OF DUNCAN STORES
BALANCE SHEET SECTION
Dr EQUIPMENT B Cr
20.4 20.4
Mar 1 Balance b/d 81 500 Nov 30 Asset disposal GJ 8 700
20.5 NO GAP
Feb 28 Balance c/d 72 800
81 500 81 500
20.5 NO GAP
ACCUMULATED DEPRECIATION ON EQUIPMENT B

20.4 20.4
Nov 30 Asset disposal GJ 3 263 Mar 1 Balance b/d 43 810
20.5 NO GAP Nov 30 Depreciation GJ 653
Feb 28 Balance c/d 48 480 20.5
51 743 51 743
[1]
81 500 – 8 700 = 72 800 x 10%
GENERAL JOURNAL OF DUNCAN STORES – NOVEMBER 20.4 GJ

1 30 Depreciation[1] 653
Acc. dep. on equipment B 653
Depreciation written off
Asset disposal 8 700
Equipment N 8 700
Transfer of cost price of equip-
ment sold
Acc. depreciation on equip.[2] B 3 263
Transfer of accum. depreciation
J. Rice (Debtors control) 4 870 4 870
Loss on disposal of asset 567
Asset disposal 567
[1]
8 700 x 10% x 9/12 [2]
2 610 + 653

GENERAL JOURNAL OF DUNCAN STORES – FEBRUARY 20.5 (Contd) GJ
28 Depreciation 7 280
Depreciation written off the bal-
ance of the equipment
Closing Transfer
Profit and Loss account 8 500
Depreciation 7 933
Transfer entry
FIXED ASSET REGISTER Fol 3

ASSET Cash Register DATE OF PURCHASE 1 March 20.1
COST PRICE DEPRECIATION
R8 700 10% on cost
RATE
Accumulated depre-
ciation
28 Feb 20.2 R870 R 870 R7 830
28 Feb 20.3 870 1 740 6 960
28 Feb 20.4 870 2 610 6 090
30 Nov 20.4 653 3 263 5 437
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 20.5
3. Fixed/Tangible Assets
Equipment
Carrying value at beginning of year 37 690
Cost 81 500
Accumulated depreciation (43 810)
Movements (13 370)
Additions at cost -
Disposals at carrying value (5 437)
Depreciation (7 933)
Carrying value at end of year 24 320
Cost 72 800
Accumulated depreciation (48 480)

TASK 4.20  Shadrack Enterprises: Fixed assets note
SHADRACK ENTERPRISES
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20.5
Vehicles Equipment Total
Carrying value at beginning of year 140 000 50 000 190 000
Cost 220 000 90 000 310 000
Accumulated depreciation (80 000) (40 000) (120 000)
Movements (56 000) 19 500 (36 500)
Additions at cost - 30 000 30 000
Disposals at carrying value (21 000) - (21 000)
Depreciation (35 000) (10 500) (45 500)
Carrying value at end of year 84 000 69 500 153 500
Cost 160 000 120 000 280 000
TASK 4.21  Babylon Jewellers: Ledger & Fixed assets note

GENERAL LEDGER OF BABYLON JEWELLERS
Dr VEHICLES B Cr
20.5 20.5
Mar 1 Balance b/d 130 000 Dec 31 Asset disposal GJ 30 000
20.6
130 000 130 000
20.6
ACCUMULATED DEPRECIATION ON VEHICLES B

20.5 20.5
Dec 31 Asset disposal[3] GJ 17 000 Mar 1 Balance b/d 36 000
20.6 Dec 31 Depreciation[1] GJ 5 000
61 000 61 000
20.6
[1
30 000 x 10% x /12
10 [2]
130 000 – 30 000 = 100 000 x 20% [3]
12 000 + 5 000
DEPRECIATION N
20.5 20.6
Dec 31 Acc dep on vehicles GJ 5 000 Feb 28 Profit and Loss GJ 28 450
20.6
Feb 28 Acc dep on vehicles GJ 20 000
(2 400[1] + 1 050[2])
28 450 28 450
[1]
30 000 – 14 000 = 16 000 x 15% [2]
14 000 x 15% x 6/12

20.5 20.5
Dec 31 Vehicle GJ 30 000 Dec 31 Acc dep on vehicles GJ 17 000
Profit on sale of asset GJ 4 250 Debtors control GJ 17 250
34 250 34 250
Land and
Buildings
Carrying value at beginning of year 360 000 94 000 16 000 470 000
Cost 360 000 130 000 30 000 520 000
Accumulated depreciation - (36 000) (14 000) (50 000)
Movements 40 000 (38 000) 10 550 12 550
Additions at cost 40 000 - 14 000 54 000
Disposals at carrying value - (13 000) - (13 000)
Depreciation - (25 000) (3 450) (28 450)
Carrying value at end of year 400 000 56 000 26 550 482 550
Cost 400 000 100 000 44 000 544 000
TASK 4.22 Commercial Sports Warehouse: Ledger & Fixed

assets note
GENERAL LEDGER OF COMMERCIAL SPORTS WAREHOUSE
Dr ACCUMULATED DEPRECIATION ON EQUIPMENT B Cr
20.5 20.5
Nov 30 Asset disposal[2] GJ 15 375 Mar 1 Balance b/d 42 000
20.6 Nov 30 Depreciation[1] GJ 3 375
Dec 31 Balance c/d 37 050 20.6
[6 000[3] + 1 050[4]]
52 425 52 425

DEPRECIATION B
20.5 20.6
Nov 30 Acc dep on equip. GJ 3 375 Feb 28 Profit and Loss a/c GJ 36 558
20.6
Feb 28 Acc dep on equip. GJ 7 050
Acc dep on vehicles GJ 26 133
[24 800[5] + 1 333[6]]
36 558 36 558
[1]
30 000 x 15% x 9/12 = 3 375 [2]
12 000 + 3 375 = 15 375
[3]
84 000 - 14 000 – 30 000 = 40 000 x 15% = 6 000 [4]
14 000 x 15% x 6/12 = 2 100
[5]
260 000 – 136 000 = 124 000 x 20% = 24 800 [6]
40 000 x 20% x 2/12 = 1 333

20.5 20.5
Nov 30 Equipment GJ 30 000 Nov 30 Acc dep on equip. GJ 15 375
Debtors control GJ 13 500
Loss on disposal of GJ 1 125
asset
30 000 30 000
Cost 260 000 70 000 330 000
Movements 13 867 (11 050) 2 817
Additions at cost 40 000 14 000 54 000
Disposals at carrying value - (14 625) (14 625)
Depreciation (26 133) (10 425) (36 558)
Carrying value at end of year 137 867 16 950 154 817
Cost 300 000 54 000 354 000
TASK 4.23 Sharks Dealers: Fixed/Tangible note

4.23.1 Calculate the missing figures for (A) – (O).
No. Answer Working (alternate calculations may apply)
A 90 000 250 000 – 160 00
B 90 000
C 9 618 30 000 – 20 382
D 41 712 60 000 - 9 618 – 8 670
E 99 512 57 800 + 41 712
F 110 000 80 000 + 60 000 – 30 000
G 10 488 110 000 – 99 512
H 217 800 160 000 + 57 800
I (22 200)
J 131 712 90 000 + 41 712
K 150 000 90 000 + 60 000
L (9 618)
M (8 670)
N 349 512 250 000 + 99 512
O 360 000 250 000 + 110 000
P (10 488)
4.23.2 Give a reason why Land and buildings are not depreciated?
Generally, Land and buildings increase in value and do not decrease. Principal of Prudence “conservative”
4.23.3 Explain why Depreciation expense is described as a “non-cash item”.

There is no cash payment associated with it – nobody is being paid the amount of the depreciation.

4.23.4
20.6 20.6
Feb 28 Vehicle GJ 30 000 Feb 28 Acc dep on vehicles GJ 20 382
Profit on disposal of GJ 200 Creditors control GJ 9 818
asset
30 200 30 200
4.23.5 Present an argument in favour of using the diminishing balance method rather than
the fixed instalment (cost) method for calculating depreciation.
Various answers possible.
More realistic – assets lose their greatest value in the early years and can never be worth nothing.
TASK 4.24 Thobani Mash: Report on vehicles

There is no right or wrong answer to this Task. The purpose of the Task is to allow the learners time to debate
control measures in a business – why they are necessary, who gets affected and how, what type of control
measures and the implications thereof. It is important that the learners identify possible problem areas and
then offer solutions to these problems.

CRITERIA LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4
Ability to identify Some attempt to The obvious prob- Obvious problems Extensive identifi-
possible problem identify possible lems areas are identified showing cation of problem
areas. problems. identified. some insight of areas showing
these problem great insight.
Areas.
Ability to make Some attempt to Makes appropriate Makes good sug- Makes excellent
feasible sugges- make appropriate suggestions based gestions based on suggestions based
tions. suggestions. on problem areas some in-depth on an in-depth
identified. Understanding. Understanding.
Report. Some aspects Some aspects of Good report. Excellent report.
Adequate. the report good.
TASK 4.25  Bestbuy Stationers: Ethical issues

1. You need to use the office laptop computer and projector to do a Powerpoint presentation
for an important client. After much investigation, you find out that a secretary has been
taking this home each weekend. On this occasion, she has forgotten to return it.
Problem:
It appears that the secretary has taken a business asset for personal use.
Also, security might be a problem – investigate how the secretary was able to remove this asset without
being detected.
Insurance cover could also be a problem as the policy will be in the name of the business.
Solution:
Establish a policy in the business to make it clear that employees do not take assets off the property unless
authorised to do so by a senior person.
Each employee must sign that they understand this policy and that disciplinary action may be taken against
those who fail to comply.

2. Three new air-conditioners have been bought for some of the offices. The cost is R5 000
each. The following day, you see an advertisement in the newspaper for the same model
of air-conditioner for R3 800 each.
Problem:
The process of obtaining quotes might be a problem, and the business might not be buying from the best-
priced supplier.
Solution:
Establish a policy in the business for three quotes to be obtained before any large asset is purchased.
The final decision should be made by a senior person or preferably by a group of senior persons in the
organisation.
3. You ask an administrative assistant to use the Fixed Asset Register to compile a list of
desks and chairs owned by the business, and their book value. You find that the book
value does not agree with the cost and accumulated depreciation in the ledger – the list is
understated by R10 000.
Problem:
The Fixed assets register forms an important part of the internal control processes in a business.
It appears that the person responsible for this register has not been doing his/her job properly.
Solution:
The employee should be reprimanded and told to update the register immediately.
A senior person should check the register to see that the totals for cost, accumulated depreciation and book
value agrees with the balances in the general ledger.
4. You count the number of office chairs in the business to be 125. The Fixed Asset Register
reflects the total number to be 175.
Problem:
There appears to be theft.
Security appears to be a major problem.
Solution:
Investigate the possible ways in which the assets could have been removed, and try to identify which chairs
have gone missing and from which department.
Code each asset clearly to cross-check with the fixed assets register, and mark each item to discourage
theft.
Consider installing security cameras.
5. The owner of the business, Barry Best, has authorised the purchase of ten new computers
for the sales office. He asks an admin assistant, M. Bezzle, to get three quotes and buy
from the cheapest supplier. On arrival of the computers, you process a cheque in favour
of Shifty Computers for R80 000. A week later, you notice that a new laptop computer has
been delivered after hours by Shifty Computers for M. Bezzle.
Problem:
There is a possibility that M. Bezzle has placed the order with the business of one of his friends or a family
member, after giving him information on the price quoted by the competing businesses.
Solution:
Inspect the quotes obtained from each business, and question them if necessary. Investigate the acquisition
of the laptop by M. Bezzle.
He should be able to provide proof of payment.
He should be informed that, as he was entrusted with an important task involving large funds, he should
be seen to be conducting himself in an ethical manner.

6. The business owns six cars which are used by the salesmen during the course of their
business. The depreciation rate is 20% p.a. on cost. These cars were fully depreciated ten
years ago (the book value is now R1.00 each) and some of the salesmen are complaining
about the cars. Because the repair costs are so high, Barry Best has issued an instruction
to buy cheaper tyres.
Problem:
The cars are 10 years old and may be unsafe – the cheaper tyres could create further problems.
Also, the old cars might not be good for the marketing image of the business.
Solution:
Investigate the possibility of selling the cars for the best price possible.
If financing of new cars is a problem, the business could investigate leasing their cars.
7. Two employees report that the desk-top computers and printers were stolen from each of
their offices. There was no forced entry and the insurance company is refusing to process
any claim on the insurance policy.
Problem:
It appears that the employees are not careful with regard to the securing of the assets entrusted to them.
Their offices should be locked when they are not there.
Solution:
The business must establish a policy whereby each employee agrees to look after the assets entrusted to
him/her.
If negligence occurs, the employees should be held responsible for the cost in terms of the policy.
In this case, an investigation needs to occur in order to determine whether the employees were at fault or
not.
Without a policy in place, the business will probably not be able to claim compensation from the employees
– they should be disciplined and given a written warning.
8. The owner of the business, Barry Best, has bought a yacht for himself for R900 000. He
bought this out of the profits of the business. Barry wants you to record the yacht in the
Fixed Assets Register and to record the depreciation on this asset in the Profit and Loss
account.
Problem:
Although Barry is entitled to use the profits of the business for his own use, a yacht cannot be regarded as
a business asset for a stationery concern.
He would be defrauding SARS for income tax purposes if he recorded the depreciation as a business ex-
pense.
Solution:
Barry must not record the yacht in the name of the business.
He must record it in his own name.
The depreciation should not be regarded as a business expense.
Note:
It is believed that some businesses might buy a yacht for advertising purposes, e.g. publicity through entry
in the Cape to Rio race.
However, in such cases, SARS will need to give approval for allowance of the deduction of expenses for tax
purposes.

CHECKLIST
Requires
Yes – profi-
cient
tion
Conduct a survey, analyse the results and present a
report.
Calculate depreciation, accumulated depreciation,
book value on fixed assets that have been sold dur-
ing the financial year.
Draw up a fixed asset register.
Identify and explain the GAAP concepts relating to
depreciation.
Explain and draw up an Asset disposal account.
Making the necessary entries in the financial state-
ments.
Discuss internal control procedures required to effec-
tively control the assets.
Discuss ethical issues relating to fixed assets and to
be able to determine what constitutes unethical
practice.

MODULE 5
PARTNERSHIPS & FINAL ACCOUNTS
Learners need to have a clear understanding of Grade 10 work relating to sole traders with regard to the
Accounting equation, GAAP, year-end procedures, year-end adjustments, closing transfers and different types
of trial balances.
TASK 5.1  Types of business enterprises

5.1.1 Identify what is meant by the following types of businesses and forms of ownership and
report back to the rest of the class.
Some general guidelines are provided.
• Service business
- This business provides a service rather than sells merchandise, e.g. laundry, attorneys, secretarial services,
DVD/Video rentals, etc.
- Income received from services provided is recorded in the ‘Fee income’ account.
• Retail business
- This type of business deals in merchandise, e.g. supermarkets, music stores, stationers, etc.
- Stock sales are recorded in the ‘Sales’ account.
• Sole proprietor
- This business is owned by one person.
- The capital invested is made by the sole owner.
- Profits belong to him.
• Partnership
- This business is formed by between 2 – 20 persons.
- Each partner invests capital and/or his skills in the business.
- Risk is shared amongst the partners.
- Profits/losses are shared between partners in an agreed proportion.
- Partners are liable for the debts of the partnership.
• Company
- This form of ownership has the capacity to raise large capital as shares are offered for sale to the public.
- Owners are called shareholders who receive a dividend for their investment in the company.
- A company offers limited liability to shareholders.
- A company is managed by directors.
- In the eyes of the law a company is a regarded as a legal person.
- A company is regulated by the provisions of the Companies Act.
5.1.2 Briefly explain why a person would want to form a partnership rather than a sole propri-
etorship.
• More capital can be raised.
• Additional skills/expertise improves profit potential.
• Risk is shared
• The workload is shared.
• Easy to form – no legal formalities are required except for a partnership agreement.
• Personal contact with clients/customers can still be maintained.
• Etc.

TASK 5.2 Starting a partnership, advantages & disadvantages
5.2.1 Advantages of converting his sole trader business into a partnership.
Refer to 5.1.2 above.
5.2.2 Disadvantages of converting his sole trader business into a partnership.

• Profits will have to be shared
• Communication breakdowns/conflicts may arise amongst the partners.
• Liability for the debts of the partnership is unlimited – personal assets are at risk.
• A partner’s resignation, death or retirement may affect the continuity of the business.
• A partner acts as an agent of a partnership – an incapable or vindictive partner could cause financial loss
to the other partner.
• Etc.
5.2.3 The steps he will have to put in place before admitting a partner into his business.
He will have to draft a Partnership Agreement, he could ask an accountant or lawyer to assist, or he could
obtain a basic format of an agreement from a website such as www.formville.com (see template attached at
the end of this Module); he must establish the amount of capital required of the new partner, his share in the
business and how profits/losses will be shared, and how decisions are to be made in the business.
5.2.4 The personal characteristics he would look for in a prospective partner.

Honest / trustworthy / reliable / ethical / moral / resilient / responsible / skilful / business knowledge.
Someone he can work with.
Etc.
Suggested marking grid for the collage and presentation:

Assessment
criteria
Can identify the
Advantages of Advantages are
Very little attempt Makes some at- advantages of con-
converting the sole identified and dis-
to identify the ad- tempt to identify verting from a sole
trader business to cussed showing
vantages. the advantages. trader to a part-
a partnership. great insight.
nership.
Can identify the
Disadvantages of Disadvantages are
Very little attempt Makes some at- disadvantages of
converting the sole identified and dis-
to identify the dis- tempt to identify converting from a
trader business to cussed showing
advantages. the disadvantages. sole trader to a
a partnership. great insight.
partnership.
Does not under- Makes some at- Discusses the
The steps needed
Identification of stand the steps tempt to identify steps needed to
to convert to a
the steps needed necessary to con- the steps needed convert to a part-
partnership are
to be put in place. vert to a partner- to convert to a nership with great
discussed fully.
ship. partnership. insight.
Personal character-
Makes very little Makes some at- istics are identified
Personal charac- Personal charac-
attempt to discuss tempt to discuss and discussed fully
teristics of the pro- teristics are identi-
the personal char- the personal char- with reasons as to
spective partner. fied.
acteristics. acteristics. why they would be
important.

TASK 5.3 Dr Brush & Dr Floss: Simulation of a partnership
Different answers and interpretations are possible for this activity. The value of this activity is in getting learn-
ers to appreciate that the formation of a partnership relies on negotiation.
TASK 5.4 Advantages & disadvantages of a partnership

5.4.1 Give a short explanation of the following phrases shown in italics in the above passage:
(a) “the only ship that never sails is a partnership”
All ships sail on the ocean. However, a partnership often fails mainly because human emotions are involved.
Often tension develops between the partners as one feels they are doing more valuable work than another.
(b) Jointly and severally liable for debts
All partners are bound by the actions of one partner. In the event of insolvency, the personal assets of a
partner may be used to pay the debts of the business. Liability for debts is unlimited.
(c) Partnership Agreement
A partnership is a legal relationship, therefore it is necessary that there be some form of agreement between
the partners. This agreement may be made verbally. However, a written agreement is preferable to avoid
any disputes in the future. An attorney may be hired to assist in drawing up the agreement.
5.4.2 Using the above scenario, identify at least 4 (four) advantages of Muso and Sipho forming
a partnership.
Refer to Task 5.1, No. 5.1.2
5.4.3 Identify at least 4 (four) disadvantages to the proposed partnership.
Refer to Task 5.2, No. 5.2.2
5.4.4 Make a list of the information you think is important to include in a Partnership Agree-
ment.
Nature and objectives of the business.
The amount or nature of capital to be contributed by each partner.
The manner in which profits/losses will be shared.
Stipulations with regard to the amount of drawings to be made by each partner.
Partners’ salaries, interest on capital, special bonuses.
Provisions relating to the admission of new partners or the withdrawal, death or retirement of existing partners.
Restraints of trade which may apply to partners who withdraw from the partnership.
Etc.
5.4.5 Draw up a table of the essential differences between Muso as a sole proprietor and op-
erating as a partnership.
Sole Trader Partnership

One owner. Minimum of 2 and maximum of 20 owners who are
called partners.
The owner provides all the capital. All partners contribute capital; the potential for more
capital depends on the number of partners contrib-
uting.
Owner is completely responsible for the decisions All partners need to agree on decisions taken in the
in the business and does not have to consult any- business.
one in this regard.
Profit belongs to the owner and is added to per- All partners share capital in the ratio agreed upon in
sonal income before income tax is calculated. the Partnership Agreement.
The owner is responsible for any losses and his per- The partners are ‘jointly and severally liable’ for debts
sonal possessions are at risk. of the business and their personal possessions are also
at risk.
The owner becomes proficient in all aspects of the Partners are able to utilise the strengths of each part-
business. ner in sharing responsibility in the management of the
business
Etc. Etc.

TASK 5.5  JBS Coffee Shop: Joint & several liability for debts
5.5.1 Calculate how this profit will be divided between the partners.
Jean: 2
/4 x 440 000 = R220 000
Ben: 1
/4 x 440 000 = R110 000
Sipho: 1
/4 x 440 000 = R110 000
5.5.2 Calculate how much each partner must contribute from personal funds in order to pay
the creditors.
Net amount owing = 100 000 – 10 000 = R90 000
Jean: 2/4 x 90 000 = R45 000
Ben: 1
/4 x 90 000 = R22 500
Sipho: 1/4 x 90 000 = R22 500
5.5.3 How will the creditors be paid?

The personal assets of Ben and Sipho may have to be used to settle the debt.
TASK 5.6  Partnership agreement

5.6.1 Why is it vitally necessary for partners to trust and have confidence in each other?
The actions of one partner can bind the other partners, e.g. if one partner enters into an agreement on behalf
of the partnership, the other partners automatically become bound to the agreement.
Other suitable answers are possible, e.g. where partners work in good faith and in the interests of the business,
an improved working relationship is established. This in turn would have a positive impact on productivity and
subsequently on profitability.
5.6.2 In developing the partnership agreement, what points must they include? Make a list.
Refer to Task 5.4, No. 5.4.4.
5.6.3 Present your list to the rest of the class. Amend your list with responses from other
groups in your class.
Various answers are possible. Ensure the learners justify their answers.
5.6.4 If you know an accountant or a lawyer, ask him/her to assist you in getting a basic format
for a Partnership Agreement. Compare this document to the list that you have compiled
in 5.6.2 and 5.6.3.
Various answers are possible. Ensure the learners justify their answers.
TASK 5.7 Ethics & internal control scenarios

Open-ended – different answers/interpretations are possible.
Note:
The Teacher must ensure that the learners are guided through these different scenarios. The learner’s an-
swers will often indicate personal or family experiences with partnerships; the TV programmes they watch
and their personal experiences that lead them to the values and ethics that they are formulating for them-
selves.
Always persuade the learners to see the situation from two different points of view, e.g. the business owners
and the customer or employee; each of the different partner’s points of view, etc. At all times learners should
display an awareness of principles of ethics, internal control and good common sense.

TASK 5.8 GH Traders: Entries in CRJ, CPJ & GJ
GH TRADERS
Analysis Sundry accounts
Doc.
D Details Fol of Bank
receipts
01 1 Greeff 200 000 200 000 Capital: Greeff
02 Harris 100 000 300 000 100 000 Capital: Harris

D Details Fol Bank
No. Amount Fol Details
01 12 Harris 505 505 Drawings: Harris
02 28 Greeff 10 000 10 000 Drawings: Greeff
03 Harris 7 500 7 500 Drawings: Harris
GENERAL JOURNAL OF GH TRADERS: MARCH 20.8 GJ

J1 8 Drawings: Greeff 1 200
Trading stock 1 200
Stock taken for own use
J2 19 Drawings: Harris 230
Trading stock 230
J3 31 Vehicles 125 000
Capital: Harris 125 000
Car contributed as additional
capital
TASK 5.9 Simunye Traders: Entries in CRJ, CPJ & GJ

SIMUNYE STORES
Date Journal Account debited Account credited Amount
5 CRJ Bank Capital: Benito R500 000
8 GJ Drawings: Khumalo Trading stock 2 000
12 GJ Land and buildings Capital: Khumalo 800 000
17 CPJ Drawings: Benito Bank 500
21 GJ Drawings: Benito Trading stock 800
24 CPJ Drawings: Benito Bank 6 700[1]
CPJ Drawings: Khumalo Bank 6 000[2]
[1]
8 000 – 500 – 800 = R6 700
[2]
8 000 – 2 000 = R6 000

TASK 5.10  PT Traders: Closing transfers & sharing of profit
5.10.1 GENERAL JOURNAL OF PT TRADERS: 28 FEBRUARY 20.4 GJ1
28 Profit and loss account F2 170 000
Appropriation account F3 170 000
Net profit transferred to appro-
priation account
Current a/c: Smit B3 85 000
Current a/c: Raj B4 85 000
Net profit transferred as per
profit sharing ratio
Current a/c: Smit B3 54 000
Current a/c: Raj B4 42 000
Drawings: Smit B5 54 000
Drawings: Raj B6 42 000
Drawings transferred to current
accounts
5.10.2 GENERAL LEDGER OF PT TRADERS

Dr CURRENT ACCOUNT: SMIT B3 Cr
20.4 20.4
Feb 28 Drawings: Smit GJ1 54 000 Feb 28 Appropriation a/c GJ1 85 000
Balance c/d 31 000
85 000 85 000
CURRENT ACCOUNT: RAJ B4

20.4 20.4
Feb 28 Drawings: Raj GJ1 42 000 Feb 28 Appropriation a/c GJ1 85 000
Balance c/d 43 000
85 000 85 000
DRAWINGS: SMIT B5
20.4 20.4
Feb 28 Balance b/d 54 000 Feb 28 Current a/c: Smit GJ1 54 000
DRAWINGS: RAJ B6
20.4 20.4
Feb 28 Balance b/d 42 000 Feb 28 Current a/c: Raj GJ1 42 000

FINAL ACCOUNTS SECTION
Dr APPROPRIATION ACCOUNT F3 Cr
20.4 20.4
Feb 28 Current a/c: Smit GJ1 85 000 Feb 28 Profit and loss a/c GJ1 170 000
Current a/c: Raj GJ1 85 000
170 000 170 000
TASK 5.11  Delcon Stores: Closing transfers & sharing of profit

5.11.1/5.11.3 GENERAL LEDGER OF DELCON STORES
Dr CAPITAL: DELPORT B1 Cr
20.2
CAPITAL: CONNOR B2
20.2
CURRENT ACCOUNT: DELPORT B3

20.3 20.2
Feb 28 Drawings: Delport GJ2 24 000 Mar 1 Balance b/d 15 000
Balance c/d 129 000 20.3
Feb 28 Appropriation a/c GJ2 138 000
153 000 153 000
CURRENT ACCOUNT: CONNOR B4

20.3 20.2
Feb 28 Drawings: Connor GJ2 35 700 Mar 1 Balance b/d 15 000
Balance c/d 71 300 20.3
Feb 28 Appropriation a/c GJ2 92 000
107 000 107 000
Dr DRAWINGS: DELPORT B5 Cr
20.2 20.3
Mar 31 Bank 2 100 Feb 28 Current a/c: Delport GJ2 24 000
Apr 30 Bank 1 200
May 31 Bank 2 000
Jun 30 Bank 1 300
Jul 31 Bank 2 200
Aug 31 Bank 3 200
Sept 30 Bank 1 200
Oct 31 Bank 1 400
Nov 30 Bank 1 500
Dec 31 Bank 4 300
20.3
Jan 31 Bank 1 200
Feb 28 Bank 2 400
24 000 24 000

Dr DRAWINGS: CONNOR B6 Cr
20.2 20.3
Mar 31 Bank 2 600 Feb 28 Current a/c: Connor GJ2 35 700
Apr 30 Bank 2 200
May 31 Bank 3 300
Jun 30 Bank 3 500
Jul 31 Bank 2 500
Aug 31 Bank 4 500
Sept 30 Bank 3 600
Oct 31 Bank 2 400
Nov 30 Bank 2 500
Dec 31 Bank 3 500
20.3
Jan 31 Bank 2 500
Feb 28 Bank 2 600
35 700 35 700

APPROPRIATION ACCOUNT F3
20.3 20.3
Feb 28 Current a/c: Peter GJ2 138 000 Feb 28 Profit and loss a/c GJ2 230 000
Current a/c: Thompson GJ2 92 000
230 000 230 000
5.11.2 GENERAL JOURNAL OF DELCON STORES: 28 FEBRUARY 20.2 GJ2

Net profit transferred to appro-
priation account
28 Appropriation account F3 230 000
Current a/c: Delport B3 138 000
Current a/c: Connor B4 92 000
Net profit transferred as per
profit sharing ratio
28 Current a/c: Delport B3 24 000
Current a/c: Connor B4 35 700
Drawings: Delport B5 24 000
Drawings: Connor B6 35 700
Drawings transferred to current
accounts
5.11.4 Comment on the current account balances. Do you think that Delport would be satisfied
with the situation? Explain.
Yes.
His capital contribution is higher than Connor’s.
He receives 60% of the net profits while Connor gets 40%.
Delport has limited his drawings to R24 000 which resulted in a larger balance in his current account.
He has only withdrawn 16% of his earnings (24 000/153 000 x 100).
Connor, on the other hand, has withdrawn 33% of his earnings (35 700/107 000 x 100).
Alternate answers may apply.

TASK 5.12  SZ Stores: Primary & Secondary distributions
5.12.1/5.12.2 GENERAL JOURNAL OF SZ STORES: 28 FEBRUARY 20.9 GJ5
1 28 Salary: S. Sishi N8 120 000
Salary: Z. Zinhle N9 240 000
Current a/c: S. Sishi B3 120 000
Current a/c: Z. Zinhle B4 240 000
Annual salary allowance as per
partnership agreement
2 28 Bonus: Z. Zinhle N10 20 000
Bonus granted to Zinhle as per
3 28 Interest on capital N11 33 750
Provision for interest on capital
at 15% p.a.
CLOSING TRANSFERS
Transfer of net profit
Salary: S. Sishi N8 120 000
Salary: Z. Zinhle N9 240 000
Bonus: Z. Zinhle N10 20 000
Interest on capital N11 33 750
Closing transfers
Net profit shared in profit shar-
ing ratio
28 Current a/c: S. Sishi B3 96 000
Drawings: S. Sishi B5 96 000
Drawings: Z. Zinhle B6 115 000
Transfer of drawings to current
accounts
5.12.3 GENERAL LEDGER OF SZ STORES

Dr CURRENT ACCOUNT: S. SISHI B3 Cr
20.9 20.9
Feb 28 Drawings: S. Sishi GJ5 96 000 Feb 28 Salary: S. Sishi GJ5 120 000
Balance c/d 99 625 Interest on capital GJ5 22 500
Appropriation a/c GJ5 53 125
195 625 195 625

Dr CURRENT ACCOUNT: Z. ZINHLE B4 Cr
20.9 20.9
Feb 28 Drawings: Z. Zinhle GJ5 115 000 Feb 28 Salary: Z. Zinhle GJ5 240 000
Balance c/d 209 375 Bonus: Z. Zinhle GJ5 20 000
Interest on capital GJ5 11 250
Appropriation a/c GJ5 53 125
324 375 324 375
DRAWINGS: S. SISHI B5
20.9 20.9
Feb 28 Balance b/d 96 000 Feb 28 Current a/c: S. Sishi GJ5 96 000
DRAWINGS: Z. ZINHLE B6
20.9 20.9
Feb 28 Balance b/d 115 000 Feb 28 Current a/c: Z. Zinhle GJ5 115 000

SALARY: S. SISHI N8
20.9 20.9
Feb 28 Current a/c: S. Sishi GJ5 120 000 Feb 28 Appropriation a/c GJ5 120 000
SALARY: Z. ZINHLE N9
20.9 20.9
Feb 28 Current a/c: Z. Zinhle GJ5 240 000 Feb 28 Appropriation a/c GJ5 240 000
BONUS: Z. ZINHLE N10

20.9 20.9
Feb 28 Current a/c: Z. Zinhle GJ5 20 000 Feb 28 Appropriation a/c GJ5 20 000
INTEREST ON CAPITAL N11

20.9 20.9
Feb 28 Current a/c: S. Sishi GJ5 22 500 Feb 28 Appropriation a/c GJ5 33 750
Current a/c: Z. Zinhle GJ5 11 250
33 750 33 750

APPROPRIATION ACCOUNT F3
20.9 20.9
Feb 28 Salary: S. Sishi GJ5 120 000 Feb 28 Profit and loss a/c GJ5 520 000
Salary: Z. Zinhle GJ5 240 000
Bonus: Z. Zinhle GJ5 20 000
Interest on capitals GJ5 33 750
Current a/c: S. Sishi GJ5 53 125
Current a/c: Z. Zinhle GJ5 53 125
520 000 520 000

TASK 5.13 Analysis of transactions & Accounting Equation
Effect on Accounting
No. Account debited Account credited Journal Amount Equation
A O L
1. Bank Capital: J. Jones CRJ R50 000 + + 0
Vehicle Capital: J. Jones GJ 130 000 + + 0
2. Drawings: S. Smith Bank CPJ 2 000 - - 0
Drawings: S. Smith Trading stock CPJ 800 - - 0
3. Drawings: J. Jones Bank CPJ 3 000 - - 0
4. Salary: J. Jones Current a/c: J. Jones GJ 36 000 0 ± 0
5. Bonus: S. Smith Current a/c: S. Smith GJ 10 000 0 ± 0
6. Interest on capital Current a/c: J. Jones GJ 9 000 0 ± 0
Current a/c: Sally Smith GJ 4 500 0 ± 0
7. Appropriation Current a/c: J. Jones GJ 49 500 0 ± 0
Current a/c: S. Smith GJ 16 500 0 ± 0
TASK 5.14 Analysis of transactions & Accounting Equation

Effect on Account-
Jour-
No. Account debited Account credited Amount ing Equation
nal
A O L
1. Drawings: Alma Stationery GJ R100 0 ± 0
2. Bank Capital: Bletter CRJ 100 000 + + 0
3. Bank Debtors control/M. Marais CRJ 375 ± 0 0
Discount allowed Debtors control/M. Marais CRJ 25 - - 0
4. Drawings: Bletter Bank CPJ 302 - - 0
5. Debtors control/V. Visagie Sales DJ 630 + + 0
Cost of sales Trading stock DJ 420 - - 0
6. Wages SARS – PAYE WJ 810 0 - +
Medical aid fund WJ 600 0 - +
UIF WJ 54 0 - +
Creditors for wages WJ 3 936 0 - +
Medical aid contribution Medical aid fund WJ 600 0 - +
Unemploy. Ins. contribution UIF WJ 54 0 - +
7. Loss due to fire Trading stock GJ 12 000 - - 0
Income receivable Loss due to fire GJ 10 000 + + 0
Salary: Alma Current a/c: Alma GJ 150 000 0 ± 0
(or Partners salary)
Salary: Bletter Current a/c: Bletter GJ 120 000 0 ± 0
(or Partners salary)
8. Bonus: Alma Current a/c: Alma GJ 15 000 0 ± 0
9. Interest on capital Current a/c: Alma GJ 30 000 0 ± 0
Current a/c: Bletter GJ 20 000 0 ± 0
10. Current a/c: Alma Appropriation a/c GJ 11 500 0 ± 0
Current a/c: B Appropriation a/c GJ 11 500 0 ± 0

TASK 5.15 Highway Gym: Current accounts & Appropriation
account
GENERAL LEDGER OF HIGHWAY GYM
5.15.1 Dr CURRENT ACCOUNT: L. STRONG B3 Cr
20.3 20.2
Feb 28 Drawings: L. Strong GJ 25 000 Mar 1 Balance b/d 4 500
Balance c/d 81 750 20.3
Feb 28 Salary: L. Strong GJ 70 000
Interest on capital GJ 9 000
Appropriation a/c GJ 23 250
106 750 106 750
5.15.2 CURRENT ACCOUNT: B. FITT B4

20.2 20.3
Mar 1 Balance b/d 3 700 Feb 28 Salary: B. Fitt GJ 75 000
20.3 Bonus: B. Fitt GJ 4 000
Feb 28 Drawings: B. Fitt GJ 23 000 Interest on capital GJ 3 000
Balance c/d 63 050 Appropriation a/c GJ 7 750
89 750 89 750

5.15.3 APPROPRIATION ACCOUNT F3
20.3 20.3
Feb 28 Salary: L. Strong GJ 70 000 Feb 28 Profit and loss a/c GJ 192 000
Salary: B. Fitt GJ 75 000
Bonus: B. Fitt GJ 4 000
Current a/c: L. Strong GJ 23 250
Current a/c: B. Fitt GJ 7 750
192 000 192 000
TASK 5.16 Beswil Travel Agency: Current & Appropriation ac-

counts
GENERAL LEDGER OF BESWIL TRAVEL AGENCY
5.16.1 Dr CURRENT ACCOUNT: BESTER B3 Cr
20.5 20.6
Mar 1 Balance b/d 20 000 Feb 28 Salary: Bester GJ 192 000
20.6 Bonus: Bester GJ 9 000
Feb 28 Drawings: Bester 180 000 Interest on capital GJ 90 000
Appropriation a/c 122 000 Balance c/d 31 000
322 000 322 000

5.16.2 Dr CURRENT ACCOUNT: WILLIAMS B4 Cr
20.6 20.5
Feb 28 Drawings: Williams GJ 144 000 Mar 1 Balance b/d 25 000
Appropriation a/c GJ 61 000 20.6
Balance c/d 160 000 Feb 28 Salary: Williams GJ 280 000
365 000 365 000

5.16.3 APPROPRIATION ACCOUNT F3
20.6 20.6
Feb 28 Salary: Bester GJ 192 000 Feb 28 Profit and loss a/c GJ 448 000
Salary: Williams GJ 280 000 Current a/c: Bester GJ 122 000
Bonus: Bester GJ 9 000 Current a/c: Williams GJ 61 000
631 000 631 000

TASK 5.17 Revision of Adjustments & Accounting Equation covered in Grade 10
5.17.1
Account debited Account credited
GAAP concept appli-
No. Description Section in Section in Amount
cable Name of account Name of account
ledger ledger
1. Correction of error Business entity rule Drawings Balance Sheet Sundry expenses Nominal R3 000
2. Omission Matching Bank Balance Sheet Fee income Nominal 2 000
Expenses payable Expenses payable /
3. Matching Legal fees Nominal Balance Sheet 50 000
(accrued) Accrued expenses
4. Expenses prepaid Matching Expenses prepaid Balance Sheet Municipal rates Nominal 1 300
Income receivable Income receivable /
5. Matching Balance Sheet Rent income Nominal 6 000
(accrued) Accrued income
Deferred income (re- Deferred income /
6. Matching Fee income Nominal Balance Sheet 800
ceived in advance) Income received in advance
Consumable stores Consumable stores on
7. Matching Balance Sheet Packing material Nominal 1 500
on hand hand
8. Trading stock deficit Matching & Prudence Trading stock deficit Nominal Trading stock Balance Sheet 7 000
Accumulated depreciation on
9. Depreciation Matching & Prudence Depreciation Nominal Balance Sheet 2 200
equipment
5.17.2
OWNERS’
No. ASSETS = LIABILITIES
EQUITY +
1. 0 ±R3 000 0
2. +R2 000 +R2 000 0
3. 0 -R50 000 +R50 000
4. +R1 300 +R1 300 0
5. +R6 000 +R6 000 0
6. 0 -R800 +R800
7. +R1 500 +R1 500 0
8. -R7 000 -R7 000 0
9. -R2 200 -R2 200 0

TASK 5.18 Tata Traders: Revision of Adjustments & Account-
ing Equation covered in Grade 10
5.18.1
GENERAL JOURNAL OF TATA TRADERS – FEBRUARY 20.9 GJ
1 28 Drawings: Akona 33 000
Trading stock 33 000
Stock taken by partner for per-
sonal use
2 Advertising 12 000
Printing & stationery 12 000
Correction of error
3 Income receivable / accrued 3 000
Commission income 3 000
Commission owed to the busi-
ness
4 Printing & stationery 1 400
Expenses payable / accrued 1 400
Amount not yet paid
5 Expenses prepaid 9 000
Repairs 9 000
Amount paid to PE Handyman in
advance
6 Rent income 7 000
Deferred income / received
in advance 7 000
Rent received in advance for
March 20.9
7 Consumable stores on hand 5 500
Cleaning materials 5 500
Materials on hand at year-end
8 Trading stock deficit[1] 6 000
Trading stock 6 000
Shortage identified at year end
9 Depreciation[2] 66 000
Accumulated depreciation
on vehicles 66 000
Depreciation at 20% p.a. on di-
minishing balance method
[1]
740 000 – 33 000 – 701 000
[2]
[450 000 – 120 000 = 330 000 x 20%

5.18.2 TATA TRADERS
POST-ADJUSTMENT TRIAL BALANCE ON 28 FEBRUARY 20.9 (Incomplete)
Balance Sheet accounts section Fol Debit Credit
Drawings: Akona (100 000 + 33 000) 133 000
Vehicles 450 000
Accumulated depreciation on vehicles (120 000 + 66 000) 186 000
Trading stock (740 000 – 33 000 – 6 000) 701 000
Income receivable / accrued 3 000
Expenses payable / accrued 1 400
Expenses prepaid 9 000
Deferred income / received in advance 7 000
Consumable stores on hand 5 500
Nominal accounts section
Advertising (43 000 + 12 000) 55 000
Cleaning materials (36 000 – 5 500) 30 500
Commission income (50 000 + 3 000) 53 000
Printing & stationery (76 000 – 12 000 + 1 400) 65 400
Rent income (91 000 – 7 000) 84 000
Repairs (54 000 – 9 000) 45 000
Trading stock deficit 6 000
Depreciation 66 000
5.18.3
OWNERS’
No. ASSETS = LIABILITIES
EQUITY +
1. -R33 000 -R33 000 0
2. 0 ±R12 000 0
3. +R3 000 +R3 000 0
4. 0 -R1 400 +R1 400
5. +R9 000 +R9 000 0
6. 0 -R7 000 +R7 000
7. +R5 500 +R5 500 0
8. -R6 000 -R6 000 0
9. -R66 000 -R66 000 0
TASK 5.19 Peebo Traders: Provision for bad debts

After completing these ledger accounts, Teachers should ask their classes the following questions:
• What figures should be reflected in the financial statements for Debtors each year? [i.e. Provision for bad
debts should be deducted off Trade debtors in the note to the Balance Sheet for Trade & other receivables
to show net trade debtors, 20.5 = R38 000 (40 000 – 2 000); 20.6 = R57 000 (60 000 – 3 000); 20.7 =
R42 750 (45 000 – 2 250); 20.8 = R62 700 (70 000 – 4 000 – 3 300)].
• What figures will affect the Income Statement each year? (i.e. Provision for bad debts adjustment, 20.5 =
R2 000 (expense); 20.6 = R1 000 (expense); 20.7 = R750 (income); 20.8 = R1 050 (expense).
• What will the entries look like in the General Journal at the end of each financial year? i.e.
For 20.5, 20.6 & 20.8:

Provision for bad debts adjustment – Debit XXX
Provision for bad debts – Credit XXX
Increase in provision.
For 20.7:
Provision for bad debts – Debit XXX
Provision for bad debts adjustment – Credit XXX
Decrease in provision.

5.19.1 GENERAL LEDGER OF PEEBO TRADERS
(a) Dr PROVISION FOR BAD DEBTS B10 Cr
20.5 20.5
Feb 28 Balance c/d 2 000 Feb 28 Provision for bad debts
adjustment GJ 2 000
2 000 2 000
20.6 20.5
20.6
Feb 28 Provision for bad debts
adjustment GJ 1 000
3 000 3 000
20.7 20.6
Feb 28 Provision for bad debts Mar 1 Balance b/d 3 000
adjustment GJ 750
Balance c/d 2 250
3 000 3 000
20.8 20.7
20.8
adjustment GJ 1 050
3 300 3 300
20.8

(b) Dr PROVISION FOR BAD DEBTS ADJUSTMENT N7 Cr
20.5 20.5
Feb 28 Provision for bad debts GJ 2 000 Feb 28 Profit & loss a/c GJ 2 000
20.6 20.6
20.7 20.7
Feb 28 Profit & loss a/c GJ 750 Feb 28 Provision for bad debts GJ 750
20.8 20.8
5.19.2
Year ending ASSETS = OWNERS’ EQUITY + LIABILITIES
28 Feb 20.5 -R2 000 -R2 000 0
28 Feb 20.6 -R1 000 -R1 000 0
28 Feb 20.7 +R750 +R750 0
-R4 000 -R4 000 0
28 Feb 20.8
-R1 050 -R1 050 0

TASK 5.20 Loco Dealers: Provision for bad debts
After completing these ledger accounts, Teachers should ask their classes the following questions:
• What figures should be reflected in the financial statements for Debtors each year? [i.e. Provision for bad
debts should be deducted off Trade debtors in the note to the Balance Sheet for Trade & other receivables
to show net trade debtors, 20.5 = R96 000 (100 000 – 4 000); 20.6 = R124 800 (130 000 - 5 200); 20.7
= R86 400 (90 000 – 3 600); 20.8 = R71 040 (86 000 – 12 000 – 2 960)].
• What figures will affect the Income Statement each year? (i.e. Provision for bad debts adjustment, 20.5 =
R4 000 (expense); 20.6 = R1 200 (expense); 20.7 = R1 600 (income); 20.8 = R640 (income).
• What will the entries look like in the General Journal at the end of each financial year? i.e.
For 20.5 & 20.6:

Provision for bad debts adjustment – Debit XXX
Provision for bad debts – Credit XXX
Increase in provision.
For 20.7 & 20.8:

Provision for bad debts – Debit XXX
Provision for bad debts adjustment – Credit XXX
Decrease in provision.
5.20.1 LEDGER OF LOCO TRADERS

(a) Dr PROVISION FOR BAD DEBTS B10 Cr
20.5 20.5
Feb 28 Balance c/d 4 000 Feb 28 Provision for bad debts
adjustment GJ 4 000
4 000 4 000
20.6 20.5
20.6
adjustment GJ 1 200
5 200 5 200
20.7 20.6
Feb 28 Provision for bad debts Feb 28 Balance b/d 5 200
adjustment GJ 1 600
Balance c/d 3 600
5 200 5 200
20.8 20.7
Feb 28 Provision for bad debts Mar 1 Balance b/d 3 600
adjustment GJ 640
Balance c/d 2 960
3 600 3 600
20.8

(b) Dr PROVISION FOR BAD DEBTS ADJUSTMENT N7 Cr
20.5 20.5
20.6 20.6
20.7 20.7
Feb 28 Profit & loss a/c GJ 1 600 Feb 28 Provision for bad debts GJ 1 600
20.8 20.8
Feb 28 Profit & loss a/c GJ 640 Feb 28 Provision for bad debts GJ 640
5.20.2
Year ending ASSETS = OWNERS’ EQUITY + LIABILITIES
28 Feb 20.5 -R 4 000 -R4 000 0
28 Feb 20.6 -R1 200 -R1 200 0
28 Feb 20.7 +R1 600 +R1 600 0
-R12 000 -R12 000 0
28 Feb 20.8
+R640 +R640 0
TASK 5.21 Tonga Stores: Disposal of one fixed asset

5.21.1
GENERAL JOURNAL OF TONGA TRADERS – FEBRUARY 20.8 GJ2
1 28 Depreciation 3 750
Accumulated depreciation 3 750
on equipment
Update of depreciation on com-
puter sold
Equipment 18 000
Cost price of computer sold on
31 Dec 20.7
equipment 15 750
computer sold
Debtors control 1 600
Selling price of computer sold on
31 Dec 20.7
Asset disposal 650
Transfer of loss on disposal of
computer.
Accumulated depreciation
on equipment 80 500
Depreciation on remaining
equipment at 25% p.a. on cost
[1]
340 000 – 18 000 = 322 000 x 25%

5.21.2
TONGA TRADERS
POST-ADJUSTMENT TRIAL BALANCE ON 28 FEBRUARY 20.8
Equipment (340 000 – 18 000) 322 000
Accumulated depreciation on equipment 248 500
(180 000 + 3 750 – 15 750 + 80 500)
Depreciation (3 750 + 80 500) 84 250
Loss on disposal of equipment 650
5.21.3
ASSETS = OWNERS’ EQUITY + LIABILITIES
Update depreciation -3 750 -R3 750 0
Cost price -18 000 -18 000 0
Accumulated depreciation +15 750 +15 750 0
Selling price +1 600 +1 600 0
= Profit / loss on disposal -650 -650 0
Deprecation on remaining assets -80 500 -80 500 0
TASK 5.22 Migro Brothers: Disposal of two fixed assets

5.22.1
No. Debit Credit Amount A= O+ L
1. Depreciation Accumulated depreciation on vehicles R23 100 – – 0
Asset disposal Vehicles 126 000 – – 0
Acc. depreciation on vehicles Asset disposal 93 100 + + 0
Creditors control Asset disposal 30 000 0 + –
Loss on disposal of fixed asset Asset disposal 2 900 0 0 0
2. Vehicles Creditors control 150 000 + 0 +
3. Depreciation[1]
Accumulated depreciation on vehicles 147 300 – – 0
4. Asset disposal Land & buildings 110 000 – – 0
Debtors control Asset disposal 200 000 + + 0
Asset disposal Profit on disposal of fixed asset 90 000 0 0 0
[1]
850 000 – 126 000 = 724 000
(724 000 x 20%) + (150 000 x 20% x 1/12] = 144 800 + 2 500 = 147 300
5.22.2 GENERAL LEDGER OF MIGRO BROTHERS

20.5 20.5
Feb 1 Vehicles GJ 126 000 Feb 1 Acc dep on vehicles GJ 93 100
Creditors control GJ 30 000
Loss on disposal of as-
GJ 2 900
set
126 000 126 000
20.5 20.5
Feb 28 Land & buildings GJ 110 000 Feb 28 Debtors control GJ 200 000
Profit on disposal of
GJ 90 000
asset
200 000 200 000

Dr PROFIT / LOSS ON DISPOSAL OF ASSETS N Cr
20.5 20.5
Feb 28 Asset disposal GJ 2 900 Feb 28 Asset disposal GJ 90 000
Profit & loss (closing
GJ 87 100
transfer)
90 000 90 000
5.22.3 MIGRO BROTHERS

POST-ADJUSTMENT TRIAL BALANCE ON 28 FEBRUARY 20.5
Land & buildings (1 500 000 – 110 000) 1 390 000
Vehicles (850 000 – 126 000 + 150 000) 874 000
Accumulated depreciation on vehicles 287 300
(210 000 + 23 100 – 93 100 + 147 300)
Debtors control (72 000 + 200 000) 272 000
Creditors control (85 000 + 150 000 – 30 000) 205 000
Depreciation (23 100 + 147 300) 170 400
Profit / loss on disposal of fixed assets 87 100
CAPITALISED INTEREST ON LOANS AND INVESTMENTS

Note to Teacher:
Teachers are advised not to make capitalised interest calculations too complicated. If interest-on-interest
calculations are required, limit these to no more than a few months only. In order to expose learners to
capitalised interest in practice, Teachers are advised to obtain examples of loan statements or fixed deposit
statements from their nearest financial institutions.
TASK 5.23 Phosa Stores: Treatment of interest

5.23.1 Assume that interest is not capitalised on the loan and the fixed deposit. Use the
following table to indicate the year-end adjustments that you would make on 28 Feb-
ruary 20.7.
Account debited Account credited Amount

Interest on loan Expenses payable (accrued) R3 500
Income receivable (accrued) Interest income R250
5.23.2 Assume that interest is capitalised on the loan and the fixed deposit. Use the following
table to indicate the year-end adjustments that you would make on 28 February 20.7.

Interest on loan Loan from Uno Lenders R3 500
Fixed deposit Interest income R250

TASK 5.24 Makho Traders: Treatment of interest
5.24.1 Assume that interest is not capitalised on the loan and the fixed deposit. Use the
following table to indicate the year-end adjustments that you would make on 28 Feb-
ruary 20.7.

Interest on loan Expenses payable (accrued) R4 000
Income receivable (accrued) Interest income R500
5.24.2 Assume that interest is capitalised on the loan and the fixed deposit. Use the following
table to indicate the year-end adjustments that you would make on 28 February 20.7.

Interest on loan Loan from Uno Lenders R4 000
Fixed deposit Interest income R500
TASK 5.25 Fairytale Toy Shop: Composite Task

5.25.1; 3 GENERAL JOURNAL OF FAIRYTALE TOY SHOP: 28 FEBRUARY 20.8 GJ5
1 28 Interest on loan N5 800
Accrued expenses B15 800
Interest owing brought into ac-
count
2 Rent expense N4 1 800
Accrued expenses B15 1 800
Rent owing for one month
3 Prepaid expenses B16 1 600
Salaries and wages N6 1 600
Amount paid in advance
4 Depreciation N9 5 500
Acc dep on equipment B9 5 500
Depreciation at 10% p.a. on
cost
5 Trading stock deficit N10 300
Trading stock B10 300
Stock deficit as per physical
count
6 Cons. stores on hand B17 240
Sundry expenses N6 240
Consumables on hand as per
physical count
7 Salary: Peter N13 120 000
Salary: Pann N14 84 000
Current a/c: Peter B3 120 000
Current a/c: Pann B4 84 000
Salary allowance as per part-
nership agreement

GENERAL JOURNAL OF FAIRYTALE TOY SHOP: 28 FEBRUARY 20.8 (Contd)
Debtors Creditors
No D Details Fol Debit Credit control control
8 28 Bonus: Peter N15 12 000
Bonus allowance as per partnership
agreement
9 Interest on capital N16 23 100
interest on capital at 10% p.a.
CLOSING TRANSFERS
Sales N1 5 000
Debtors allowances N2 5 000
Debtors allowances transferred to
sales a/c
Sales N1 340 000
Trading account F1 340 000
Closing entry
Cost of sales N3 204 000
Closing entry
Profit and loss account F2 136 000
Transfer of gross profit
Discount received N9 1 620
Closing entry
Rent expense N4 21 600
Depreciation N5 6 100
Loss on disposal of equipment N6 1 000
Interest on loan N7 4 000
Prov. for bad debts adjustment N10 400
Sundry expenses N11 25 760
Trading stock deficit N12 300
Closing entries
Appropriation F3 84 940
Transfer of net loss
Salary: Peter N13 120 000
Bonus: Peter N15 12 000
Interest on capital N15 23 100
Closing transfers
Remaining loss shared equally

GENERAL JOURNAL OF FAIRYTALE TOY SHOP: 28 FEBRUARY 20.8 (Contd)
Debtors Creditors
Drawings: Peter B5 44 000
Drawings: Pann B6 38 000
Transfer of drawings to current ac-
counts
5.25.1; 3; 4 GENERAL LEDGER OF FAIRYTALE TOY SHOP

Dr CURRENT ACCOUNT: PETER B3 Cr
20.8 20.7
Feb 28 Drawings: Peter GJ5 44 000 Mar 1 Balance b/d 3 400
Appropriation a/c GJ5 162 020 20.8
Feb 28 Salary: Peter GJ5 120 000
Bonus: Peter GJ5 12 000
Balance c/d 58 120
206 020 206 020
CURRENT ACCOUNT: PANN B4

20.8 20.7
Feb 28 Drawings: Pann GJ5 38 000 Mar 1 Balance b/d 5 300
Appropriation a/c GJ5 162 020 20.8
Feb 28 Salary: Pann GJ5 84 000
Balance c/d 100 120
200 020 200 020

TRADING ACCOUNT F1
20.8 20.8
Feb 28 Cost of sales GJ5 204 000 Feb 28 Sales GJ5 340 000
Profit and loss a/c GJ5 136 000
340 000 340 000
PROFIT AND LOSS ACCOUNT F2

20.8 20.8
Feb 28 Rent expense GJ5 21 600 Feb 28 Trading account GJ5 136 000
Interest on loan GJ5 4 000 Discount received GJ5 1 620
Salaries and wages GJ5 163 400 Appropriation a/c GJ5 84 940
Sundry expenses GJ5 27 760
Depreciation GJ5 5 500
Loss on disposal of
equipment GJ5 25 760
Provision for bad debts
adjustment GJ5 6 100
Trading stock deficit GJ5 300
222 560 222 560

20.8 20.8
Feb 28 Profit and loss a/c GJ5 84 940 Feb 28 Current a/c: Peter GJ5 162 020
Salary: Peter GJ5 120 000 Current a/c: Pann GJ5 162 020
Salary: Pann GJ5 84 000
Bonus: Peter GJ5 12 000
Interest on capitals GJ5 23 100
324 040 324 040
5.25.2 POST-ADJUSTMENT TRIAL BALANCE ON 28 FEBRUARY 20.8

Capital: Peter B1 125 000
Capital: Pann B2 112 000
Current account: Peter [3 400 + 120 000 + 12 000 + 12 500] B3 147 900
Current account: Pann [5 300 + 84 000 + 10 600] B4 99 900
Drawings: Peter B5 44 000
Drawings: Pann B6 38 000
Loan: SBDC B7 20 000
Equipment B8 55 000
Accumulated depreciation on equipment [8 400 + 5 500] B9 13 900
Trading stock [47 000 – 300] B10 46 700
Debtors control B11 13 200
Provision for bad debts B12 700
Creditors control B13 13 700
Bank B14 12 920
Expenses payable [800 + 1 800] B15 2 600
Prepaid expenses B16 1 600
Consumable stores on hand B17 240
Sales N1 345 000
Cost of sales N3 204 000
Rent expense [19 800 + 1 800] N4 21 600
Depreciation [600 + 5 500] N5 6 100
Loss on disposal of equipment N6 1 000
Interest on loan [3 200 + 800] N7 4 000
Salaries and wages [165 000 – 1 600] N8 163 400
Provision for bad debts adjustment N10 400
Sundry expenses [26 000 – 240] N11 25 760
Trading stock deficit N12 300
Salary: Peter N13 120 000
Bonus: Peter N15 12 000
Interest on capital [12 500 + 10 600] N16 23 100
882 320 882 320

5.25.4 POST-CLOSING TRIAL BALANCE ON 28 FEBRUARY 20.8
Capital: Peter B1 125 000
Capital: Pann B2 112 000
Current account: Peter
[3 400 + 120 000 + 12 000 +12 500 – 44 000 – 162 020] B3 58 120
Current account: Pann [5 300 + 84 000 + 10 600 – 38 000 – 162 020] B4 100 120
Drawings: Peter [44 000 – 44 000] B5 0
Drawings: Pann [38 000 – 38 000] B6 0
Loan: SBDC B7 20 000
Equipment B8 55 000
Accumulated depreciation on equipment B9 13 900
Trading stock B10 46 700
Provision for bad debts B12 700
Bank B14 12 920
Expenses payable B15 2 600
287 900 287 900

In wrapping up this Task, get learners to consider the big debit balances on the partners’ current accounts –
what these mean and how they came about.
5.25.5 GENERAL JOURNAL OF FAIRYTALE TOY SHOP: 01 MARCH 20.8 GJ6

Debtors Creditors
1 Accrued expenses B15 800
Interest on loan N5 800
Reversal entry
Accrued expenses B15 1 800
Rent expense N4 1 800
Reversal entry
Reversal entry
Sundry expenses N6 240
Cons. stores on hand B17 240
Reversal entry
5.25.6 Explain how the following figures would arise in the Pre-adjustment Trial Balance:
Provision for bad debts adjustment R400
The provision for bad debts was increased from R300 to R700.
Loss on disposal of equipment R1 000

A fixed asset was sold at a loss of R1 000. Entries were made for the cost, accumulated depreciation and
selling price.
Depreciation R600
Depreciation on the fixed asset that was sold during the year amounted to R600. This was entered on the
date of sale.

TASK 5.26 Singh-A-Long Music Store: Composite Task
5.26.1 GENERAL JOURNAL OF SINGH-A-LONG MUSIC STORE: 28 FEBRUARY 20.2 GJ
1 28 Drawings: Singh 5 800
Trading stock 5 800
2 Sundry expenses[1] 2 400
Trading stock 2 400
Stock donated to SPCA
3 Packing materials 5 300
Expenses payable 5 300
Amount owed at year-end
4 Income receivable[2] 300
Interest on investments 300
Amount receivable for inter-
est on fixed deposit
5 Commission income 1 400
Deferred income 1 400
Amount received in advance
6 Rent income 1 600
Deferred income[3] 1 600
Amount received in advance
7 Prepaid expenses[4] 380
Sundry expenses 380
8 Interest on loan 4 200
Mortgage loan 4 200
Amount owing in respect of
interest on loan
9 Debtors control/D. Davis 200
Bad debts recovered 200
Correction of error in posting
10 Bad debts 500
Debtors control 500
Additional bad debts written
off
Provision for bad debts ad- 250
justment[6]
Provision for bad debts 250
Increase in provision for bad
debts
11 Trading stock deficit[7] 12 000
Stock deficit identified as per
physical stock-take
Consumable stores on hand 440
Packing materials 440
Packing material on hand as
per stock-take
12 Income receivable 1 400
Selling price of equipment

5.26.1 GENERAL JOURNAL OF SINGH-A-LONG MUSIC STORE (Continued)
28 Loss on disposal of equip. 600
Asset disposal 600
Transfer of loss on sale of
equipment
Acc dep on equipment 2 340
Depreciation calculated at
10% p.a. on diminishing bal-
ance
14 Salary: Singh 90 000
Salary: Song 60 000
Current a/c: Singh 90 000
Current a/c: Long 60 000
Salary allowances as per
15 Bonus: Singh 8 000
Bonus allowance agreed as
per partnership agreement
16 Interest on capital 30 000
Current a/c: Long 10 000
Interest on capital as per
[1]
This could also be charged to Donations or Ad- Adjusted provision = 23 000 x 5%
vertising. = R1 150
[2]
(75 000 – 20 000) x 6% x 2/12 = 550 Increase = 1 150 – 900
75 000 x 6% x 10/12 = 3 750 = R250
[7]
4 300 Stock figure = 122 500 – 5 800 – 2 400
Accrued amount = 4 300 – 4 000 = R300 = R114 300
[3]
6 x 8 000 = 48 000 Deficit = 114 300 – 102 300
Deferred amount = 49 600 – 48 000 = R12 000
= R1 600 [8]
162 000 – 30 000 – 123 600 x 10% = 840
[4]
1 140  12 x 4 = R380 30 000 x 10% x 6/12 = 1 500
[5]
Debtors = 23 300 + 200 – 500 2 340
= R23 000

5.26.2 POST-ADJUSTMENT TRIAL BALANCE ON 28 FEBRUARY 20.2
Capital: Singh B 400 000
Capital: Long B 200 000
Current account: Singh [-44 000 + 90 000 + 8 000 + 20 000] B 74 000
Current account: Long [67 000 + 60 000 + 10 000] B 137 000
Drawings: Singh [68 000 + 5 800] B 73 800
Drawings: Long B 60 000
Mortgage loan ABC Bank [360 000 + 4 200] B 364 200
Land and buildings B 910 000
Equipment B 162 000
Accumulated depreciation on equipment [123 600 + 840 + 1 500] B 125 940
Trading stock [122 500 – 5 800 – 2 400 – 12 000] B 102 300
Debtors control [23 300 + 200 – 500] B 23 000
Provision for bad debts [900 + 250] B 1 150
Creditors control B 36 600
Fixed deposit B 75 000
Bank B 20 300
Cash float B 1 000
Expenses payable/accrued B 5 300
Income receivable/accrued [300 + 1 400] B 1 700
Deferred income/Income received in advance [1 400 + 1 600] B 3 000
Prepaid expenses B 380
Consumable stores on hand B 440
Sales N 1 440 000
Debtors allowances N 20 000
Cost of sales N 800 000
Rent income [49 600 – 1 600] N 48 000
Interest on loan [46 200 + 4 200] N 50 400
Packing materials [22 000 + 5 300 – 440] N 26 860
Salaries and wages N 270 000
Commission income [17 000 – 1 400] N 15 600
Interest on investments [4 000 + 300] N 4 300
Bad debts [9 700 + 500] N 10 200
Trading stock deficit [12 500 + 12 000] N 24 500
Depreciation [500 + (840 + 1 500)] N 2 840
Loss on disposal of fixed asset [2 000 -1 400] N 600
Sundry expenses [29 700 + 2 400 – 380] N 31 720
Bad debts recovered N 200
Provision for bad debts adjustment N 250
Salary: Singh N 90 000
Salary: Long N 60 000
Bonus: Singh N 8 000
Interest on capital [20 000 + 10 000] N 30 000
2 855 290 2 855 290

5.26.3 GENERAL LEDGER OF SINGH-A-SONG MUSIC STORE
Dr CURRENT ACCOUNT: SINGH B3 Cr
20.1 20.2
Mar 1 Balance b/d 44 000 Feb 28 Salary: Singh GJ 90 000
20.2 Bonus: Singh GJ 8 000
Feb 28 Drawings: Singh GJ 73 800 Interest on capital GJ 20 000
Balance c/d 49 838 Appropriation a/c GJ 49 638
167 638 167 638
CURRENT ACCOUNT: LONG B4

20.2 20.1
Feb 28 Drawings: Long GJ 60 000 Mar 1 Balance b/d 67 000
Balance c/d 110 092 20.2
Feb 28 Salary: Long GJ 60 000
Appropriation a/c GJ 33 092
170 092 170 092

TRADING ACCOUNT F1
20.2 20.2
Feb 28 Cost of sales GJ 800 000 Feb 28 Sales GJ 1 420 000
Profit and loss a/c GJ 620 000
1 420 000 1 420 000

20.2 20.2
Feb 28 Interest on loan GJ 50 400 Feb 28 Trading account GJ 620 000
Packing materials GJ 26 860 Rent income GJ 48 000
Salaries and wages GJ 270 000 Commission income GJ 15 600
Bad debts GJ 10 200 Int. on investments GJ 4 300
Trading stock deficit GJ 24 500 Bad debts recovered GJ 200
Depreciation GJ 2 840
Loss on disposal of
equipment GJ 600
Sundry expenses GJ 31 720
Provision for bad debts
adjustment GJ 250
Appropriation GJ 270 730
688 100 688 100

20.2 20.2
Feb 28 Interest on capital GJ 30 000 Feb 28 Profit and loss a/c GJ 270 730
Salary: Singh GJ 90 000
Salary: Long GJ 60 000
Bonus: Singh GJ 8 000
Current a/c: Singh [3/5] GJ 49 638
Current a/c: Long [2/5] GJ 33 092
270 730 270 730
5.26.4 POST-CLOSING TRIAL BALANCE ON 28 FEBRUARY 20.2

Capital: Singh B 400 000
Capital: Long B 200 000
Current account: Singh B 49 838
Current account: Long B 110 092
Mortgage loan ABC Bank (19% p.a.) B 364 200
Land and buildings B 910 000
Equipment B 162 000
Accumulated depreciation on equipment B 125 940
Trading stock B 102 300
Debtors control B 23 000
Provision for bad debts B 1 150
Creditors control B 36 600
Fixed deposit (12% p.a.) B 75 000
Bank B 20 300
Cash float B 1 000
Expenses payable/Accrued expenses B 5 300
Income receivable/Accrued income B 1 700
Deferred income/Income received in advance B 3 000
Prepaid expenses B 380
1 296 120 1 296 120
TASK 5.27 Welkom Stores: Ethical & internal control scenarios

relating to year-end procedures
Alternative valid responses acceptable. Examples of valid responses below:
SCENARIOS RELATING TO INTERNAL CONTROL

1. Dea Dilley clearly does not understand the bookkeeping process and the need for internal control at
each stage of the process. Whilst it is important for the totals of the Pre-Adjustment Trial Balance to
agree, this merely indicates that debits = credits. It is still possible that errors have crept into the
books. That is why adjustments are required, in order to ensure that the figures are accurate and
comply with GAAP. There might well be many year-end adjustments, and the financial statements will
be prepared from these figures. It is essential that the Post-Adjustment Trial Balance balances, other-
wise the financial statements will not balance and will lead readers to assume that some figures are
missing. The Post-Closing Trial Balance is prepared after the closing transfers have been completed,
and the figures in this Trial Balance will be reflected in the Balance Sheet. These figures will also be
used to start off the new financial year, hence it is essential that the totals in the Post-Closing Trial
Balance agree.

2. The totals from the Debtors List and Fixed Assets Register must agree to the main accounts (i.e.
Debtors control and the relevant fixed assets). This is a basic requirement of ensuring good internal
control because duties will be divided amongst the employees in the Accounting department so that
the work of one person serves as a check on the other. One employee will be responsible for the
General Ledger, while others will be responsible for the Debtors Ledger and Fixed Assets Register,
which contain details of individual debtors and fixed assets respectively. If the totals do not agree,
then someone has made a mistake, or possibly fraud has occurred.
3. The trading stock deficit in this case is R170 000. This amounts to more than one-third of the stock
on hand according to the ledger. It is very significant (material) if the deficit is so large. There is
obviously a serious error in the books or in the physical count, or there is major fraud in the business.
In either case, this must be investigated thoroughly. Bearing in mind all the threats to internal control
in this business, it is clear that they need to employ an internal auditor to monitor these problems on
a daily basis.
SCENARIOS RELATING TO BUSINESS ETHICS

1. The amount should remain debited to Drawings: Steele as it relates to a personal expense (business
entity rule). It is unethical of Steele to expect the business to pay for this, and it will also lead to
criminal charges for tax evasion if this is portrayed as a business expense. Steele must either pay in
the amount or it must be debited to Drawings: Steele. This incident also indicates another problem.
Journal vouchers for adjustments should be authorised and signed by two senior persons in the busi-
ness to prevent this sort of financial abuse from occurring.
2. The circumstances of this incident are very questionable. It appears that partner Deale has paid a
bribe to a decision-maker in the municipality. There can be no valid reason for a cash withdrawal of
this amount especially without a valid voucher. The partners must portray a positive ethical stance at
all times. If they become known for ‘wheeling & dealing’ then this will rub off on the employees who
might at some stage be tempted to make similar unethical decisions in future. The business will then
become known as disreputable and this would lead to a loss of customer goodwill. Furthermore, the
R100 000 is clearly not a salary, so it should not be shown under the Salaries account. If it is not a
valid expense, the partners can be charged with tax evasion. Criminal charges can also be laid against
persons offering and receiving the bribe. You should refuse to put the entry through, otherwise you
would be implicated as an accessory to the crime.
3. To keep quiet about this matter would not be ethical. It appears that the tenant has made a genuine
error in making the over-payment of R1 000 per month and he probably has not noticed this because
of the debit order being processed automatically each month. The correct and ethical thing to do is to
inform the tenant of the over-payment and offer to off-set the R12 000 over-payment against the rent
for the next two months. An entry should be made for deferred income / received in advance.

ADDITIONAL RESOURCE:
EXAMPLE OF A FREE PARTNERSHIP AGREEMENT DOWNLOADABLE FROM www.formville.com.
Note that the sections of a Partnership Agreement may be mutually decided upon by the partners and need
not specifically adhere to this draft agreement.
AGREEMENT OF PARTNERSHIP
A. Parties to the Agreement: This Agreement is made between the following parties:
Name: _________________________________________ ID number:________________________
Residential address: _______________________________________________________________
and
Name: _________________________________________ ID number:________________________
Residential address: _______________________________________________________________
B. Purpose: All parties to this agreement agree to begin, and carry on, a Partnership for the following
purposes:
2.1
2.2
2.3
C. All parties agree to the following terms and conditions:
1. Commencement: The Partnership will commence on _______________________ (date) and will

continue indefinitely until terminated.
2. Name: The name of the Partnership will be: _________________________________________.
3. Start-up capital: The start-up capital of the Partnership will be R________________ (in words:
______________________________________________________).
4. Capital contributions: Each partner of the Partnership will contribute the following property,
services, or cash to help complete this total amount:
The Capital contribution of ______________________ (name of partner) will comprise:

_______________________________________________________________________.
The Capital contribution of ______________________ (name of partner) will comprise:
_______________________________________________________________________.
5. Additional capital: These contributions must be made by ________________ (date). At any

time the partners may decide, upon a complete and unanimous vote, to contribute additional capital
to the Partnership.
6. Decisions: Each and every partner will have an equal right to manage and control this Partnership.
All Partnership decisions will have to be made by unanimous vote. The partners can select one
member of the Partnership to carry on the day-to-day operations of the Partnership.
7. Bank account: The Partnership will maintain a bank account, on which cheques may be signed
by either all of the partners, or by the partner selected to carry on the day-to-day operations of the
Partnership.

8. Accounting records: The Partnership will maintain records for accounting purposes, which will
be open to any partner for inspection. Such records will include separate accounting sections for
both income and capital for each of the partners. The financial year-end of the Partnership will be
________________________ of each year. The capital account for each partner will consist of no
less than the value of the services, property, or cash that was contributed and listed under section
three of this agreement. The partners may withdraw money from their current (income) accounts
on the following basis: ___________________________________________________________.
9. Audit: The books of the Partnership will / will not be (delete whichever is not applicable) subject
to an annual audit. The appointment of auditors is to be unanimously agreed by all partners.
10. Sharing of profits and losses: The profits and losses of the Partnership will be shared by all of
the partners as follows:
11. Withdrawal: If any member withdraws from the Partnership for any reason, including death, then
the Partnership may continue and be operated by the remaining partners. The withdrawing partner,
or their representative, will be obligated to sell their interest in the Partnership to the remaining
partners or their representatives, while the remaining partners or their representatives will be obli-
gated to buy that interest. The value of the withdrawing partner's interest will be their share pro-
portionate to the total value of the Partnership. The total value of the Partnership will be determined
by an independent appraisal that must be made within ninety days of the partner's withdrawal. All
members of the Partnership, including the member who withdraws, will share the cost of this ap-
praisal equally.
12. Transfer of Partner’s interest: No member of the Partnership may transfer or sell any or all of
their interest in the Partnership to any other party without the prior, written, approval of the re-
maining partners.
13. Termination: The Partnership may be terminated at any time upon the unanimous agreement
among the members. Upon the termination, the members will agree to apply the assets and money
of the Partnership in the following order:
a. Pay all debts owed by the Partnership.
b. Distribute the partners’ income accounts to them in the proper, proportionate amount.
c. Distribute the partners’ capital accounts to the partners in the proper, proportionate amount.
d. Distribute any assets that remain in accordance with the profit-sharing ratio.
14. Resolution of disputes between partners: If there is any dispute between the partners related
to this written agreement will be settled by mediation. If any mediation is unsuccessful, then the
dispute will be settled according by binding arbitration.
15. Additional items:
16. Modification: No modification of this agreement will be considered effective unless it is in writing,
and is signed by all members of the Partnership. This agreement will bind and benefit all the
partners and any successors. This document, and any attachments, will constitute the entire agree-
ment between the partners. This agreement will be governed and enforced according to the laws
of South Africa.
SIGNED BY ALL PARTIES TO THIS AGREEMENT:

Name of Partner: Signature: Date: Place: Witness:

CHECKLIST
Requires
Yes – profi-
cient
tion
Define a partnership.
Identify the difference between a sole proprietor and
a partnership as a form of business ownership.
Explain the accounting cycle relating to a partnership.
Explain the term joint and several liability for debts as
it applies to partners.
Identify essential parts of a partnership agreement.
Draw up partners’ capital, current and drawings ac-
counts in the ledger.
Draw up an Appropriation account in the ledger.
Explain the difference between primary and secondary
distributions to partners.
Explain how partner’s salaries, interest on capital, di-
vision of remaining profit/loss and drawings are rec-
orded in the ledger and journals.
Define and explain GAAP concepts and how they relate
to year-end adjustments.
Record year-end adjustments in the general journal
and ledger.
Record closing transfers in the general journal and
ledger.
Explain and prepare the three types of trial balances
applicable to a financial year-end.
Analyse entries relating to partnerships under the Ac-
counting Equation.
Prepare a set of partnership final accounts.
Comment on and evaluate internal control in a part-
nership context.
Comment on and evaluate ethical behaviour in a part-
nership context.

MODULE 6
PREPARING FINANCIAL STATEMENTS
OF PARTNERSHIPS
TASK 6.1  Stakeholders
No. Answer
1. E
2. D
3. A
4. F
5. B
6. G
7. C
TASK 6.2 Characteristics of financial statements

No. Answer
1. D
2. E
3. B
4. A
5. C
TASK 6.3  The need for rules or GAAP

6.3.1 Investigate what is meant by GAAP.
Refer to the Learner’s Book.
6.3.2 In groups, list the ways in which the users of the financial statements and the econ-
omy would be affected if accountants did not ‘follow the rules’ of GAAP at all times.
Various answers are possible, e.g. if figures are unreliable, investors will not entrust their money to busi-
nesses – this would affect employment offered and consequently standard of living.
6.3.3 In your group, decide how the professional institutes should act should one of their
members be guilty of not following GAAP or the professional procedures laid down.
Various answers are possible, e.g. the guilty members should face a disciplinary inquiry to explain their
actions and, if necessary, the guilty members should have their membership of the institute removed, de-
pending on the severity of the offence and whether or not this is a repeated offence.
TASK 6.4  Application of GAAP

Example of
No. Description
application
1. C U
2. E X
3. A W
4. F V
5. B Z
6. D Y

TASK 6.5  Operating, financing & investing activities
No. Activity No. Activity
(a) Operating (i) Financing
(b) Operating (j) Financing
(c) Operating (k) Operating
(d) Operating (l) Financing
(e) Investing (m) Financing and investing
(f) Investing (n) Financing
(g) Investing (o) Operating
(h) Financing (p) Operating
TASK 6.6  Sequence of year-end procedures

1. Preparing a Pre-Adjustment Trial Balance.
2. Entering adjustments in the General Journal and posting to the ledger.
3. Preparing a Post-Adjustment Trial Balance.
4. Entering closing transfers in the General Journal and posting to the ledger.
5. Preparing a Post-Closing Trial Balance.
6. Preparing financial statements.
7. Interpreting financial statements and making decisions.
8. Entering reversals in the General Journal and posting to the ledger.
Suggestion: Photostat the following examples of financial statements, enlarge them to A3 size
and pin them up on your classroom wall.
Suggestion: Learners must be able to identify and use the correct format for drawing up financial
statements. You may wish to cut pieces of paper with the different sections and let them put them
together (similar to doing a puzzle) and have a competition between the groups to see if they can
better their own time.

Names of partners: ………………………………………………
Trading as: ………………………………………………
INCOME STATEMENT / STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED ………………………………………….
Note 20.2 20.1
Sales xxx xxx
Cost of sales (xxx) (xxx)
Gross profit xxx xxx
Income from services rendered xxx xxx
Fee income xxx xxx
Commission income* xxx xxx
Other operating income xxx xxx
Rent income xxx xxx
Profit on sale of fixed assets xxx xxx
xxx xxx
xxx xxx
Gross operating income xxx xxx
Operating expenses (xxx) (xxx)
Salaries & wages xxx xxx
Maintenance xxx xxx
Stationery & printing xxx xxx
Water & electricity xxx xxx
xxx xxx
xxx xxx
xxx xxx
xxx xxx
xxx xxx
xxx xxx
Operating profit xxx xxx
Interest income 1 xxx xxx
Profit before interest expense xxx xxx
Interest expense / Financing cost 2 (xxx) (xxx)
Net profit for the year 8 XXX XXX
*Note that commission income may be shown under other operating income. Abide by the guidelines of
your examining body.
Samples of suggested word blocks for the Income Statement:
Income from ser-

Cost of sales vices rendered
Sales
Gross profit Interest expense /

financing cost
Net profit for the
year Operating expenses
Profit before interest
expense
Other operating
Operating profit
income
Interest income

Trading as: ………………………………………………
BALANCE SHEET / STATEMENT OF FINANCIAL POSITION ON ……………………..
ASSETS Note 20.2 20.1
Non-current assets xxx xxx
Tangible / Fixed assets 3 xxx xxx
Financial assets – Fixed deposit xxx xxx
Current assets xxx xxx
Inventories 4 xxx xxx
Trade and other receivables 5 xxx xxx
Cash and cash equivalents 6 xxx xxx
Total assets XXX XXX
EQUITY AND LIABILITIES

Capital and reserves / Owners’ equity xxx xxx
Capital 7 xxx xxx
Current accounts 8 xxx xxx
Non-current liabilities xxx xxx
Mortgage loan xxx xxx
Current liabilities xxx xxx
Trade and other payables 9 xxx xxx
Bank overdraft (if applicable) xxx xxx
Total equity and liabilities XXX XXX
Samples of suggested word blocks for the Balance Sheet:
ASSETS
EQUITY AND
LIABILTIES
Non-current liabili-
ties Non-current assets
Current assets Total assets Capital and reserves /

Owners’ equity
Total equity and
liabilities
Above we have only used the headings for the Balance Sheet. You could
also add the accounts that fall under these headings.

Trading as: ………………………………………………
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED ………………..………
20.2 20.1
1.. INTEREST INCOME
From investments xxx xxx
From overdue debtors xxx xxx
From cheque account xxx xxx
XXX XXX
2. INTEREST EXPENSE
On mortgage loan xxx xxx
On bank overdraft xxx xxx
XXX XXX
3. FIXED ASSETS Land & Equip-

Vehicles 20.2 20.1
buildings ment
Carrying value at beginning xxx xxx xxx xxx xxx
Cost xxx xxx xxx xxx xxx
Accumulated depreciation (xxx) (xxx) (xxx) (xxx) (xxx)
Movements xxx xxx xxx xxx xxx
Additions at cost xxx xxx xxx xxx xxx
Disposals at carrying value (xxx) (xxx) (xxx) (xxx) (xxx)
Depreciation (xxx) (xxx) (xxx) (xxx) (xxx)
Carrying value at end XXX XXX XXX XXX XXX
Cost xxx xxx xxx xxx xxx
Accumulated depreciation (xxx) (xxx) (xxx) (xxx) (xxx)
4. INVENTORIES 20.2 20.1

Trading stock xxx xxx
Consumable stores on hand xxx xxx
XXX XXX
5. TRADE AND OTHER RECEIVABLES
Net trade debtors xxx xxx
Trade debtors xxx xxx
Provision for bad debts (xxx) (xxx)
Income receivable / accrued xxx xxx
Expenses prepaid xxx xxx
XXX XXX
6. CASH AND CASH EQUIVALENTS
Fixed deposits (maturing within 12 months) xxx xxx
Savings account xxx xxx
Bank xxx xxx
Cash float xxx xxx
Petty cash xxx xxx
XXX XXX
7. CAPITAL Partner A Partner B 20.2 20.1

Balance at the beginning of the year xxx xxx xxx xxx
Contribution of capital during the year xxx xxx xxx xxx
Withdrawal of capital during the year (xxx) (xxx) (xxx) (xxx)
Balance at the end of the year XXX XXX XXX XXX

8. CURRENT ACCOUNTS Partner A Partner B 20.2 20.1
Profit per Income Statement xxx xxx xxx xxx
Partners’ salaries xxx xxx xxx xxx
Interest on capital xxx xxx xxx xxx
Partners’ bonus xxx xxx xxx
Primary distribution of profits xxx xxx xxx xxx
Final distribution of profits xxx xxx xxx xxx
Drawings during the year (xxx) (xxx) (xxx) (xxx)
*Retained income for the year xxx xxx xxx xxx
*Retained income at beginning of year xxx xxx xxx xxx
*Retained income at end of year XXX XXX XXX XXX
*Or Balance
9. TRADE AND OTHER PAYABLES 20.2 20.1
Trade creditors xxx xxx
Expenses payable / accrued xxx xxx
Income received in advance / deferred xxx xxx
Creditors for salaries xxx xxx
SA Revenue Services (PAYE) xxx xxx
Pension fund xxx xxx
Medical aid fund xxx xxx
UIF xxx xxx
Current portion of loan/Short-term loan xxx xxx
XXX XXX
Sample of suggested word blocks on notes to the balance sheet for puzzle game:
Interest from cheque

account Interest from over-
due debtors
INTEREST INCOME
INTEREST EXPENSE
Interest from invest- Interest on overdraft Interest on mort-

ments gage loan

TASK 6.7  PL Traders: Preparing financial statements and
assessment of current accounts & stock
6.7.1 PARTNERS PENN AND LUKHAN TRADING AS PL TRADERS
FOR YEAR ENDED 28 FEBRUARY 20.5
Note
Sales [975 000 – 15 000] 960 000
Cost of sales [560 000]
Gross profit 400 000
Income from services rendered 93 360
Fee income 53 000
Other operating income 80 900
Rent income 72 000
Profit on disposal of vehicle 8 900
Gross operating income 574 260
Operating expenses (299 690)
Advertising 7 000
Consumable stores 18 000
Salaries and wages 204 000
Provision for bad debts adjustment 310
Depreciation [32 500 + 10 500] 43 000
Sundry expenses 14 180
Operating profit 274 570
Interest income 1 3 900
Profit before interest expense 278 470
Interest expense / Financing cost 2 [58 100]
Net profit for the year 8 220 370
BALANCE SHEET / STATEMENT OF FINANCIAL PPOSITION ON 28 FEBRUARY 20.5

ASSETS Note
Non-current assets 945 000
Tangible / Fixed assets 3 880 000
Financial assets: Fixed deposit 65 000
Current assets 288 070
Inventories 4 219 000
Trade and other receivables 5 46 070
Cash and cash equivalents 6 23 000
Total assets 1 233 070

Capital and reserves / Owners’ equity 922 070
Capital 7 870 000
Current accounts 8 52 070
Non-current liabilities 229 950
Mortgage loan: XBS 229 950
Current liabilities 81 050
Trade and other payables 9 73 510
Bank overdraft 7 540
Total equity and liabilities 1 233 070

1. INTEREST INCOME
From investments 3 900
2. INTEREST EXPENSE
On mortgage loan 57 400
On overdraft 700
58 100
3. FIXED ASSETS Land &

buildings
Carrying value at beginning 775 000 104 500 43 500 923 000
Cost 775 000 180 000 70 000 1 025 000
Accumulated depreciation - [75 500] [26 500] [102 000]
Movements - [32 500] [10 500] [43 000]
Additions at cost - - - -
Disposals at carrying value - - - -
Depreciation - [32 500] [10 500] [43 000]
Carrying value at end 775 000 72 000 33 000 880 000
Cost 775 000 180 000 70 000 1 025 000
4. INVENTORIES
219 000
Net trade debtors 40 280
Trade debtors 42 400
Provision for bad debts [2 120]
Income receivable / accrued 3 130
46 070
Savings account 20 000
Petty cash 2 000
Cash float 1 000
23 000
7. CAPITAL Penn Lukhan Total

Balance at the beginning of the year 580 000 290 000 870 000
Contribution of capital during the year - - -
Withdrawal of capital during the year - - -
Balance at the end of the year 580 000 290 000 870 000

8. CURRENT ACCOUNTS Penn Lukhan Total
Profit per Income Statement 143 580 76 790 220 370
Partners’ salaries 90 000 50 000 140 000
Interest on capital 40 600 20 300 60 900
Primary distribution of profits 130 600 70 300 200 900
Final distribution of profits 12 980 6 490 19 470
Drawings during the year [84 000] [76 000] [160 000]
Retained income for the year 59 580 790 60 370
Retained income at beginning of year 9 000 [17 300] [8 300]
Retained income at end of year 68 580 [16 510] 52 070
9. TRADE AND OTHER PAYABLES

Trade creditors 51 000
Income received in advance / Deferred income 1 370
Accrued expenses / Expenses payable 4 140
Creditors for wages 13 940
SA Revenue Services (PAYE) 3 060
73 510
6.7.2 Penn is worried about the balances on the current accounts. Do you agree? Explain.
Yes. Lukhan is withdrawing more than his earnings while Penn is retaining a large amount in the business.
A positive balance increases the net worth of the partners.
A negative balance decreases partner’s equity.
The partners need to discuss this – a review of the partnership agreement may be necessary where limits
could be set on withdrawals by partner.
Any other suitable answer.
6.7.3 Lukhan is worried that the business is not carrying enough stock to satisfy its custom-
ers. Do you agree? Explain.
Open-ended question.
Ideally a business selling household appliances should carry a large variety of stocks.
Learners may also comment on the trading stock deficit amount of R13 200.
Note also that carrying large stocks ties up working capital and also exposes merchandise to damage,
mishandling, obsolescence and theft.
If many customers are being turned away because of the lack of stock then the situation needs to be dealt
with.
Any other suitable answer.

TASK 6.8 Hariclaire Supplies: Identifying errors in financial
statements
There is no right or wrong answer to this Task. The purpose is to allow the learners an opportunity to discuss
the following issues:
• The need for accurate financial statements.
• The implications of financial statements not being correctly completed.
• The errors made and why – what principles did she contravene? This will ensure that the learners
have an understanding of the principles and can apply them instead of just being a theory topic that
they learn.
• How to correct the financial statements based on their findings.
6.8.1 In your opinion, have Harry and Claire made the right decision in employing Miss I.
Trye? Explain. If not, how do they solve the problem regarding the accuracy of the
financial statements?
Use discretion – learners must justify their answer.
6.8.2 List the errors that Miss I. Trye has made. What are the main principles that she does
not understand?
Errors made by Miss I. Trye, e.g.:
• Audit fees have been omitted from the Income Statement.
• Stock purchases have not been recorded.
• The calculation of gross profit is incorrect – she included the sale of packing materials and income from
services rendered in the calculation.
• The fixed deposit matured has been entered in the Income Statement.
• Interest income and interest expense have not been shown separately at the bottom of the Income
Statement.
• Drawings of partners have been recorded in the Income Statement as operating expenses.
• The purchase of equipment has been recorded in the Income Statement.
• Trading stock has been reflected as a non-current asset in the Balance Sheet.
• Consumable stores on hand have not been included under Inventory
• Bank overdraft has been entered as a non-current liability.
• The long-term loan has been reflected as a current liability – no mention has been made that the loan
is repayable within 12 months.
• The drawings of partners have not been considered in the calculation of current account balance.
• Interest on capitals calculated wrongly.

6.8.3 HARICLAIRE SUPPLIES
Note
Sales 870 000
Sale of packing materials 13 000
Bad debts recovered 17 000
Operating expenses [287 460]
Wages 105 000
Rent expense 40 000
Bank charges 7 800
Telephone & electricity 9 200
Depreciation 38 000
Stationery & printing 4 300
Packing materials cost 12 400
Catering consumable costs 35 000
Audit fees 20 000
HARICLAIRE SUPPLIES
BALANCE SHEET / STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.9
ASSETS Note
Tangible assets /Fixed assets [334 000 + 4 800] 3 338 800
Financial assets: Fixed deposit [43 000 – 20 000] 23 000
Inventories [122 000 – 4 500 + 24 000] 4 141 500
Total assets 570 340

Capital 7 230 000
Long-term loan from Friendly Lenders 125 000
Trade and other payables [36 000 + 20 000] 9 56 000
Bank overdraft 24 800
Total equity and liabilities 570 340

HARICLAIRE SUPPLIES
NOTES TO THE FINANCIAL STATEMENTS AS AT 28 FEBRUARY 20.9
7. CAPITAL Haripersad Cele Total
Contribution of capital on 31:08:20.8 - 25 000 25 000
Withdrawal of capital on 28:02:20.9 [20 000] - [20 000]
8. CURRENT ACCOUNTS Haripersad Cele Total

Partners’ salaries 0 80 000 80 000
[1]
Retained income for the year 25 943 93 597 119 540
Retained income at beginning of year 6 000 9 000 15 000
Retained income at end of year 31 943 102 597 134 540
[1]
150 000 x 5% = 7 500
[2]
[75 000 x 5% x 6/12 = 1 875] + [100 000 x 5% x 6/12 = 2 500] = 4 375
TASK 6.9  Donduck Stores: Preparing financial statements

6.9.1 PARTNERS DONALD AND DUCK TRADING AS DONDUCK STORES
Note
Sales [438 000 - 4 000] 434 000
Fee income 76 000
Other operating income 340
Profit on disposal of equipment 240
Depreciation 13 400
Pension contributions 4 800
Rent expense 36 800
Trading stock deficit 510

DONDUCK STORES
BALANCE SHEET / STATEMENT OF FINANCIAL POSITION ON 28 FEBRUARY 20.7
ASSETS Note
Financial assets – Fixed deposit 15 000

Capital 7 150 000
Loan from Mickey Mouse Lenders 50 000
Mortgage loan: HBS 60 000
1. INTEREST INCOME
on current account 600
from investments 880
1 480
2. INTEREST EXPENSE
On loans 18 000
18 000

buildings
Cost 130 000 125 000 27 700 282 700
Movements - [11 000] [2 900] [13 900]
Disposals at carrying value - - [500] [500]
Depreciation - [11 000] [2 400] [13 400]
Cost 130 000 125 000 27 000 282 000
4. INVENTORIES
53 740

Provision for bad debts [975]
Income receivable / accrued 990
Prepaid expenses 2 200
21 715
Bank 6 875
Petty cash 400
Cash float 500
8 775
7. CAPITAL Donald Duck Total

Contribution of capital during year 20 000 20 000 40 000
8. CURRENT ACCOUNTS Donald Duck Total

Retained income at beginning of year [10 000] 4 000 [6 000]

Income received in advance / Deferred income 880
Accrued expenses / Expenses payable 1 980
Creditors for wages 7 200
39 220

6.9.2 Which figure/s indicates that this business started many years ago? Explain.
Land and buildings is stated at R130 000 while the current value is estimated at R1.4m.
Historical cost concept and Prudence concept is applicable.
Rather understate values than overstate.
6.9.3 If you were Debbie or David, would you consider going into this business full-time?
Use discretion.
Learners must justify or give reasons why they have made their decision.
(At this stage it is not absolutely essential that they calculate percentage or ratios to comment but it
would help – depends on their prior knowledge).
• Profit is good.
• In comparison to the capital invested the partners are earning a good return.
• Loans are low – low risk.
• Solvent business.
• No liquidity problems – can pay off the current liabilities with the current assets.
• Etc.

The Tasks will be bringing in some theory and problem solving questions. It is vital that learners are exposed
to these skills on an on-going basis and not just in certain lessons. At this stage we have not covered ratio
analysis and some learners might not have covered it in Grade 10. However, what is important is that they
start ‘reading’ the figures, see the inter-relationship and start using them to make decisions. Using percent-
ages or ratios makes comparisons easier so this would be a natural progression from the activities now.
Learners need to understand the ‘why’ and are able to comment on these rather than them just learning a
list of formulae.
TASK 6.10  UV Stores: Appropriation Statement & Statement

of Equity
6.10.1 UV STORES
APPROPRIATION STATEMENT ON 28 FEBRUARY 20.8
Usha Victor TOTAL
Profit per the Income Statement 142 000 202 000 344 000
Bonus: Victor - 20 000 20 000
Primary division of profits 90 000 124 000 214 000
Final division of profits 52 000 78 000 130 000
STATEMENT OF OWNER’S EQUITY ON 28 FEBRUARY 20.8

CAPITAL Usha Victor Total
Contribution of capital during the year - - -

CURRENT ACCOUNTS Usha Victor Total
Bonus: Victor - 20 000 20 000
Retained income at beginning of year [4 567] 7 810 3 243
6.10.2 The bookkeeper feels that the partners are taking too much in the form of drawings.
She feels this is placing a strain on the cash resources of the business. Do you agree?
Explain.
Use discretion. Learners must justify their answer.
Possible answers:
• Usha has withdrawn R120 000 of a profit of R142 000 (84.5%) while Victor withdrew R143 000 of a
profit of R202 000 (70.8%).
• No – they are entitled to withdraw the profits.
• Yes, as the percentage is high and will have impact on the cash flow and expansion.
TASK 6.11  Jacklynn Traders: Appropriation Statement &

Statement of Equity
6.11.1
JACKLYNN TRADERS
APPROPRIATION STATEMENT ON 28 FEBRUARY 20.7
Jack Lynn TOTAL
Bonus: Lynn 45 000 15 000 60 000
Interest on capital - 21 600 21 600
Final division of profits [28 800] [9 600] [38 400]

STATEMENT OF OWNER’S EQUITY ON 28 FEBRUARY 20.7
CAPITAL Jack Lynn Total
Contribution of capital during the year - 50 000 50 000
Withdrawal of capital during the year [50 000] - [50 000]
CURRENT ACCOUNTS Jack Lynn Total

Bonus - 21 600 21 600
Final distribution of profits [28 800] [9 600] [38 400]
Retained income at beginning of year 45 000 [7 000] 38 000
6.11.2 In your opinion, should the partners be satisfied with the amount they are each
earning from the business? Explain.
Use discretion as there is no right or wrong answer. However, learners must justify their answers.
Possible answers:
• Jack earned R117 000 on an investment of R300 000 (39%). Lynn earned R99 000 on an investment
of R100 000 (99%).
• Yes, these returns are very good – far more than they would receive in a bank.
• No, they would expect more. Jack might not be happy that Lynn is earning more than he is.
Note:
The capital balances changed at the end of the year; hence the average capital was not used in this
calculation. The accuracy is not essential at this stage, but rather that the learners realise the importance
of comparing the return to what they earn in a financial institution.

TASK 6.12  KK Stores: Financial Statements & reflection on
results
KAY-KAY STORES
Note
Sales [945 000 – 5 000] 940 000
Fee income 92 000
Commission income [36 300 + 1 600] 37 900
Salaries and wages [220 000 – 550] 219 450
Advertising [13 000 + 200] 13 200
Insurance [6 600 – 400] 6 200
Bad debts 3 000
Consumable stores [5 000 – 600] 4 400
Sundry expenses [12 600 + 250] 12 850
Depreciation 8 000

ASSETS Note
Tangible / fixed assets 3 902 000

Capital 7 900 000
Loan from Business Partners Ltd 240 000

1. INTEREST INCOME
from investments [4 100 – 300] 3 800
4 300
2. INTEREST EXPENSE
on loans 28 800
28 800

Equipment Total
buildings
Carrying value at beginning 860 000 50 000 910 000
Cost 860 000 80 000 940 000
Accumulated depreciation - [30 000] [30 000]
Movements - [8 000] [8 000]
Additions at cost - - -
Disposals at carrying value - - -
Depreciation - [8 000] [8 000]
Carrying value at end 860 000 42 000 902 000
Cost 860 000 80 000 940 000
Accumulated depreciation - [38 000] [38 000]
4. INVENTORIES
Trading stock [210 000 – 2 800] 207 200
207 800
Income receivable / Accrued income 1 600
Prepaid expenses 950
22 500
Bank 4 600
Cash float 1 000
17 600
7. CAPITAL Kelo Kisten Total

Contribution of capital during the year 10 000 10 000 20 000

8. CURRENT ACCOUNTS Kelo Kisten Total
Bonus: Kisten 0 20 000 20 000
Retained income for the year 24 233 [8 383] 15 850
Retained income at beginning of year [25 000] 34 000 9 000
Retained income at end of year [767] 25 617 24 850

Income received in advance / Deferred income 300
Accrued expenses / Expenses payable [200 + 250] 450
25 850
6.12.1 Work in pairs: Inspect the figures in the financial statements. Make a list of the main
points that should interest the partners. Share your list with the rest of the class.
Various answers are possible. Allow the learners time to engage with the documents and their discussions
are more important than a right or wrong answer. Encourage them to justify their comments.
Possible answers (Alternative valid responses acceptable):

• Gross profit is R380 000 on sales of R940 000 (40%) – learners could regard this as good or bad – we
are not given the type of products that this business deals in.
• Net profit is R215 850 on sales of R940 000 (23%).
• Expenses are R269 900 on sales of R940 000 (29%) – good or bad. They need previous figures to do
a comparison but let them engage with these figures – it is not important now whether they say they
are too high or not.
• Salaries constitute a high percentage of the total expenses (81,3%) – as we do not know what type of
business this is, it is difficult to comment but they must be aware of this.
• The owners have invested far more than has been borrowed – risk factor reduced.
• Company is solvent – can pay off their debts.
• No liquidity problems – current assets more than current liabilities. If the learners have studied the
liquidity ratios you could bring in that perhaps the current assets are too high.
• Kelo has earned R124 233 on a capital of R590 000 / R600 000 (21%). Kisten has earned R91 617 on
a capital of R290 000 / R300 000 (30%).
• Returns are good in comparison to financial institutions.

TASK 6.13  Gold Reef Surf Shop: Correction of financial
statements & reflection on results
6.13.1 GOLD REEF SURF SHOP
Note
Sales [705 000 - 400] 704 600
Income from services rendered [116 000 + 1 200] 117 200
Rent expense [39 000 – 3 000] 36 000
Advertising 5 000
Salary of part-time shop assistant 45 600
Wages of workshop assistant 62 000
Telephone & electricity 8 500
Insurance 4 200
Depreciation[1] 17 776
Bank charges [4 800 + 520] 5 320
Packing materials 5 700
Bad debts [900 + 230] 1 130
Interest expense / Financing cost [10 010 + 910[2] + 170] 2 [11 090]
[1]
265 000 – 95 000 + 7 660 = R177 660
177 660 x 10% = R17 776
[2]
10 010 ÷ 11 = R910

GOLD REEF SURF SHOP
ASSETS Note
Fixed assets – Equipment (265 000 + 7 660 – 17 776) 3 254 884
Financial assets – Fixed deposit (75 000 + 6 750) 81 750
Inventories (105 300 – 610) 4 104 690
Trade & other receivables
5
(17 950 – 400 + 1 200 + 3 000 – 6 750 - 230) 14 770
Cash & cash equivalents 6 1 600

Capital 7 300 000
Loan from Breakers Bank (54 600 + 910 – 12 000) 43 510
Loan from G Gold 30 000
Trade & other payables (27 600 + 12 000) 9 39 600
Bank overdraft (25 850 + 170 + 520) 26 540
8. CURRENT ACCOUNTS G. GOLD R. REEF Total
Partner’s bonus 20 000 0 20 000
Final distribution of profits 1 991 663 2 654
Drawings during year (150 000 + 610) (150 610) (70 000) (220 610)
Retained income for the year 13 381 (6 337) 7 044
Retained income at end of year 18 381 (337) 18 044
6.13.2 In your opinion, should the partners be satisfied with their earnings? Explain.
Learners own opinions.
Possible answers:
In total, the partners have earned a profit of R227 654 on a capital of R300 000 (76%) – this is a good
return in comparison with the financial institutions.
The partners each earned R12 000 interest on capital. This means that their partners’ capital must have
been equal.
Learners can assess the individual returns as well.

TASK 6.14  Zumzum Furnishers: Correction of financial state-
ments, reflection & Accounting equation
6.14.1 ZUMZUM FURNISHERS
Note
Sales [810 000 + 18 000] 828 000
Cost of sales [450 000 + 10 000] [460 000]
Income from services rendered [154 000 + 5 000] 159 000
Rent income [60 000 + 12 000] 72 000
Commission income [63 000 – 3 000] 60 000
Salaries & wages [234 000 + 5 000] 239 000
Telephone & electricity [18 500 + 900] 19 400
Repairs & maintenance [25 500 – 20 000] 5 500
Advertising 8 000
Bad debts 4 700
Depreciation [38 000 – 19 000] 19 000
Packing materials [16 400 – 8 000] 8 400
Insurance [18 720 – 1 440] 17 280
Bank charges [12 400 + 600] 13 000
Sundry expenses [51 200 – 30 000] 21 200

ZUMZUM FURNISHERS
BALANCE SHEET / STATEMENT OF FINANCIAL POSITION AT 28 FEBRUARY 20.7
ASSETS Note
Non-current assets 1 015 000
Fixed assets [920 000 + 20 000 + 19 000] 3 959 000
Financial assets – Investments [60 000 – 4 000] 56 000
Inventory [102 000 – 10 000 – 1 800 + 8 000] 4 98 200
Trade and other receivables
[62 000 + 18 000 + 12 000 + 1 440] 5 93 440
Cash and cash equivalents [2 000 + 5 000 – 600 + 4 000] 6 10 400

Capital 7 800 000
Mortgage loan: Sun Bank 220 000
Loan from B. Zuma 80 000
Trade and other payables [42 000 + 5 000 + 3 000 + 900] 9 50 900
8. CURRENT ACCOUNTS A. Zuma B. Zuma Total
Partner’s bonus 15 000 - 15 000
Drawings during year* [107 000] [119 990] [226 990]
*B. Zuma: 89 990 + 30 000
6.14.2 Write a brief explanation to the partners on how much they could each withdraw from
the business.
Various answers are possible.
• The learners could say that they could just increase their salaries and interest and withdraw more during
the year.
• However, they need to note that the cash balance is only R10 400 and if they are going to withdraw
more, it will result in a bank overdraft.
• Therefore if they need to earn more, they should aim to improve the profitability of the business by any
of the following:
- Increase sales.
- Decrease cost of sales (obtain another supplier).
- Increase the mark-up percentage.
- Decrease expenses.
- Etc.

6.14.3 GAAP principles that were violated:
GAAP principle Adjustment No.
Prudence 3
Business entity 9
Matching 1, 2, 3, 4, 5, 6, 8, 11, 12
Historical cost 7
Note: Some adjustments can be classified in more than one principle.
6.14.4 Effect of adjustments on the Accounting equation:

No. A= O+ L
+18 000 +18 000
1. 0
-10 000 -10 000
2. 0 -5 000 +5 000
3. -1 800 -1 800 0
+5 000 +5 000
4. 0
-600 -600
5. 0 -3 000 +3 000
6. 0 -900 +900
7. +20 000 +20 000 0
8. +8 000 +8 000 0
9. 0 ±30 000 0
10. +19 000 +19 000 0
11. +12 000 +12 000 0
12. +1 440 +1 440 0
13. ±4 000 0 0
14. 0 ±97 630 0

TASK 6.15  Cobra Traders: Accounting equation for adjust-
ments
Adjustment at the finan- Effect on Accounting
No. cial year-end, 28 Febru- Account debit Account credit equation
ary 20.3 A= O+ L
1. Rent of R10 000 for February
Income receivable Rent income +10 000 +10 000 0
is owed to the business.
2. Fee income of R2 000 has
Fee income Deferred income 0 -2 000 +2 000
been received in advance.
3. The February telephone ac-
count of R500 has not been Telephone Expenses payable 0 -500 +500
paid.
4. Insurance premium of R800
Expenses prepaid Insurance +800 +800 0
has been paid in advance.
5. Trading stock deficit of
Trading stock deficit Trading stock -6 000 -6 000 0
R6 000 is to be written off.
6. Packing materials of R700
Consumable stores
were physically counted at Packing materials +700 +700 0
on hand
the year-end.
7. Depreciation of R9 000 is to Accumulated depre-
Depreciation -9 000 -9 000 0
be written off. ciation on equipment
8. Bad debts of R3 000 are to
Bad debts Debtors control -3 000 -3 000 0
be written off.
9. Provision for bad debts is to Provision for bad Provision for bad
-300 -300 0
be increased by R300. debts adjustment debts
10. Fixed asset disposal:
Transfer the cost price of
R11 000 to the asset disposal Asset disposal Equipment -11 000 -11 000 0
account.
Transfer the accumulated de-
Accumulated depre-
preciation of R4 000 to the Asset disposal +4 000 +4 000 0
ciation on equipment
asset disposal account.
Enter the selling price of the
fixed asset of R8 500 (sold Debtors control Asset disposal +8 500 +8 500 0
on credit).
11. Appropriation of profits:
Provide for a salary due to ±50 00
Salary: Jones Current a/c: Jones 0 0
Partner: Jones of R50 000. 0
Provide for interest on capital
Interest on capital Current a/c: Smith 0 ±7 700 0
of R7 700 to Partner: Smith
Remaining profits of R45 000
±30 00
are shared between Jones Appropriation a/c Current a/c: Jones 0 0
0
and Smith in the ratio 2 : 1.
±15 00
Appropriation a/c Current a/c: Smith 0 0
0

TASK 6.16  RM Stationers: Financial statements, Accounting
equation & reflection
6.16.1 RM STATIONERS – YEAR-END WORKSHEET: 28 FEBRUARY 20.3
NOMINAL BALANCE SHEET
PRE-ADJUSTMENT ADJUSTMENTS
SECTION SECTION
Balance Sheet section Debits Credits Debits Credits Debits Credits Debits Credits
Capital: Radebe 170 000 170 000
Capital: Miller 170 000 170 000
Current account: Radebe 25 400 54 000 55 957
12 000
17 000
Current account: Miller 28 200 54 000 59 757
17 000
Drawings: Radebe 96 400 0
Drawings: Miller 83 400 0
Mortgage loan: XY Bank 173 200 173 200
Land and buildings 420 000 420 000
Vehicles (at cost) 148 000 148 000
Accum. dep on vehicles 93 800 10 840 104 640
Equipment (at cost) 68 000 68 000
Accum. depr on equip. 44 500 6 800 51 300
Fixed deposit: Umlazi 45 230
Bank 905 46 135
Savings: Umlazi Bank 8 320 8 320
Trading stock 122 800 560 119 000
3 240
Debtors control 21 200 180 21 020
Provision for bad debts 780 481 1 261
Bank 3 310 3 310
Petty cash 500 500
Cash float 750 750
Creditors control 47 060 47 060
SARS (PAYE) 2 560 2 560
Consumables on hand 1 900 1 900
375
Deferred income 3 200 3 200
Accrued income 1 400 1 400
Accrued expenses 375 375
Nominal a/c’s section
Sales 800 500 800 500
Cost of sales 418 500 418 500
Debtors allowances 9 200 9 200
Salaries and wages 147 000 147 000
Advertising 5 150 600 4 550
Rent income 41 600 3 200 38 400
Commission income 39 600 1 400 41 000
Discount received 12 860 12 860
Discount allowed 1 500 1 500
Motor expenses 7 450 7 450
Bad debts 1 220 180 1 400
Interest on investments 4 070 905 4 975
Interest on bank a/c 380 380
Interest on loan 19 200 19 200
TOTALS 1 627 130 1 654 510 8 560 182 581 608 800 898 115 839 310 839 310

RM STATIONERS – YEAR-END WORKSHEET: 28 FEBRUARY 20.3 (Continued)
SECTION SECTION
Debits Credits Debits Credits Debits Credits Debits Credits
TOTALS b/f 1 627 130 1 654 510 8 560 182 581 608 800 898 115 839 310 839 310
Postage & stationery 2 460 560 3 020
Packing materials 8 740 1 900 6 840
Insurance 8 640 375 8 265
Sundry expenses 7 540 375 7 915
Trading stock deficit 3 240 3 240
Provision for b/debts adj. 481 481
Depreciation 6 800 17 640
10 840
Partners’ salaries 108 000 108 000
Partner’s bonus 12 000 12 000
Interest on capitals 34 000 34 000
Remaining profit 87 914
TOTALS 1 654 510 1 654 510 184 856 184 856 898 115 898 115 839 310 839 310
Share of remaining profit: Radebe 43 957
Share of remaining profit: Miller 43 957
6.16.1 RM STATIONERS
Note
Sales [800 500 – 9 200] 791 300
Commission income [39 600 + 1 400] 41 000
Rent income [41 600 – 3 200] 38 400
Advertising [5 150 – 600] 4 550
Discount allowed 1 500
Motor expenses 7 450
Bad debts [1 220 + 180] 1 400
Postage and office stationery [2 460 + 560] 3 020
Insurance [8 640 – 375] 8 265
Sundry expenses [7 540 + 375] 7 915
Depreciation 17 640

RM STATIONERS
ASSETS Note
Fixed/Tangible assets 3 480 060
Financial assets:
Fixed deposit: Umlazi Bank [45 230 + 905] 46 135
Inventory 4 120 900

Capital 7 340 000
Mortgage loan: XY Bank 173 200
1. INTEREST INCOME
from investments [4 070 + 905 ] 4 975
5 355
2. INTEREST EXPENSE
on loan 19 200
19 200

buildings
Cost 420 000 148 000 68 000 636 000
Movements - [10 840] [6 800] [17 640]
Depreciation - [10 840] [6 800] [17 640]
Cost 420 000 148 000 68 000 636 000
4. INVENTORIES
Trading stock [122 800 – 560 – 3 240] 119 000
120 900

Trade debtors [21 200 – 180] 21 020
Provision for bad debts [780 + 481] [1 261]
Accrued income/Income receivable 1 400
Prepaid expenses [600 + 375] 975
22 134
Savings account: Umlazi Bank 8 320
Bank 3 310
Petty cash 500
Cash float 750
12 880
7. CAPITAL Radebe Miller Total

Contribution of capital during the - - -
year
8. CURRENT ACCOUNTS Radebe Miller Total


Income received in advance / Deferred income 3 200
Accrued expenses / Expenses payable 375
53 195

6.16.2 Effect of adjustments on the Accounting equation:
No. A O L
1. -560 -560 0
-3 240 -3 240
2. 0
+1 900 +1 900
3. +600 +600 0
4. +375 +375 0
5. 0 -3 200 +3 200
6. +905 +905 0
7. +1 400 +1 400 0
8. 0 -375 +375
-180 -180
9. 0
-481 -481
10. -17 640 -17 640 0
±108 000
±12 000
11. 0 0
±34 000
±87 914
6.16.3 The partners are worried that they will not be able to settle the immediate debts. Do
you agree? If so, what solution can you provide to solve the problem?
The immediate debts amount to R53 195 and the business has R155 914 in current assets. However, a
large portion of the current assets is tied up in inventory. Without the inventory the business has R35 014
to pay the R53 195. Therefore, if they do not sell the stock, they will experience problems paying the debts.
Possible solutions:
• Take out an overdraft.
• Increase the loan.
• Reduce the stock by having a sale.
• Cash in the fixed deposit – if possible.
• Etc.
TASK 6.17  Types of Balance Sheet adjustments

6.17.1 Financial assets:
• Explain where these are placed in the financial statements.
Under Non-current assets.
• Define what is meant by ‘financial asset’.
Investments which mature after 12 months.
6.17.2 • Consider your answer in 6.17.1 above and explain how the financial statements
should be adjusted at this year-end. Provide your reasons.
Financial assets in the Balance Sheet will be entered as R80 000 (100 000 – 20 000).
R20 000 will be entered under Cash and cash equivalents.
6.17.3 Long-term loans:

• Explain where these are placed in the financial statements.
Under Non-current liabilities.
• Define what is meant by ‘long-term loans’.
Loans which are repayable after 12 months.
The loan amount in the Balance Sheet under Non-current liabilities will be entered as R48 000 (60 000 –
12 000).
R12 000 will be entered under Trade and other payables as a current portion of loan or short-term loan.

6.17.5 Post-dated cheques:
• Explain which items in financial statements are affected by these, and how they are
affected.
Creditors control will decrease.
Bank will decrease if the balance is favourable; if unfavourable bank overdraft will increase.
• Define what is meant by the term ‘post-dated cheque’.

Cheques which are dated for the future. The cheque can only be banked or deposited on the date specified.
• Why would a business issue post-dated cheques?

The business may not have immediate funds to cover the value of the cheque.
It expects to have the available funds on the date specified on the cheque.
Add to Bank (if favourable) OR subtract from Bank (if unfavourable); Add to Creditors control.
The cheque only becomes valid only on 31 May 20.6 but the entry has already been recorded in the CPJ for
February 20.6.
To represent a true state of affairs (Prudence concept) the entry in the CPJ is reversed as the amount has
not yet been deducted from the trader’s bank account.

The following Tasks offer opportunities to learners to use the extended columnar worksheet method or the
direct method of writing adjustments in brackets on the face of the financial statements.
Teachers are advised to vary the approaches that their learners use, but they should require learners to get
practice at using the direct method (with adjustments in brackets) to familiarise them with examination tech-
nique.
Due to time constraints, it is not advisable to use the extensive T-accounts or the extended worksheet method
during exams.

TASK 6.18  Geekay Clothing: Financial statements, Account-
ing equation & reflection
6.18.1 GEEKAY CLOTHING – YEAR-END WORKSHEET: 28 FEBRUARY 20.5
NOMINAL BALANCE
SECTION SHEET SECTION
Balance Sheet a/c’s sec-
tion
Capital: Gee 240 000 240 000
Capital: Kay 160 000 160 000
Current account: Gee 15 050 72 000 74 789
24 000
11 583
Current account: Kay 33 490 36 000 8 646
8 000
Drawings: Gee 56 400 0
Drawings: Kay 77 400 0
Land and buildings 495 100 495 100
Mortgage loan: Nerd Bank 138 050 1 956 140 006
Vehicle 152 580 152 580
Accum. Dep. on vehicle 142 400 10 179 152 579
Equipment 47 450 47 450
Accum. dep on equip. 9 000 3 845 12 845
Trading stock 53 460 1 460 52 000
Debtors control 22 640 70 300 22 410
Provision for bad debts 787 334 1 121
Bank 6 417 6 417
Petty cash 150 150
Cash float 500 500
Fixed deposit: Nerd Bank 31 982 187 32 169
Savings a/c: Nerd Bank 6 000 420 6 420
Creditors control 25 430 25 430
Prepaid expenses 900 1 220
320
Income received in advance 1 170 1 170
Accrued expenses 620 920
300
Income accrued 350 350
Nominal accounts sec-
tion
Sales 680 000 680 000
Cost of sales 270 000 270 000
Rent income 5 850 1 170 4 680
Fee income 45 575 350 45 925
Interest on fixed deposit 1 925 187 2 112
Interest on current bank a/c 150 150
Rates 9 900 9 900
Salaries and wages 168 090 168 090
Stationery 2 554 320 2 234
Packing materials 5 475 740 4 735
Interest on loan 17 250 1 956 19 206
Bank charges 3 585 3 585
Insurance 9 600 900 8 700
TOTALS 1 468 833 1 497 707 6 113 174 244 518 750 732 867 817 506 817 506

GEEKAY CLOTHING – YEAR-END WORKSHEET: 28 FEBRUARY 20.5 (Continued)
NOMINAL BALANCE
SECTION SHEET SECTION
TOTALS b/f 1 468 833 1 497 707 6 113 174 244 518 750 732 867 817 506 817 506
Advertising 22 600 620 23 220
Interest on overdue a/c’s 125 70 195
Discount allowed 1 240 1 240
Discount received 1 750 1 750
Sundry expenses 7 429 300 7 729
Trading stock deficit 1 460 1 460
Bad debts 300 300
Provision for b/debts adj. 334 334
Interest on savings account 420 420
Depreciation[1] 10 179 14 024
3 845
Interest on capitals[2] 19 583 19 583
Remaining profit 17 112
TOTALS 1 500 102 1 500 102 174 734 174 734 735 752 735 752 817 506 817 506
Share of remaining profit: Gee 8 556
Share of remaining profit: Kay 8 556
[1]
152 580 x 20% = R30 516
Accumulated depreciation = 142 400 + 30 516 = R172 916
Carrying/Book value = 152 580 – 172 916 = -R20 336
Accumulated depreciation cannot be greater than the cost of the vehicles. An asset cannot be reflected as
a negative value in the Balance Sheet – its value should be kept to at least R1. The calculation for depre-
ciation (20%) therefore falls away. In order to show a book/carrying value of R1 depreciation amounting
to R10 179 has to written off in the current period. This figure is arrived as follows:
Cost price at beginning of year = R152 580
Accumulated depreciation at beginning of year = 142 400
Carrying/Book value at beginning of year = R10 180
Depreciation for the year = 10 179
Carrying/Book value at end of year = R 1
[2]
Gee: [240 000 – 25 000] x 5% x 4/12 = R3 583
240 000 x 5% x 8/12 = 8 000
R11 583
Kay: 160 000 x 5% = R8 000

6.18.1 GEEKAY CLOTHING
Note
Sales [680 000 – 32 300] 647 700
Fee income [45 575 + 350] 45 925
Rent income [5 850 – 1 170] 4 680
Rates 9 900
Stationery [2 554 – 320] 2 234
Packing materials [5 475 – 740] 4 735
Bank charges 3 585
Insurance [9 600 – 900] 8 700
Advertising [22 600 + 620] 23 220
Sundry expenses [7 429 + 300] 7 729
Bad debts 300
Depreciation [10 179 + 3 845] 14 024

BALANCE SHEET / STATEMENT OF FINANCIAL POSTION ON 28 FEBRUARY 20.5
ASSETS Note
Financial assets:
Fixed deposit: Nerd Bank [31 982 + 187] 32 169
Inventory 4 52 740

Capital 7 400 000
Mortgage loan: Nerd Bank [138 050 + 1 956 – 28 800] 111 206
1. INTEREST INCOME
from investments [1 925 + 187] 2 112
on overdue accounts [125 + 70] 195
on savings account 420
2 877
2. INTEREST EXPENSE
on loan [17 250 + 1 956] 19 206
19 206

buildings
Cost 495 100 152 580 47 450 695 130
Movements - [10 179] [3 845] [14 024]
Depreciation - [10 179] [3 845] [14 024]
Carrying value at end 495 100 1 34 605 529 706
Cost 495 100 152 580 47 450 695 130
4. INVENTORIES
Trading stock [53 460 – 1 460] 52 000
52 740

Trade debtors [22 640 – 300 + 70] 22 410
Provision for bad debts [787 + 334] [1 121]
Accrued income/Income receivable 350
Prepaid expenses [900 + 320] 1 220
22 859
Savings account [6 000 + 420] 6 420
Bank [6 417 + 5 200] 11 617
Petty cash 150
Cash float 500
18 687
7. CAPITAL Gee Kay Total

Contribution of capital during the 25 000 - 25 000
year
8. CURRENT ACCOUNTS Gee Kay Total


Trade creditors [25 430 + 5 200] 30 630
Accrued expenses [620 + 300] 920
Current portion of loan 28 800
Income received in advance/Deferred income 1 170
61 520

6.18.2 Inspect the adjustments that you have made to the financial statements. Identify
which adjustments (if any) have the following effects on the Accounting equation:
Various answers - possible responses
No. A= O+ L Adjustment number:
1. - - 0 No. 1 (for R1 460)
2. + + 0 No. 1 (for R740)
3. 0 + -
4. 0 - + No. 5 (for R1 956)
5. + 0 +
6. - 0 -
6.18.3 The partners ask you for your impressions on these financial statements. Provide
three of your main opinions based on the information provided in these financial
statements.
Various answers:
Possible answers:
• Owners’ returns (Gee: R116 139 on an investment of R215 000 ÷ R240 000 = 54%). (Kay: R52 556
on investment of R160 000 = 32.5%).
• Profitability of the business – mark up; net profit as a % of sales, expenses as a % of sales – do not
need to work out the percentages but can comment on them.
• Risk – loan in comparison to owners’ equity.
• Solvency – assets are more than the liabilities.

TASK 6.19 Tantim T-Shirts: Financial statements, reflection
& ethics
6.19.1 TANTIM T-SHIRTS – YEAR-END WORKSHEET: 28 FEBRUARY 20.6
SECTION SECTION
Balance Sheet a/c’s section Debits Credits Debits Credits Debits Credits Debits Credits
Capital: Tando 60 000 60 000
Capital: Timm 40 000 10 000 50 000
Current account: Tando 1 960 40 000
10 000 10 176
6 000
Current account: Timm 2 200 30 000 10 796
4 000
Drawings: Tando 24 000 370 0
Drawings: Timm 34 000 0
Equipment 62 000 10 000 8 000 64 000
Accum. dep. on equip. 22 500 5 048 3 950 21 402
Trading stock 104 000 260 86 800
370
16 570
Debtors control 5 400 800 150 6 050
Provision for bad debts 210 93 303
Savings a/c: Goodwill Bank 6 000 6 000
Bank 12 100 2 500 14 600
Creditors control 7 900 800 8 700
Loan: Goodwill Bank 30 000 30 000
Consumables on hand 560 560
Expenses accrued 290 800 2 905
2 000
395
SARS – PAYE 700 700
Medical aid fund 440 880
440
UIF 50 100
50
Creditors for salaries 3 810 3 810
Income received in advance 740 740
Sales 366 000 366 000
Cost of sales 205 000 205 000
Advertising 700 700
Bad debts 400 150 550
Commission income 15 850 740 15 110
Delivery expenses 1 700 1 700
Donations 300 260 560
Insurance 6 300 910 5 390
Interest on current bank a/c 200 200
Interest on investments 830 830
Interest on overdue debtors 100 100
Interest on loan[1] 3 000 2 000 5 000
Medical aid contributions 4 840 440 5 280
TOTALS 477 700 545 940 24 068 140 528 230 180 382 390 189 716 189 716

TANTIM T-SHIRTS – YEAR-END WORKSHEET: 28 FEBRUARY 20.6 (Contd)
SECTION SECTION
TOTALS B/F 477 700 545 940 24 068 140 528 230 180 382 390 189 716 189 716
Packing material 4 200 560 3 640
Rent expense 8 800 800 9 600
Salary to shop assistant 50 000 5 000 55 000
Sundry expenses 4 410 395 290 4 515
Trading stock deficit 330 16 570 16 900
Unemployment insurance
cont. 500 50 550
Provision for b/debts adjust. 93 93
Asset disposal 8 000 [2]
5 048 0
2 500
452
Loss on disposal of asset 452 452
Depreciation[3] 3 950 3 950
Interest on capitals 10 000 10 000
Remaining loss 32 490
TOTALS 545 940 545 940 149 378 149 378 414 880 414 880 189 716 189 716
Share of remaining loss: Tando [19 494]
Share of remaining loss: Timm [12 996]
[1]
[30 000 + 10 000] x 15% x 4/12 = 2 000] + [30 000 x 15% x 8/12 = 3 000]
Total interest = 2 000 + 5 000 = 5 000
Accrued amount = 5 000 – 3 000 = R2 000
[2]
8 000 – 4 720 = 3 280 x 10% = 328
Total accum. dep. = 4 720 + 328 = 5 048
[3]
62 000 – 22 500 = 39 500 x 10% = 3 950

6.19.1 TANTIM T-SHIRTS: INCOME STATEMENT / STATEMENT OF COMPREHENSIVE INCOME
Note
Sales [366 000 - 6 000] 360 000
Commission income [15 850 – 740] 15 110
Advertising 700
Bad debts [400 + 150] 550
Delivery expenses 1 700
Donations [300 + 260] 560
Insurance [6 300 – 910] 5 390
Medical aid contributions [4 840 + 440] 5 280
Packing material [4 200 – 560] 3 640
Rent expense [8 800 + 800] 9 600
Sundry expenses [4 410 – 290 + 395] 4 515
Salary to shop assistant [50 000 + 5 000] 55 000
Trading stock deficit [330 + 16 570] 16 900
Unemployment insurance contribution [500 + 50] 550
Depreciation 3 950

ASSETS Note
Inventory 4 87 360
Capital 7 110 000
Current accounts 8 [620]
Loan: Goodwill Bank (13% p.a.) [30 000 – 10 000] 20 000

1. INTEREST INCOME
from investments 830
on overdue debtors 100
1 130
2. INTEREST EXPENSE
on loan [3 000 + 2 000] 5 000
5 000
3. FIXED ASSETS Equipment

Carrying value at beginning 39 500
Cost 62 000
Accumulated depreciation [22 500]
Movements 3 098
Additions at cost 10 000
Disposals at carrying value [8 000 – 5 048] [2 952]
Depreciation [3 950]
Carrying value at end 42 598
Cost 64 000
4. INVENTORIES
Trading stock [104 000 – 260 – 370 – 16 570] 86 800
87 360
Trade debtors [5 400 + 800 – 150] 6 050
Provision for bad debts [210 + 93] [303]
6 657
Bank [12 100 + 2 500] 14 600
20 600
7. CAPITAL TANDO TIMM TOTAL

Contribution of capital during the year - 10 000 10 000

8. CURRENT ACCOUNTS TANDO TIMM TOTAL
Retained income for the year 12 136 [12 996] [860]
Retained income at beginning of year [1 960] 2 200 240
Retained income at end of year 10 176 [10 796] [620]

Trade creditors [7 900 + 800] 8 700
Accrued expenses [800 – 290 + 2 000 + 195] 2 705
SARS – PAYE 700
Medical aid fund [440 + 440] 880
UIF [50 + 50] 100
Creditors for salaries 3 810
Income received in advance 740
27 835
6.19.2 In your opinion, have Tando and Timm made the right choices with regard to the
operation of this business and with regard to their studies at university? Explain.
Various options – learners need to give reasons for their answers.
Possible answers:
• Yes, as they are earning an income and gaining experience.
• No, as they need to concentrate on their studies.
6.19.3 In your opinion, how can this Tando and Timm use their business to make a positive
contribution to their local community? How will this affect their profits?
Making a difference to the community:
Various answers are possible, e.g.:
• They could advertise messages on their T-shirts, e.g. AIDS awareness, SPCA.
• They could sponsor prizes in local events, e.g. school competitions.
• They could expand their business and employ more people.
• They could publicise their efforts to safely dispose of waste materials, or they could devote these to a
secondary industry.
• The effect on profit could well be positive – although there will be extra expenses, these might well be
offset against additional income resulting from increased public awareness in their business.

In rounding off this Task, Teachers are advised to question the class (at random) on the effect of the adjust-
ments on the Accounting Equation, similar to that done in Task 6.18.
TASK 6.20 Clinbush Hardware: Financial statements, Ac-

counting Equation, Reflection & Ethics
6.20.1 CLINBUSH HARDWARE
Adjustments in the General Journal: 28 February 20.8
No Account debit Account credit Amount
A O L
.
1. Prepaid expenses Advertisement R750 + + 0
2. Depreciation[1] Accum. depreciation on equipment 50 - - 0
Asset disposal Equipment 600 - - 0
Accum. depreciation on equipment Asset disposal 230 + + 0
Drawings: B. Bush Asset disposal 385 0 ± 0
Asset disposal Profit on disposal of asset 15 0 ± 0
3. Depreciation[2] Accum. depreciation on equipment 4 340 - - 0
4. Salary SARS – PAYE 960 0 - +
UIF 60 0 - +
Medical aid fund 330 0 - +
Creditors for salaries 4 650 0 - +
Medical aid contribution Medical aid fund 330 0 - +
Unemploy. insurance contribution UIF 60 0 - +
5. Debtors allowances Debtors control 2 880 - - 0
Trading stock Cost of sales 1 800 + + 0
6. Drawings: B. Bush Trading stock 3 200 - - 0
Trading stock Trading stock surplus[3] 2 100 + + 0
Consumables on hand Stationery 420 + + 0
7. Repairs Land and buildings 3 710 - - 0
8. Prepaid expenses Insurance 1 680 + + 0
9. Debtors control Creditors control 1 360 + 0 +
10. Provision for bad debts adjustment Provision for bad debts 1 590 - - 0
12. Fixed deposit[4] Interest on fixed deposit 227 + + 0
Interest on mortgage loan[5] Mortgage Bond: USA Bank 26 345 0 - +
Savings account Interest on savings 1 265 + + 0
Bank charges Bank 410 - - 0
Bank Interest on current bank account 164 + + 0
13. Commission income Income received in advance 1 100 0 - +
14. Partners’ salaries Current account: Clinton 108 000 0 ± 0
Partners’ salaries Current account: Bush 66 000 0 ± 0
Bonus: Bush Current account: Bush 6 000 0 ± 0
Interest on capital [6]
Current account: Clinton 9 500 0 ± 0
Interest on capital[7] Current account: Bush 6 000 0 ± 0
Appropriation account Current account: Clinton 12 028 0 ± 0
Current account: Bush 12 028 0 ± 0
[1]
600 x 10% x 10/12 = R50 [2]
[44 000 – 600] x 10% = R4 340
[3]
75 300 + 1 800 – 3 200 = R73 900 [4] 17 000 x 8% x 1/12 = 113
Surplus = R76 000 – 73 900 = R2 100 [17 000 + 113] x 8% x 1/12 = 114
227
[5]
189 145 + 37 200 – 200 000 = 26 345
[6]
[240 000 – 100 000 = 140 000 x 5% x 6/12 = 3 500] + [240 000 x 5% x 6/12 = 6 000]; Total: 9 500
[7]
[170 000 – 100 000 = 70 000 x 5% x 6/12 = 1 750] + [170 000 x 5% x 6/12 = 4 250]; Total: 6 000

Adjustments in the Financial statements: 28 February 20.8
No. Adjustment in financial statements only A O L
11. Add to Bank; Add to Creditors control R2 000 + 0 +
12. Subtract R10 412 from the fixed deposit amount: 17 000 – 10 412 = R6 588;
± 0 0
enter R10 412 under Cash and cash equivalents.
12. Subtract R12 000 from the loan amount; enter the R12 000 as a short-term
0 0 ±
loan or current portion of loan under Trade and other payables.
6.20.2 CLINBUSH HARDWARE

INCOME STATEMENT / STATEMENT OF COMPREHENSIVE INCOME FOR YEAR ENDED
28 FEBRUARY 20.8
Note
Sales [439 400 – 2 880] 436 520
Cost of sales [130 000 – 1 800] (128 200)
Commission income [16 060 – 1 100] 14 960
Profit on sale of asset 15
Trading stock surplus 2 100
Operating expenses (81 900)
Salaries and wages [45 000 + 6 000] 51 000
Stationery [900 – 420] 480
Advertising [1 430 – 750] 680
Medical aid contributions [460 + 330] 790
Insurance [11 670 – 1 680] 9 990
Depreciation [50 + 4 340] 4 390
Unemployment insurance contribution [800 + 60] 860
Repairs 3 710
Provision for bad debts adjustment 1 590
Bank charges 410
Interest expense / Financing cost 2 (28 945)

CLINBUSH HARDWARE
ASSETS Note
Tangible/Fixed assets 3 706 040
Financial assets: Fixed deposit at NYC Bank 6 815
(17 000 – 10 412 + 227)
Inventory 4 76 420

Capital 7 410 000
Mortgage Loan: USA Bank (162 800 + 26 345 – 12 000) 177 145
Loan: DC Lenders 14 000
1. INTEREST INCOME
from investments [1 000 + 227] 1 227
on current account [150 + 164] 314
on savings 1 265
2 806
2. INTEREST EXPENSE
on loan 2 600
on mortgage 26 345
28 945
3. FIXED ASSETS Land and

Equipment Total
buildings
Cost [1]
686 800 44 000 730 800
Accumulated depreciation - (20 000) (20 000)
Movements - (4 760) (4 760)
Disposals at carrying value - (370) (370)
Depreciation - (4 390) (4 390)
Cost *
686 800 43 400 730 200
[1]
690 510 – 3 710

4. INVENTORIES
Trading stock [ 75 300 + 1 800 – 3 200 + 2 100] 76 000
76 420
Trade debtors [21 000 – 2 880 + 1 360] 19 480
Provision for bad debts [510 + 1 590] (2 100)
Prepaid expenses [750 + 1 680] 2 430
19 810
Savings account [2 000 + 1 265] 3 265
Bank [3 920 + 2 000 – 410 + 164] 5 674
Fixed deposit 10 412
19 351
7. CAPITAL C. Clinton B. Bush Total

Contribution of capital during the 100 000 100 000 200 000
year
Withdrawal of capital during the year
8. CURRENT ACCOUNTS C. Clinton B. Bush Total

Interest on capital[1] 9 500 6 000 15 500
Drawings during the year (25 000) (3 585) (28 585)
Retained income at beginning of year (11 350) 2 270 (9 080)
[1]
Bush: 1 750 + 4 250; Clinton: 3 500 + 6 000 [2]
Bush: 385 + 3 200 = 3 585

Trade creditors [21 660 + 1 360 + 2 000] 25 020
Accrued expenses -
SARS – PAYE [830 + 960] 1 790
Medical aid fund [60 + 330 + 330] 720
UIF [60 + 60] 120
Creditors for salaries 4 650
Income received in advance 1 100
45 400
6.20.3 In your opinion:

• Has the business been operating efficiently?
- The business has made a net profit of R219 556 on a turnover of R436 520 (50%).
- The business has made a gross profit of R308 320 on a turnover of R436 520 (71%).
- The expenses as a percentage of sales are R81 900 / R436 520 (19%).
- Good or bad depending on reasons.
• Should the partners be satisfied with their earnings?

- Clinton earned R129 528 on a capital of R190 000 (average) for the year (68%).
- Bush earned R90 028 on a capital of R120 000 (average) for the year (75%).
- Above the interest rates offered by financial institutions.
- Etc.
• Do you have confidence in this business as a ‘going concern’?

- Yes, the business has made good profits.
- Business is solvent.
- Liquidity is reasonable.
- Risk is low, etc.
• How can Clinton and Bush use their business to make a positive contribution to their local
community? How will this affect their profits?
- They could advertise good causes in their shop, e.g. support of housing projects, SPCA.
- They could sponsor prizes in local events, e.g. school competitions.
- They could expand their business and employ more people.
- The effect on profit could well be positive – although there will be extra expenses, these might well be
offset against additional income resulting from increased public awareness in their business.
TASK 6.21 Rossdan Tyre Shop: Financial statements & GAAP

6.21.1 ROSSDAN TYRE SHOP
Adjustments in the General Journal: 28 February 20.7
No. Account debit Account credit Amount
1. • Subtract R550 from discount al-
lowed; add R550 to discount re-
ceived.
• Subtract R90 from repairs
• Stationery Prepaid expenses 500
Advertising Prepaid expenses 700
2. Depreciation [8 500 x 20% x 9/12] Accum. depreciation on computer 1 275
Asset disposal Computer 8 500
Accum. depreciation on computer Asset disposal 7 475
Drawings: Ross Asset disposal 1 000

Adjustments in the General Journal: 28 February 20.7 (Continued)
Loss on disposal of asset Asset disposal 25
Computer Creditors control 11 000
Depreciation [11 000 x 20% x 3/12] Accum. depreciation on computer 550
3. Depreciation Accum. depreciation on equipment 9 800
[262 000 – 164 000 x 10%]
4. Loss due to theft Petty cash 50
Accrued income Loss due to theft 350
5. Savings account Interest on savings 62
6. • Debtors control (F Foster) Sundry expenses 260
• Trading stock Sundry expenses 590
7. • Debtors control Interest on overdue debtors 40
• Bad debts Debtors control 234
• Debtors allowances Debtors control 2 880
Trading stock Cost of sales 2 020
• Debtors control Bank 1 230
Debtors control Discount allowed 35
• Debtors control Bad debts recovered 490
• Provision for bad debts adjustment Provision for bad debts 600
8. Advertising Trading stock 6 400
9. Trading stock deficit Trading stock 4 000
[1 200 x 100/150 x 5]
10. Interest on loan Mortgage bond 16 800
11. Prepaid expenses Advertising 12 000
12. Consumables on hand Consumable stores 7 300
13. Prepaid expenses Stationery 1 240
14. Fee income Deferred income 410
15. Interest on fixed deposit Deferred income 900
16. No entry
17. Drawings: Dan Sundry expenses 1 460
18. Partners’ salaries Current account: Ross 60 000
Current account: Dan 60 000
Partner’s bonus Current account: Ross 12 000
Interest on capital Current account: Ross 28 800
Current account: Dan 19 200
Current account: Ross Appropriation account 67 342
Current account: Dan Appropriation account 44 895
Adjustments in the Financial statements: 28 February 20.7

No. Adjustment in financial statements only
10. Subtract R24 000 from the mortgage bond; show the R24 000 as a current portion of loan under
Trade and other payables.
15. Subtract R20 000 from the fixed deposit amount and show this under Cash and cash equivalents.

In rounding off this Task, Teachers are advised to question the class (at random) about the effect of adjust-
ments on the Accounting equation, or they may add A O L columns to the first template in this Task.

6.21.2 ROSSDAN TYRE SHOP
Note
Sales [996 000 - 3 200 – 2 880] 989 920
Cost of sales [540 300 – 2 020] [538 280]
Fee income [106 110 – 410] 105 700
Sundry income 1 000
Discount received [1 380 + 550] 1 930
Repairs [14 680 – 90] 14 590
Advertising [19 900 + 700 + 6 400 – 12 000] 15 000
Stationery and printing [4 700 + 500 – 1 240] 3 960
Discount allowed [2 150 - 550 – 35] 1 565
Bad debts [6 450 + 234] 6 684
Consumable stores [33 100 – 7 300] 25 800
Sundry expenses [21 250 – 260 – 590 – 1 460] 18 940
Loss due to theft [500 – 350] 150
Depreciation [1 275 + 550 + 9 800] 11 625
Loss on disposal of asset [8 500 – 7 475 – 1 000] 25

ROSSDAN TYRE SHOP
ASSETS Note
Financial assets:
Fixed deposit: QP Bank [40 000 – 20 000] 20 000
Inventory 4 218 510

Capital 7 600 000
Mortgage loan: QP Bank 97 800
[105 000 + 16 800 – 24 000]
Loan from Ross 30 000
Bank overdraft [12 480 + 1 230] 13 710
1. INTEREST INCOME
on fixed deposit [4 500 – 900] 3 600
on savings account [1 100 + 62] 1 162
on overdue debtors 40
5 002
2. INTEREST EXPENSE
on mortgage loan 16 800
on loan (Ross) 3 000
19 800

Equipment Computer Total
buildings
Cost 372 000 262 000 8 500 642 500
Movements - [9 800] 8 150 [1 650]
Additions at cost - - 11 000 11 000
Disposals at carrying value - - [1 025] [1 025]
Depreciation - [9 800] [1 825] [11 625]
Cost 372 000 262 000 11 000 645 000
Accumulated depreciation - [173 800] [550] [174 350]

4. INVENTORIES
[219 000 + 2 020 + 590 – 6 400 – 4 000]
218 510
[67 080 + 40 – 234 – 2 880 + 1 230 + 35 + 490 + 260]
Provision for bad debts [5 000 + 600] [5 600]
Prepaid expenses [1 200 – 1 200 + 12 000 + 1 240] 13 240
Accrued income 350
74 011
Fixed deposit 20 000
Petty cash [1 300 – 500] 800
28 962
7. CAPITAL ROSS DAN TOTAL

Contribution of capital during the - - -
year
8. CURRENT ACCOUNTS ROSS DAN TOTAL

Retained income at beginning of year 2 200 [11 200] [9 000]
Retained income at end of year 22 814 [2 251] 20 563
[1]
Ross: 12 000 + 1 000 = 13 000 Dan: 24 000 + 1 460 = 25 460

Trade creditors [13 750 + 11 000] 24 750
Deferred income [410 + 900] 1 310
50 060
6.21.3 Provide examples of how you have applied the following principles in preparing the
financial statements (give one example of each application).
• Historical cost principle
Valuation of land and buildings.
• Rule of prudence
Depreciation written off, debtor being declared insolvent, stock shortage, provision for bad debts.

• Matching principle
Burglary, interest on savings, interest on mortgage, advertising prepaid, stationery paid but not yet received,
repairs in advance.
• Business entity rule

Private account with local caterers.
• Going-concern principle
Physical stock taking.
• Materiality
Delivery charges.
TASK 6.22 Highway Service Station: Financial statements,

Asset Disposal, Reflection & Ethics
6.22.1 HIGHWAY SERVICE STATION
INCOME STATEMENT / STATEMENT OF COMPREHENSIVE INCOME FOR YEAR ENDED
28 FEBRUARY 20.6
Note
Sales [812 000 – 1 050] 810 950
Cost of sales [725 000 – 875] [724 125]
Gross profit 86 825
Fee income [601 600 – 850] 600 750
Salaries and wages [255 000 + 600 + 6] 255 606
Security services 120 000
Cleaning and maintenance 22 800
Insurance [8 640 – 550] 8 090
Stationery and printing [4 300 – 120 – 400] 3 780
Staff development & training 50 000
HIV Aids awareness programme 10 000
Bank charges [5 320 + 430] 5 750
Depreciation [(10 000[1] + 28 400[2]) + 9 200] 47 600
Loss on disposal of asset [60 000 – 34 000 – 22 000] 4 000
Loss due to burglary [12 000 – 7 000] 5 000
[1]
60 000 x 20% x 10/12 = R10 000
[2]
[(181 000 – 60 000) x 20%] + [126 000 x 20% x 2/12] = 24 200 + 4 200 = R28 400

HIGHWAY SERVICE STATION
ASSETS Note
Tangible/Fixed assets 3 1 014 300
Financial assets:
Fixed deposit: West Bank [43 906 + 296 – 11 540] 32 662
Inventory 4 81 900

Capital 7 520 000
Mortgage loan: Northern Bank 394 648
[422 060 + 4 748 – 32 160]
Bank overdraft [41 751 + 430 + 545 – 27 500] 15 226
1. INTEREST INCOME
on fixed deposit [3 906 + 296] 4 202
4 516
2. INTEREST EXPENSE
on loan [49 500 + 4 748[1]] 54 248
on overdraft 545
54 793
[1]
422 060 x 13.5% x 1/12 = R4 748

buildings
Cost [833 000 – 12 000] 821 000 181 000 114 000 1 116 000
Movements - 61 600 8 800 70 400
Additions at cost - 126 000 18 000 144 000
Disposals at carrying value - [26 000] - [26 000]
Depreciation - [38 400] [9 200] [47 600]
Carrying value at end 821 000 151 400 41 900 1 014 300
Cost 821 000 247 000 132 000 1 200 000

4. INVENTORIES
Trading stock:
Petrol 61 200
Motor oil [21 500 + 875 – 400 – 1 675] 20 300
81 900
Trade debtors [39 800 – 1 050 – 850 + 360] 38 260
Provision for bad debts [1 990 – 77] [1 913]
Accrued income 7 000
43 897
Fixed deposit: West Bank 11 540
11 540
7. CAPITAL BARNES MCHUNU TOTAL

Contribution of capital during the - 18 000 18 000
year
8. CURRENT ACCOUNTS BARNES MCHUNU TOTAL

Partner’s bonus 2 027 - 2 027
Drawings during the year [120] [43 960] [44 080]
Retained income at beginning of year [14 050] 1 670 [12 380]
Retained income at end of year 45 348 (444) 44 904

Trade creditors [41 290 + 126 000 – 22 000 + 27 500 + 360] 173 150
SARS – PAYE [3 580 + 80] 3 660
UIF [425 + 6 + 6] 437
Creditors for wages [600 – 80 – 6 – 400] 114
209 521

6.22.2 The partners are not happy with their profits. What advice would you provide to
them? Bear in mind that petrol prices are fixed by the government.
Various answers:
Possible answers:
• Net profit as a percentage of turnover is 12.5%.
• Barnes’ return is 18.7%.
• Mchunu’s return is 21%.
Advice:
• Increase the mark-up % (presently it is 11.7%).
• Reduce expenses if possible.
• High loan which results in high interest – try to reduce it.
• Increase the sales.
• Advertise the products.
• Etc.
6.22.3 The accountant of the business feels that the business is wasting money on staff
development and the HIV awareness programme as these are not benefiting the
business. Do you agree? Explain.
In the long term these programmes benefit both the community and the business.
The business is giving back to the community – for this it gets publicity.
This enhances the image of the business.
This may result in an improvement in profitability.
Etc.

In rounding off this Task, Teachers may discuss the following with their classes:
• The Accounting Equation: effect of adjustments.
• Responsible citizenship – making a difference to the local community.
TASK 6.23  Ethics and internal control scenarios

6.23.1 David phones Thabo from Brazil to say he is there for a month to investigate new
products for Power Sports. This means that Thabo will have to work overtime.
This is an ethical matter.
The partners have to agree in advance otherwise this can cause a problem between them.
David should not inform Thabo once he has left. Thabo might well think that David is just having a holiday.
The business should also be supporting local products to benefit the South African economy.
This could also be an internal control matter which affects the finances of the business.
If David is going to charge the cost of the trip to the partnership, then this will affect Thabo financially too.
SARS might well contest the costs of the trip if they feel that it is not a genuine business expense.
6.23.2 David and Thabo want to solve the financial problems of Power Sports by admitting a
new partner. The financial results of 20.7 are much better than 20.8. They tell the
accountant to delay in preparing the 20.8 financial statements until they finalise the
agreement with the new partner.
This is completely unethical.
The partners may be accused of fraud if they hide information from a prospective new partner.
The accountant should not agree to delay the publication of the financial statements.

6.23.3 David has awarded himself a bonus without consulting Thabo.
This is both an ethical and internal control matter.
David must comply with the partnership agreement.
There will probably be stipulations about bonuses in the agreement.
If David receives the bonus, this will affect the sharing of the profit and will negatively affect Thabo’s
returns.
6.23.4 The partners decide that they do not have time to do a physical count of the fixed
assets each year. They decide to install security cameras instead.
This is an internal control matter.
Stock has to be counted in order to compare to the balance on the Trading stock account in order to identify
shortages as soon as they occur.
Cameras will only identify a culprit once the partners know when the incident occurs.
The partners will probably not have the time to sit watching hours of video recordings. Doing the physical
counts is much more effective.
6.23.5 Thabo has paid for entertainment expenses but he has not bothered to keep the doc-
uments. He says this was to benefit the partnership.
This is an internal control matter.
The expenses might well be genuine but Thabo will have to prove this by presenting the vouchers.
He cannot submit vouchers for private drinks and meals.
SARS will also disallow the expenditure as a tax deduction if the vouchers are missing.
6.23.6 David has taken over a fully depreciated vehicle at the book value of R1.00. The ve-
hicle had been used for delivering goods to customers.
This is both an internal control and ethical matter.
A vehicle worth R1.00 might well still serve the purpose for which it was bought, even if the asset is fully
depreciated.
The business will have to replace the vehicle at current market price which could be over R200 000.
This will affect the financial position of the partnership as a whole.
6.23.7 The partners decide to take drawings in the form of trading stock rather than cash.
They feel that cash would have to be recorded as it affects the bank reconciliation
whereas they do not have to make an entry for the trading stock.
This is both an internal control and ethical matter.
All transfers of stock to partners must be recorded as drawings to ensure that the correct financial position
is calculated.
Also, if no entry is made for the stock taken, it will increase the value of the trading stock deficit and reduce
the net profit which is taxable.
The taking of the stock without recording it in order to reduce profit and tax will be regarded as tax evasion
which is illegal.

TASK 6.24  Pinevalley Pharmacy: Income Statement & ethics
6.24.1 PINEVALLEY PHARMACY
INCOME STATEMENT FOR YEAR ENDED 28 FEBRUARY 20.6
Note
Sales (4 140 000 – 18 000) 4 122 000
Cost of sales (1 840 000 – 8 000) (1 832 000)
Gross profit 2 290 000
Rent income (218 400 + 50 400[3]) 268 800
Profit on plastic packets (27 000 + 4 500) 31 500
Gross operating income (2 623 300)
Operating expenses 991 100
Depreciation (8 000 + 155 000[1] + 27 000[2]) 190 000
Loss on disposal of asset (93 000 – 10 000) 83 000
Salary to pharmacist (95 200 – 7 600) 87 600
Employer's contributions to Medical Aid & Provident Fund
(21 400 – 1 800) 19 600
Wages (56 000 + 5 200) 61 200
Motor vehicle expenses 95 000
Repairs & maintenance (176 000 – 75 000) 101 000
Commission paid (80 000 + 50 000) 130 000
Insurance (30 000 – 2 100) 27 900
Electricity & water (35 000 + 2 800) 37 800
Donation to Pinevalley Clinic (60 000 + 11 000) 60 000
Sponsorship of Pinevalley Soccer Club (60 000 + 11 000) 71 000
Operating profit 1 632 200
Interest income [35 000 – 7 000] 28 000
Profit before interest expense 1 660 200
Interest expense / Financing cost [77 000 + 4 470] (81 470)
[1]
620 000 x 25%
[2]
(300 000 – 30 000) x 10% = 27 000
[3]
218 400 – (4 200 x 2 mths) = 218 400 – 8 400 = 210 000
210 000 ÷ 10 mths = 21 000
New rent per month = 21 000 + 4 200
In advance = 25 200 x 2 mths = 50 400
OR:
8y + 2(y + 4 200) = 218 400; Solve for y = 21 000; New rent = R25 200;
In advance = 25 200 x 2 = 50 400
6.24.2 NOTES TO THE FINANCIAL STATEMENTS ON 28 FEBRUARY 20.6

7. CAPITAL F. Flue V. Virus TOTAL
Balance at the beginning of the year 700 000 2 200 000 2 900 000
Contribution of capital during the year (1 Jan 20.6) 200 000 0 200 000
Withdrawal of capital during the year (1 Aug 20.5) 0 (400 000) (400 000)
Balance at the end of the year 900 000 1 800 000 2 700 000

8. CURRENT ACCOUNTS F. Flue V. Virus TOTAL
Profit per Income Statement 586 243 992 487 1 578 730
Partners’ salaries [1]
220 000 330 000 550 000
Bonus to Flue 50 000 0 50 000
Drawings (230 000) (500 000) (730 000)
Retained income at beginning of year (40 000) 70 000 30 000
[1]
330 000 x 100/150
[2]
Flue: [700 000 x 6% x 10/12= 35 000] + [900 000 x 6% x 2/12 = 9 000]; Total = 44 000
[3]
Virus: [2 200 000 x 6% x 6/12 = 66 000] + [1 800 000 x 6% x 6/12 = 54 000]; Total = 120 000
6.24.3 Ethical issues affecting Pinevalley Pharmacy

(a) The customers feel that the partners are taking unfair advantage of the fact that the
nearest competitor is 80 km away. Do you agree?
Yes.
The mark-up is 125% which is very unfair as the customers have no other place to buy their medicines.
The business has made a gross profit of R2.29m out of this community.
Furthermore they are also making a profit on the plastic bags.
This is an added insult to the community as the business should aim to break-even on these items.
(b) The employees want to resign but they have no alternative employment in the area. Why
are they dissatisfied?
The shop assistants got only a 4% increase in their wages.
They are not subject to PAYE deductions because their R2 600 per month wages are below the taxable
threshold, and they do not get any of the standard benefits regarding medical aid and provident fund.
The qualified pharmacist is earning less than R100 000.
For a person of his/her qualifications this is very low, especially as he is also running the business on a daily
basis.
The partners are together earning almost R1.6m.
The partners are not looking after their employees properly.
(c) You are told that the commission expense comprises payments to Billy Bell and other
individuals. These payments are made by the partners, Flue and Virus, to secure lucrative
contracts (tenders) to supply hospitals in the province with medical supplies.
The amounts of R130 000 are not ‘commission’.
They are in fact bribes which are illegal.
The partners may be accused of corruption, as well as the persons such as B. Bell who are paid these
amounts.
If this becomes known to the public, the business and the partners will get a very poor reputation.
(d) The partners feel that their donations to a local clinic and sponsorship of the local soccer
club will increase the ‘goodwill’ which the community would have for the pharmacy and
gain them more customers. Is this a good strategy?
Yes: Supporting local communities is a very good strategy because the local community will tend to support
the business in future.
‘Corporate social investment’ by the business in encouraging good, healthy activity through the soccer club
(R71 000) and encouraging better health care through the clinic (R60 000) are most worthwhile causes,
although they might get criticised for the amounts being so low in comparison to the profit earned of almost
R1.6m.

(e) Refer to part (d) above. Would your opinion change if you were told the following:
• The donation to the clinic contained a requirement that the clinic would have to buy
all its medical supplies from Pinevalley Pharmacy.
• The sponsorship of the local soccer club is dependent on the fact that Flue’s son and
Virus’ son must both be selected for the club’s 1 st team.
Yes, most definitely.
These conditions indicate that the partners were not serious about supporting the community.
All they are concerned about is their own self-interest in either making a profit (through the clinic) or giving
their children an unfair advantage in sport (through the soccer club).
(f) Explain your opinion on the following points:

• The Repairs & maintenance account contains figures that relate to the repairs of the
homes of both partners.
• The Vehicle expenses account contains payments made for petrol for Mrs Flue and
Mrs Virus.
The business entity rule should apply.
Many of these expenses do not relate to the business.
If they are for private expenses, and they are paid through the business, they must be debited to Drawings
and not treated as expenses which will reduce the net profit of the business.
SARS can lay criminal charges against the partners for tax evasion because income tax on the partners is
calculated on their portions of the net profit.
(g) You are told that the Shady Nightclub does not check identity documents of the people
who want to get in. How will this affect Pinevalley Pharmacy?
The Pharmacy will get a bad reputation amongst parents in the community who want to bring their children
up to respect the law.
They are likely to protest and attract negative publicity to the Pharmacy, a business which professes: ‘Your
health is our concern’. In order to retain its reputation, the Pharmacy should rent out its unused premises
to a business which does not clash with its own line of business.
Alternatively, they should sell the portion of the property that they do not need.
(h) Consider the following statement: Although the partners of Pinevalley Pharmacy have
made very impressive returns on their capital investment in the business, the business is
not sustainable, i.e. it will not last very long into the future. Do you agree?
Yes.
The partners have indeed made an excellent return of R1.574m net profit on their capital investment of
R2.7m, which is more than a 50% return.
However, the pharmacy may well lose its good employees or the employees may deliberately decide to
reduce the quality of their work if they are legitimately dissatisfied.
Without a qualified pharmacist the business cannot continue.
The pharmacy is also accused of corruption (i.e. tax evasion and bribery) which could land the partners in
jail or face large fines imposed by the courts.
The loss of goodwill through the nightclub could also be a major concern.
Furthermore, the partners are making such a good return that a potential competitor is likely to enter the
area.
If the competitor applies a reasonable mark-up percentage, Pinevalley Pharmacy will be driven out of busi-
ness very quickly.

TASK 6.25 Monument TV Shop: Balance Sheet & internal
control
6.25.1 MONUMENT TV SHOP
BALANCE SHEET (STATEMENT OF FINANCIAL POSITION) ON 28 FEBRUARY 20.8
ASSETS Note
Tangible/Fixed assets 3 3 150 441
Financial assets: Fixed deposit (654 100 – 116 000) 538 100
Inventories
4
(846 400 – 27 600 + 36 800 – 36 800 – 110 400) 708 400
Cash & cash equivalents
6
(15 000 + 9 000 + 116 000 – 3 000) 137 000

Capital and reserves / Owners’ equity 1 885 000
Capital 7 2 000 000
Current accounts 8 (158 300)
Non-current liabilities 1 556 000
Mortgage loan: Mafikeng Bank
(993 795 + 134 205 – 72 000) 1 056 000
Loan from W. Williams 500 000
Current liabilities 1 221 530
Current portion of mortgage loan 72 000
Bank overdraft
(345 300 + 2 400 + 4 610 + 11 000 - 55 000 + 70 000) 378 310
6.25.2 NOTES TO THE FINANCIAL STATEMENTS ON 28 FEBRUARY 20.8

Vehicles Equipment Computers Total
buildings
Carrying value at beginning 2 695 389 3 59 000 180 000 2 934 392
Cost 2 695 389 930 000 292 000 240 000 4 157 389
Accumulated depreciation - (929 997) (233 000) (60 000) (1 222 997)
Movements 275 000 (1) 56 050 (115 000) 253 384
Additions at cost 275 000 - 63 000 - 338 000
Disposals at carrying value - (1) - (35 000) (35 001)
Depreciation - (0) *(6 950) **(80 000) (86 950)
Carrying value at end 2 970 389 2 115 050 65 000 3 150 441
Cost 2 970 389 620 000 355 000 156 000 4 101 389
Accumulated depreciation - (619 998) (239 950) (91 000) (950 948)
*(59 000 x 10%) + (63 000 x 10% x 2/12) = 6 950

**240 000 x 331/3% = 80 000

Trade debtors (196 000 – 64 400 – 45 360 + 12 100) 98 340
Provision for bad debts (9 000 + 5 751) (14 751)
83 589
Income receivable (24 000 + 4 000) 28 000
128 589
3. CAPITAL WILLIAMS ZONDO TOTAL

Capital at the beginning of the year 900 000 1 300 000 2 200 000
Additions (withdrawals) during the 300 000 (500 000) (200 000)
year
Capital at the end of the year 1 200 000 800 000 2 200 000
4. CURRENT ACCOUNTS WILLIAMS ZONDO TOTAL

Profit for the year 275 000 375 000 650 000
Bonus 0 100 000 100 000
Interest on capital* 84 000 84 000 168 000
Primary distribution 384 000 484 000 868 000
Share of remaining profits (109 000) (109 000) (218 000)
Drawings (Zondo: 410 400 + 27 600) (340 000) 438 000 (778 000)
Retained income for the year (65 000) (63 000) (128 000)
Retained income at beginning of year 67 000 (54 000) 13 000
Retained income at end of year 2 000 (117 000) (115 000)
*Williams: [900 000 x 8% x 6/12 = 36 000] + [1 200 000 x 8% x 6/12 = 48 000]; Total = 84 000
Zondo: [1 300 000 x 8% x 6/12 = 52 000] + [800 000 x 8% x 6/12 = 32 000]; Total = 84 000

Trade creditors (282 700 + 306 000 – 36 800 + 55 000) 606 900
Expenses payable (33 900 + 18 750) 52 650
Deferred income 48 400
Creditors for wages (37 000 – 13 100) 23 900
SARS (PAYE) (25 700 – 2 400) 23 300
UIF (2 300 – 170 – 170) 1 960
Cape Provident Fund (18 100 – 1 330 – 2 660) 14 110
771 220
6.25.3 Answer the following questions. In each case explain, provide a reason and quote
figures (where possible) to support your answer.
(a) Have the partners controlled their fixed assets well?
No.
• The delivery vehicles are very old. They are valued at R1.00 each as they are fully depreciated. The
vehicles and might well be a danger to other road-users in view of the crash that occurred. The partners
should not have used a driver without the required driver’s licence.
• The computers were not properly secured. Seven of them had been stolen without any sign of breaking
and entering. This is extremely negligent of the employees. Policies should be put in place to require
employees to take due care over the assets entrusted to them. These computers will now need to be
replaced which will cause further financial strain to the business.

(b) Have the partners controlled their debtors well?
No.
• Bad debts are extremely high at R387 000 (more than 10% of gross sales).
• The provision for bad debts has been increased to 15% of debtors which is also very high.
• In February, there was a dishonoured cheque from a debtor of R11 000 and an insolvent debtor written
off of R45 360. It appears that debtors are not being properly screened or checked before opening
accounts. Credit limits should also be set as these amounts for the adjustments are both very high.
(c) Have the partners controlled the wages well?

No.
• There were 10 ghost employees in the Wages Journal for the last week in February (amount of net
wages R1 310). It is clear that fraud has occurred here and the wages clerk is probably the main
suspect. If this has occurred in the last week of the financial year, there must be a suspicion that it has
also occurred at other times of the year.
(d) Have the partners controlled their cash resources well?

No.
• There is a large bank overdraft of R378 310, the mortgage loan is R1 056 000, and the loan from Williams
is R500 000 with large amounts of interest attached to each.
• In contrast there is R654 100 in the fixed deposits, earning a low interest rate of 5.5%.
• It would make sense to use the funds in the fixed deposit to settle as many of the debts as possible.
• The partners have also been over-drawing. Their drawings were R778 000 whereas the net profit was
only R650 000. They are not retaining any of the funds for future expansion.
• The petty cash has also not been well controlled. Every payment should have a valid voucher. In
February, R3 000 was lost. To charge the amount to sundry expenses is an easy but unsatisfactory
solution. Possibly this type of fraud has also occurred earlier in the year.
(e) What general advice can you offer the partners?

• Appoint an internal auditor to do a detailed audit of all aspects of the business’ accounting procedures.
• Ensure that divisions of duty exist so that the work of one individual serves as a check on another.
• Ensure that proper policies are drawn up to regulate the work of the employees, and place all of them
on training to ensure that they take due care of the assets entrusted to them.

CHECKLIST
Requires more
Skills Yes – proficient Complete
attention
Identify various groups or people who are interested
in the financial statements of a business.
Understand important characteristics of financial
statements.
Explain basic rules of GAAP.
Identify GAAP applications and explain each one.
Distinguish between operating, financing and
investing activities.
List year-end procedures in the correct sequence.
Draw up a basic format of an income Statement
(Statement of Comprehensive Income) and a
Balance Sheet (Statement of Financial Position) with
Notes.
Work out year-end adjustments to be entered in
preparing the financial statements.
Understand the difference between normal
adjustments in the books and Balance Sheet
adjustments.
Understand the effect of year-end adjustments on
the Accounting equation.
Draw up an Income Statement (Statement of
Comprehensive Income) and Notes for a
partnership.
Allocate the net profit to partners in accordance with
the partnership agreement and draw up an
Appropriation Statement.
Draw up a Balance Sheet (Statement of Financial
Position) and Notes for a partnership.
Identify errors and correct the errors in financial
statements.
Reflect on the figures in the financial statements and
express general opinions.
Explain and express opinions on internal control
issues relating to partnerships.
Explain and express opinions on issues affecting
business ethics relating to partnerships.

MODULE 7
PARTNERSHIPS:
INTERPRETATION OF FINANCIAL STATEMENTS
Advice to Teachers on how to use this Module.
Teachers are advised to use different strategies so that learners can share opinions on certain Tasks. They
can learn from each other and learn to test their understanding by expressing their opinions to others. Also,
there are opportunities on other Tasks for them to work independently and to enhance their examination
techniques.
Teachers should also provide opportunities for learners to mark their own work from time to time, guided by
their Teachers, so that they gain an understanding of the marking process which should also enhance their
examination techniques.
Learners do not need to do every Task in this Module, but they should do all the Tasks indicated by the symbol
 in order to understand the essential basics of financial indicators, their calculation and interpretation.
Learners should not memorise formula for the financial indicators. All the financial indicators are based on
Accounting logic. If learners understand the concepts of profitability, solvency, liquidity, gearing and return,
and where these are located in the financial statements, they should find the logical calculation of the financial
indicators much easier to understand and remember.
Teachers are urged to nurture their learners through the essential and relatively easy Tasks denoted by 
through to the more challenging Tasks denoted by or . The challenging Tasks are inserted in
this Module to challenge and extend the more capable learners.
ADVANCED INTERPRETATION OF FINANCIAL STATEMENTS
From the previous Tasks in this Module, learners should have become aware that financial statements are
prepared with a major purpose in mind, i.e. to provide information that enables the owners and other stake-
holders to assess the performance of the business and to make appropriate decisions based on that infor-
mation.
TASK 7.1  Information relevant to owners

This Task is suitable for working in pairs or groups.
• How profitable is this undertaking? The owner can see whether the capital that has been invested in the
undertaking is providing the highest possible return. He/she must consider whether it would be more
rewarding to invest his capital elsewhere. (This is done by calculating the net profit as a percentage of the
capital invested).
• How efficient is the purchasing policy, the stock control policy and the sales policy of this undertaking?
(Calculate the percentage of the gross profit and net profit on the turnover).
• Are the current expenses (operating expenses) within acceptable limits? Compare the percentage of gross
profit on turnover with the percentage of net profit on turnover.
• Has the business sufficient liquidity to pay creditors if the business deteriorated and is placed under pres-
sure? The ratio of current assets to current liabilities must be monitored with great care.
• Is there a pattern of progress, deterioration or even stagnation in the activities of the business undertaking?
This is done by comparing figures, ratios and results with those of previous years and also by comparing
these with particulars of other similar business undertakings).
• Do the financial statements reflect good internal control over assets, expenses, income, etc., or are there
areas of concern which need attention?
• Do the financial statements reflect any positive contribution to the local community or the environment?
Not only is this the ‘right thing to do’ but the business’ sustainability could depend on it.

TASK 7.2  Information relevant to owners
1. Financial institutions, e.g. commercial banks and building societies.
If the owner should apply for short-term credit (a bank overdraft facility on his current banking account, or
short term loans), the institution can determine - from the statements - whether the business is in a position
to supply sufficient security and settle current liabilities on a regular basis.
In the case of long term credit (e.g. mortgage bonds at building societies or commercial banks), security
will be required. These institutions can determine from the business’ statements whether the interest can
be paid regularly. They can also assess the settlement of the capital debt.
2. Creditors who grant short-term credit.

By making a careful study of the statement, creditors can also determine whether the business undertaking
has sufficient assets (liquid assets) to be turned into cash when necessary, in order to meet current liabili-
ties.
3. South African Revenue Services (SARS).

The South African Revenue Services must be convinced that the annual income return has been recorded
correctly so that the income tax can be levied on the correct taxable income; that VAT paid appears to be
correct in relation to total sales; or that PAYE returns appear to be correct in relation to total salaries and
wages paid.
4. Employees or their representative trade unions.

Employees will be interested in whether or not the business is profitable as this is likely to provide them
with job security, but they would also be interested in assessing whether a reasonable share of the business’
income is allocated to salaries and wages.
5. The local and wider community.

There is a growing awareness that for a business to sustain itself into the future, it needs to respect the
wider community and gain its support. Provision of employment, social upliftment and respect for the
environment are examples of concerns in this area.
TASK 7.3  Concepts reflected in the financial statements

Information: Location: Definition:
At the bottom of the Income State- The final profit after deducting all expenses
Net profit
ment. from income.
The trading profit made on the buying and
Gross profit At the top of the Income Statement.
the selling of goods
Those assets that are expected to be con-
Current assets Under Assets in the Balance Sheet.
verted into cash within a year.
Amount invested by Under Owners’ equity in the Balance The capital invested by the owners and the
the owners Sheet. profit retained (reinvested) in the business.
The amount of salary, interest on capital,
Amount earned by In the Current account note to the fi-
other earnings, and share of remaining prof-
each partner nancial statements.
its.
Amount withdrawn In the Current account note to the fi- The amount of earnings withdrawn by the
by the owners nancial statements. owners (i.e. not retained in the business).
Those debts which will be settled within the
Current liabilities Under Liabilities in the Balance Sheet.
next year.
In the Income Statement between Expenses incurred in operating the business.
Operating expenses
gross profit and operating profit.
The profit earned in operating the business,
In the Income Statement below oper-
Operating profit i.e. operating income less operating ex-
ating expenses.
penses.
Assets that will not be converted into cash
Non-current assets In the Balance Sheet under Assets.
within the next year
Debts that will be settled in periods longer
Non-current liabilities In the Balance Sheet under Liabilities.
than a year.

TASK 7.4  Basic interpretation of items in financial state-
ments
7.4.1 The net profit of R80 000 is a lot of money. The business has done very well.
Assessment of profit depends on the size or risk of the business – consider or compare to the owner’s equity
as well.
7.4.2 The gross profit of R120 000 is very good. The business has sets its prices very well in
order to earn this gross profit.
Assessment of gross profit depends on the volume of goods sold – consider or compare to the cost of sales
or sales.
7.4.3 The operating expenses of R90 000 are satisfactory. The business has controlled them
well.
Assessment of operating expenses depends on the size of the business and sales volume – consider or compare
to Sales.
7.4.4 The debts of the business that must be repaid within the next year amount to
R105 000. The business can easily settle these debts.
Assessment of current liabilities depends on resources available to settle the debts – consider or compare to
current assets or liquid assets (debtors or cash).
7.4.5 All the debts of the business amount to R300 000. The business can repay these with-
out a problem.
Assessment of all debts depends on the volume of all the assets of the business – consider or compare to total
assets.
7.4.6 The business has trading stock on hand amounting to R60 000. This is sufficient to
satisfy the needs of the customers.
Assessment of stock depends on the volume of goods traded during a year – consider or compare to credit
purchases, or if this figure is not available, Cost of Sales (this will equal purchases if stock levels are fairly
constant).
7.4.7 The trade debtors amount to R36 000. They are settling their debts on time and the
business is controlling them well.
Assessment of trade debtors depends on how much is sold to them each month – consider or compare to
credit sales per month.
7.4.8 The trade creditors amount to R40 000. They are being paid in accordance with normal
credit terms.
Assessment of trade creditors depends on how much is bought from them each month – consider or compare
to credit purchases, or if this figure is not available, Cost of sales (this will equal purchases if stock levels are
fairly constant).
7.4.9 It is good business practice for a business to dump waste materials in a nearby river as
there are no cost implications.
There is a cost implication – the effect on the environment.
This will have to be cleaned up.
The community will end up paying through the municipality or through volunteer work.
This practice will cause a business to lose support from the community, which will affect its sustainability.
7.4.10 A business should always try to achieve the highest mark-up percentage possible.
A business has to apply prices that are competitive, otherwise sales will decline.
If the business is a monopoly with not competition, high mark-ups will lead to consumer resistance.

TASK 7.5  Understanding practical financial indicators state-
ments
7.5.1 Why is it not advisable to make your decision simply on the basis of the number of runs
that each batsman has scored?
One batsman might have played more innings than the other.
7.5.2 If you calculate their batting averages, who appears to be the more successful batsman
in this series?
Kallis’ average = 512 ÷ 6 = 85.3
Amla’ average = 665 ÷ 10 = 66.5
According to the averages, Kallis appears to be more successful.
7.5.3 Amla might be upset that you have made your decision based on the averages. What
factors might make the averages misleading?
He opens the batting – has to face fast bowlers.
He played on all the pitches, some of them might have been difficult to play on.
He has played more often – fatigue could occur.
Note to Teacher:
Teachers should stress that financial indicators are not an exact science, but they do give clues as to areas of
interest or concern.
TASK 7.6  DD Magazines: Calculation and explanation of fi-

nancial indicators
No. Description of calculation Workings Answer Explanation
The percentage of the selling
304 000 x 100
7.6.1 Gross profit as a percentage of sales 38.8% price that represents gross
784 000 1
profit.
The mark-up % - the extent
Gross profit as a percentage of cost 304 000 x 100
7.6.2 63.3% to which prices are marked
of sales 480 000 1
up from cost to selling price.
The % of the selling price
Operating profit as a percentage of 136 240 x 100
7.6.3 17.4% that represents operating
sales 784 000 1
profit.
The % of the selling price
Operating expenses as a percentage 201 290 x 100
7.6.4 25.7% that is used to settle operat-
of sales 784 000 1
ing expenses.
104 040 x 100 The % of the selling price
7.6.5 Net profit as a percentage of sales 13.3%
784 000 1 that represents net profit.
The return earned by the
Net profit as a percentage of own- 104 040 x 100 business on equity invested
7.6.6 16.4%
ers’ equity at beginning of the year 635 000[1] 1 by the owners at the begin-
ning of the year.
The return earned by the
business on average equity
Net profit as a percentage of aver- 104 040 x 100
7.6.7 15.5% invested by the owners dur-
age owners’ equity 672 020[2] 1
ing the year (this is the more
accurate calculation).
The Rand amount of net assets, i.e. The Rand amount by which
7.6.8 OE = R709 040
total assets minus total liabilities assets exceed liabilities.
The ratio of total assets to total lia- The extent to which assets
7.6.9 928 400 : 219 360 4.2 : 1
bilities exceed liabilities.

No. Description of calculation Workings Answer Explanation
The Rand amount of net current
The Rand amount by which
assets (working capital), i.e. cur-
7.6.10 110 500 – 19 360 R91 140 current assets exceed cur-
rent assets minus current liabili-
rent liabilities.
ties
The extent to which current
The ratio of current assets to cur-
7.6.11 110 500 : 19 360 5.7 : 1 assets exceed current liabili-
rent liabilities
ties.
The amount earned by each
The amount earned by each part- Dube = R59 770
7.6.12 partner out of the business
ner Dimba = R44 270
profits.
[1]
420 000 + 210 000 + 3 000 + 2 000 = 635 000
[2]
(630 000 + 5 000) + (630 000 + 79 040) = 1 344 040 ÷ 2 = 672 020
PART B
Profitability Return Solvency Liquidity
Gross profit as a percent- Net profit as a percent- The Rand amount of net The Rand amount of net
age of sales. age of average owners’ assets, i.e. total assets current assets, i.e. cur-
Gross profit as a percent- equity. minus total liabilities. rent assets minus current
age of cost of sales. The amount earned by The ratio of total assets liabilities.
Operating profit as a per- each partner. to total liabilities. The ratio of current as-
centage of sales. sets to current liabilities.
Operating expenses as a
percentage of sales.
Net profit as a percent-
age of sales.
TASK 7.7  Basic calculation of and comment on financial indi-

cators
7.7.1 AB Stores:
(a) Calculate the percentage gross profit on sales (turnover).
560 000 – 400 000 x 100
560 000 1
160 000 x 100 = 28.6%
560 000 1
(b) Calculate the percentage gross profit on cost of sales.

160 000 x 100 = 40%
400 000 1
(c) Calculate operating expenses as a percentage of sales (turnover).

164 000 x 100 = 29.3%
560 000 1
(d) Calculate operating profit as a percentage of sales (turnover).

Operating profit = 160 000 + 60 000 – 164 000 = 56 000
56 000 x 100 = 10%
560 000 1
(e) Calculate net profit as a percentage of sales (turnover).

Net profit = 56 000 + 16 000 – 30 000 = 42 000
42 000 x 100 = 7.5%
560 000 1

(f) Use the financial indicators you have calculated to comment on the profitability of the busi-
ness. Bear in mind that AB Stores uses a fixed mark-up of 50% when pricing its merchan-
dise.
The business has achieved only a 40% mark-up instead of its intended 50%, probably due to trade discounts.
On each R1.00 of sales the business earns 28.6c gross profit, operating expenses account for 29.3c, the
business earns 10c operating profit, and a final net profit of 7.5c.
These should be compared to performance in the previous year or to some target which they might have had.
7.7.2 CD Stores:
(a) Calculate net profit as a percentage of owners’ equity at the beginning of the year.
240 000 x 100 = 60%
400 000 1
(b) Calculate net profit as a percentage of owners’ equity at the end of the year.
240 000 x 100 = 20%
1 200 000 1
(c) Calculate net profit as a percentage of average owners’ equity.

Average owners’ equity = (400 000 + 1 200 000) ÷ 2 = R800 000
240 000 x 100 = 30%
800 000 1
(d) Which of these three calculations is the more reliable one to use? Explain.
Average owners’ equity.
Equity changes throughout the year as profits are earned and as the owners invest extra capital.
The average will therefore be more accurate.
(e) Use the financial indicators you have calculated in order to comment on the return earned
in this business. Should the owners be satisfied with this return? Explain briefly.
Yes.
Compare with alternative investments (e.g. a Fixed deposit or shares on the stock exchange). A 30% return
is very favourable.
Alternative investments could earn a much lower return than 30% - compare with the current bank rates.
7.7.3 EF Stores:
(a) Calculate net assets.
(360 000 + 60 000 + 270 000) – (180 000 + 300 000)
690 000 – 480 000 = R210 000
(b) Calculate the solvency ratio (i.e. total assets : total liabilities).
690 000 : 480 000 = 1.4 : 1
(c) Use the financial indicator you have calculated in order to comment on the solvency situa-
tion of the business. Should the owners be satisfied? Explain.
Yes.
Assets are 40% higher than liabilities.
The business should not have too much trouble in settling its debts.
7.7.4 GH Stores:
(a) Calculate net current assets.
720 000 – 340 000 = R380 000
(b) Calculate the current ratio (i.e. current assets : current liabilities).
720 000 : 340 000 = 2.1 : 1
(c) Calculate liquid assets (i.e. current assets without inventories).

720 000 – 410 000 = R310 000

(d) Calculate the acid-test ratio (i.e. liquid assets : current liabilities).
310 000 : 340 000 = 0.9 : 1
(e) Use the financial indicators you have calculated in order to comment on the liquidity situa-
The business should not have a liquidity problem.
The current assets are more than twice the current liabilities as indicated by a current ratio of 2.1 : 1.
However, when one excludes the inventories, the liquid assets are lower than the current liabilities as indicated
by an acid-test ratio of 0.9 : 1.
This could be a concern if the business is not able to sell any of its stock, which is unlikely.
7.7.5 IJ Stores:
(a) Calculate average stock for the year.
(140 000 + 180 000) ÷ 2 = R160 000
(b) Estimate how long it will take the business to sell its closing stock, assuming sales and cost
of sales remain constant in future.
Average daily cost of sales = 800 000 ÷ 365 = R2 192
Closing stock = R180 000
Number of days of stock on hand = 180 000 ÷ 2 192 = 82 days
Alternative calculation:
180 000 x 365 days = 82 days
800 000
(c) Calculate how many times the business had to re-order stock during the year, i.e. the turn-
over rate of stock (use average stock in your calculation).
800 000 ÷ 160 000 = 5 times
(d) Comment on appropriate stock levels:

- Why should stock levels not be too low?
Stock levels should not be too low, as customers could get disappointed when their orders cannot be satisfied.
They will then support competitors.
- Why should stock levels not be too high?

Stock levels should not be too high for various reasons: possibility of theft, storage space problems, obsoles-
cence (new models came onto the market), stock ties up working capital in an asset that does not earn a
return.
- How does a business decide on appropriate stock levels?

Consider sales volumes, customer demand, the type of product (perishable or durable?), and possibility of
new models coming out.
TASK 7.8  Liquidity & Working capital

7.8.1 Calculate the current ratio for 20.7.
(94 000 + 64 000 + 15 000) : 51 000
173 000 : 51 000 = 3.4 : 1
7.8.2 Calculate the acid-test ratio for 20.7.

(173 000 – 94 000) : 41 000 OR (64 000 + 15 000) : 51 000
79 000 : 51 000 = 1.5 : 1

7.8.3 Calculate the stock turnover rate for 20.7.
400 000
½[94 000 + 110 000]
400 000 = 3.9 times
102 000
7.8.4 Calculate the stock holding period (period for stock on hand) at the end of 20.7.
94 000 x 365 = 85.8 days
400 000 1
7.8.5 Calculate the debtors collection period for 20.7. Use average debtors in your calcula-
tion.
½[64 000 + 75 000] x 365
760 000 1
69 500 x 365 = 33.4 days
760 000 1
7.8.6 Calculate the creditors payment period for 20.7. Use average creditors in your calcula-
tion.
OR
½[51 000 + 69 000] x 365
400 000 1 ½[51 000 + 69 000] x 365
60 000 x 365 = 54.8 days 384 000 1
400 000 1 60 000 x 365 = 57.0 days
384 00 1
7.8.7 Comment on your calculations. Bear in mind this is a furniture shop and their suppliers
offer them 60 days credit. Has the business controlled its working capital effectively?
Explain. The corresponding calculations for the previous year are:
The business should not experience any liquidity problems. In fact, the current ratio and acid-test ratio
have both increased from the previous year, and now appear to be too high. This means that the business
has excess current assets which are not earning a return.
The turnover rate of stock has increased from 2.5 to 3.9 which indicate that a greater volume of goods was
sold, while the stock on hand has declined from an excessive 143 days to 85.8 days. This is sufficient to
satisfy customers’ needs.
Debtors are taking a little too long to pay. They should be restricted to one month but are usually paying
after 33 days. However, this is an improvement from the 44 days of the previous year.
Creditors are being paid before the credit terms expire, which could cause strain on liquid assets. However
this is a far better result than the 90 days of the preceding year which would have earned them a poor
reputation with their suppliers.
TASK 7.9 Liquidity & Working capital

7.9.1 Calculate the current ratio for 20.9.
(19 000 + 13 000 + 4 000) : 31 000
36 000 : 31 000 = 1.2 : 1
7.9.2 Calculate the acid-test ratio for 20.9.

(36 000 – 19 000) : 31 000
17 000 : 31 000 = 0.5 : 1

7.9.3 Calculate the stock turnover rate for 20.9.
490 000
½[19 000 + 20 000]
490 000 = 25 times
19 500
7.9.4 Calculate the stock holding period (period for stock on hand) at the end of 20.9.
19 000 x 365 = 14 days
490 000 1
7.9.5 Calculate the debtors collection period for 20.9.

13 000 x 365
640 000 x 25% 1
13 000 x 365 = 29.7 days
160 000 1
7.9.6 Calculate the creditors payment period for 20.9.

OR
31 000 x 365 = 23.1 days 31 000 x 365 = 23.1 days
490 000 1 489 000 1
7.9.7 Comment on your calculations. Bearing in mind this is a grocery shop, has the business
controlled its working capital effectively? Explain. The corresponding calculations for
the previous year are:
The current and acid-test ratios appear to be very low, and they have declined from the previous year. This
could indicate possible liquidity problems, especially if all the stock could not be sold. However, the business
has operated with low liquidity rates in the past, which means it could do so in future.
Stock on hand for 14 days might be appropriate as certain perishables (e.g. bread) need to be re-stocked
daily, while durables (e.g. minerals or canned items) could be re-stocked monthly.
The business is selling goods on credit to selected customers, and their debtors are paying promptly in 29.7
days, which is much better than the 52 days of the previous year.
The creditors are now being paid in 23.1 days, rather than the 28 days in 20.8. This could be extended to
one month depending on the credit terms provided by the suppliers.
TASK 7.10  Debt-equity & Gearing

7.10.1 Calculate your debt : equity ratio on 1 January 20.7.
1 000 : 40 000 = 0.025 : 1
7.10.2 Assuming you earn interest only, how much will you earn during the year ended 31
December 20.7?
7% x 20 000 = R1 400
7.10.3 Calculate your return on equity for 20.7.

1 400 x 100 = 3.5%
40 000 1

7.10.4 Your grandmother has won a lot of money in the lottery. She offers to lend you
R50 000 which must be repaid in 10 years’ time. She will charge interest of 4% p.a.
You are tempted to borrow the money and invest it in a Fixed Deposit account. If you
accept her offer on 1 January 20.8, what will your new debt : equity ratio be?
(51 000 + 1 000) : 40 000
51 000 : 40 000 = 1.275 : 1
7.10.5 Assuming you accept her offer on 1 January 20.8, how much profit will you make dur-
ing the year ended 31 December 20.8?
Interest income = 7% x R70 000 = R4 900
Interest expense = 4% x R50 000 = R2 000
Profit = R2 900
7.10.6 Calculate your expected return on equity for 20.8.

2 900 x 100 = 7.25%
40 000 1
7.10.7 Taking all the above into account, will you borrow the money from your grandmother?
Explain.
Yes. It pays to borrow at 4% because I would be earning 7% on the amount invested, which increases the
overall return on equity to 7.25%.
7.10.8 If your grandmother charges interest of 8% p.a. will you accept her offer? Explain,
quoting figures to support your answer.
No - the interest rate on the loan is higher than the rate on the investment.
I would earn less than I did before taking out the loan.
Interest income = 7% x R70 000 = R4 900
Interest expense = 8% x R50 000 = R4 000
Profit = R900
% Return on equity drops to 2.25%.
7.10.9 Reflect on your calculations. Under what conditions will it be favourable to make use
of the loan from your grandmother, i.e. under what conditions will your return be
‘geared up’ as a result of utilising the loan?
If the money borrowed can be utilised at a rate higher than the rate on the loan, my returns will be ‘geared
up’.
TASK 7.11 Debt-equity & Gearing

7.11.1 Study the information and fill in the missing figures or details denoted (a) to (j).
No. Answer Working

(a) 16.5% 16 500 x 100
100 000 1
(b) 0.1 : 1 10 000 : 1
(c) Low -
(d) 310 000 110 000 + 200 000
(e) 210 000 10 000 + 200 000
(f) 100 000 310 000 – 210 000
(g) 49 500 16 500 x 3
(h) 29 500 49 500 – (200 000 x 10%) = 49 500 – 20 000
(i) 29.5% 29 500 x 100
100 000 1
(j) 2.1 : 1 210 000 : 100 000
(k) High -

7.11.2 In your opinion, should Khoza Bags take out the loan? List the main positive and
negative points, and explain your conclusions.
Positive point of taking out the loan
- Increased operating profit exceeds interest to be paid on the loan.
Negative point of taking out the loan
- Increased risk.
- Possible effect on personal assets of owners if business cannot repay loan or pay interest.
Overall decision:
Take out the loan if the profits can treble. The return is expected to increase from 16.5% to 29.5%.
Repay the loan as soon as possible if the operating profit does not increase to that extent.
7.11.3 In your opinion, should the business consider taking out more loans? Explain.
Learners might well disagree on this. Their answers will depend on their attitude towards risk. The personal
assets of the partners could be at risk if the business becomes insolvent or illiquid, i.e. if their future profits
do not outweigh the extra interest on the loans, and if the cash flow will enable them to repay the loans on
due date.
TASK 7.12  Partners’ returns & Gearing

7.12.1 Calculate the percentage return earned by the business for 20.6.
Average equity = [420 000 + 380 000 + 20 000 + 5 000] + [360 000 + 330 000 + 8 000 + 3 000] ÷ 2
= [825 000 + 701 000] ÷ 2 = 763 000
152 250 x 100 = 20%
763 000 1
7.12.2 Calculate the amount earned by Naidoo for 20.6.

60 000 + 19 500 + 15 000 = R94 500
7.12.3 Calculate the amount earned by Martin for 20.6.

30 000 + 17 750 + 10 000 = R57 750
7.12.4 Calculate the percentage return earned by Naidoo for 20.6.

Average equity = (420 000 + 20 000) + (360 000 + 8 000) ÷ 2
= (440 000 + 368 000) ÷ 2 = 404 000
94 500 x 100 = 23.4%
404 000 1
7.12.5 Calculate the percentage return earned by Martin for 20.6.

Average equity = (380 000 + 5 000) + (330 000 + 3 000) ÷ 2
= (385 000 + 333 000) ÷ 2 = 359 000
57 750 x 100 = 16.1%
359 000 1
7.12.6 Calculate the debt : equity ratio for both years.

20.6 = 200 000 : 825 000 = 0.2 : 1
20.5 = 300 000 : 701 000 = 0.4 : 1

7.12.7 Comment on your calculations above.
SUGGESTED RUBRIC
Criterion: Level 1 Level 2 Level 3 Level 4
One or two indica-
Comparison of fi- No valid compari- Three indicators All four indicators
tors compared ex-
nancial indicators son done to previ- compared explicitly compared explicitly
plicitly to previous
to previous year. ous year. to previous year. to previous year.
year.
Comparison well
Comparison done
Comparison of Comparison done done highlighting
No valid compari- but poor explana-
Partner A’s return but differential be- the differential be-
son done between tion on the differen-
to Partner B’s re- tween the partners tween the partners
the partners. tial between the
turn. not convincing. and possible rea-
partners.
sons.
Comparison done Comparison well
Comparison done
Comment on re- but knowledge of done indicating
No valid comment but knowledge of
turns compared to returns on alterna- knowledge of re-
or comparison returns on alterna-
returns on alternative investments turns on alternative
done. tive investments
tive investments. and opinion not investments and
and opinion is poor.
clear. opinion.
Comment on de- Clear explanation of
No valid explana- Risk and/or gearing Risk and/or gearing
gree of financial risk and gearing in-
tion of risk or gear- mentioned, but mentioned, but not
risk as indicated by cluding considera-
ing. poorly explained. convincingly ex-
the debt/equity ration of interest
plained.
tio. rates.

7.13.1 GENERAL LEDGER OF CR TRADERS
Dr CURRENT ACCOUNT: CHETTY B Cr
20.4 20.3
Feb 28 Drawings: Chetty GJ 244 000 Mar 1 Balance b/d 6 000
Balance c/d 14 000 20.4
Feb 28 Salary: Chetty* GJ 120 000
Appropriation GJ 60 000
266 000 266 000
20.4
*[700 000 x 10% x 6/12] + [900 000 x 10% x 6/12] = 35 000 + 45 000 = 80 000
7.13.2 Calculate the percentage return earned by the business for the year ended 28 Febru-
ary 20.4.
Average equity = [700 000 + 6 000 + 900 000 + 14 000] + [500 000 – 8 000 + 700 000 + 8 000] ÷ 2
= 1 620 000 + 1 200 000 = 2 820 000 ÷ 2 = R1 410 000
486 000 x 100 = 34.3%
1 410 000 1
7.13.3 Calculate the percentage return earned by each partner for the year ended 28 Febru-
ary 20.4.
Chetty:
Earnings = 120 000 + 80 000 + 60 000 = R260 000
Average equity = (700 000 + 6 000 + 900 000 + 14 000) ÷ 2 = R810 000
260 000 x 100 = 32.1%
810 000 1

Robb:
Earnings = 140 000 + 10 000 + 60 000* = R210 000
Average equity = (500 000 - 8 000 + 700 000 + 8 000) ÷ 2 = R600 000
210 000 x 100 = 35%
600 000 1
*140 000 – 80 000 = 60 000 OR (500 000 x 10% x 6/12] + [700 000 x 10% x 6/12] = 60 000
7.13.4 Calculate the debt : equity ratio for 20.4.

600 000 : (900 000 + 700 000 + 14 000 + 8 000]
600 000 : 1 622 000
0.4 : 1

SUGGESTED RUBRIC
Criterion: Level 1 Level 2 Level 3 Level 4
One or two indica-
Comparison of fi- No valid compari- Three indicators All four indicators
tors compared ex-
nancial indicators son done to previ- compared explicitly compared explicitly
plicitly to previous
to previous year. ous year. to previous year. to previous year.
year.
Comparison well
Comparison done
Comparison of Comparison done done highlighting
No valid compari- but poor explana-
Partner A’s return but differential be- the differential be-
son done between tion on the differen-
to Partner B’s re- tween the partners tween the partners
the partners. tial between the
turn. not convincing. and possible rea-
partners.
sons.
Comparison done Comparison well
Comparison done
Comment on re- but knowledge of done indicating
No valid comment but knowledge of
turns compared to returns on alterna- knowledge of re-
or comparison returns on alterna-
returns on alternative investments turns on alternative
done. tive investments
tive investments. and opinion not investments and
and opinion is poor.
clear. opinion.
Comment on de- Clear explanation of
No valid explana- Risk and/or gearing Risk and/or gearing
gree of financial risk and gearing in-
tion of risk or gear- mentioned, but mentioned, but not
risk as indicated by cluding considera-
ing. poorly explained. convincingly ex-
the debt/equity ration of interest
plained.
tio. rates.
7.13.6 In your opinion, should the business repay its loans as soon as possible? List the main
points for and against this proposal, and explain your recommendation.
No.
The return earned by the business exceeds the interest rate.
It is advisable to make use of loans.
The debt/equity ratio has remained constant, so there has been no increase in financial risk of borrowing.

7.14.1 GENERAL LEDGER OF BESWIL TRADERS
20.9 20.9
Feb 28 Salary: Bester GJ 100 000 Feb 28 Profit and loss a/c GJ 335 500
Salary: Wilton GJ 100 000
Bonus: Bester GJ 20 000
Current a/c: Bester GJ 24 000
Current a/c: Wilton GJ 24 000
335 500 335 500
7.14.2 Calculate owners’ equity at the beginning and end of the year, and calculate the aver-
age for the year.
Beginning End Average

Capital: Bester 400 000 600 000 500 000
Current a/c: Bester 10 000 51 500 30 750
Capital: Wilton 320 000 480 000 400 000
Current a/c: Wilton (9 000) (65 000) (37 000)
721 000 1 066 500 893 750
7.14.3 Calculate the percentage return earned by the business for the 20.9 financial year.
335 500 x 100 = 37.5%
893 750 1
7.14.4 Calculate the amount earned by each partner for 20.9.

Bester: 100 000 + 20 000 + 37 500 + 24 000 = R181 500
Wilton: 100 000 + 30 000 + 24 000 = R154 000
7.14.5 Calculate the percentage return earned by each partner for 20.9.
Bester: 181 500 x 100
500 000 + 30 750 1
181 500 x 100 = 34.2%
530 750 1
Wilton: 154 000 x 100

400 000 – 37 000 1
154 000 x 100 = 42.4%
363 000 1
7.14.6 Calculate the debt : equity ratio for 20.9.

360 000 : 1 066 500 = 0.3 : 1

Business’ return has improved from 32% to 37.5%
Bester’s return has remained the same at 34%
Wilton’s return has improved from 29% to 42%
The debt-equity ratio has declined from 0.6 : 1 to 0.3 : 1
The business should make more use of borrowed capital – positive gearing.

7.14.8 Explain the manner in which each partner increased his/her capital.
Bester has contributed an extra R200 000 cash.
Wilton has provided a vehicle worth R160 000.
7.14.9 What is the profit-sharing ratio that is stipulated in the partnership agreement?
Bester : Wilton = 1 : 1
7.14.10 The loan from Sharon Bester, Barry’s cousin, is repaid in equal annual instalments
on the same date each year. Explain how the loan will be treated in the financial
statements for 20.9.
Non-current loans = R300 000
Current loans = R60 000
7.14.11 Comment on the drawings and the current account balances of the partners at the
end of the year. Should the partners be satisfied?
Bester will not be happy.
He could have drawn R51 500 but did not.
Wilton has overdrawn by R65 000.
This is placing strain on the liquidity situation, and accounts for why Wilton is earning such a high per-
centage return.
Effectively she has invested less in the business, while Bester has invested more.
7.14.12 The partners wish to open a second branch. Suggest ways in which they can raise
finance in order to do this. Should they take out further loans?
Consider:
• Positive gearing effect – interest rate lower than return earned by the business.
• Low cash situation – Debt : equity = 0.3 : 1
• Conclusion – make use of loan.
TASK 7.15 Partners’ returns & Gearing

Very good insight
Some attempt to
Appropriate indica- Appropriate indica- shown in the selec-
choose appropriate
Indicators tors with some er- tors are correctly tion of indicators
indicators with
rors. calculated. that are correctly
many errors.
calculated.
Some attempt to Generally thorough Interpretation
Validity of inter- Thorough interpre-
interpret the infor- interpretations but shows great in-
pretation tation of indicators.
mation. some flaws. sight.
Some aspects of
Communication Very simple letter Interesting, well Outstanding, very
the letter are inter-
of letter written. presented letter. professional letter.
esting.
TASK 7.16 Partners’ returns & Gearing

7.16.1 Which business earns the better net profit? What is the reason for this, bearing in
mind that they are both efficient businesses.
GG Garbs earns the higher net profit as they have lower interest expense.
7.16.2 Calculate the debt : equity ratio for each business.

AA Attire: 450 000 : 450 000 = 1 : 1
GG Garb: 90 000 : 810 000 = 0.1 : 1

7.16.3 Calculate the percentage return earned by each business.
AA Attire: 130 500 x 100
½[330 000 + 450 000] 1
130 500 x 100 = 33.5%
390 000 1
GG Garb: 171 100 x 100

½[600 000 + 810 000] 1
171 100 x 100 = 24.3%

705 000 1
7.16.4 Which business would you choose to join as a one-third partner? Remember that you
will have to contribute one-third of the equity (capital). Compare your decision and
the reasons for this decision with those of the learner sitting next to you in class.
Consider points in favour of AA Attire:
• Higher percentage return.
• Positive gearing effect.
• Less capital to contribute (1/3 of R450 000 = R150 000, rather than 1/3 of R810 000 = R270 000).
Consider points in favour of GG Garb:

• Safer investment – lower debt-equity ratio. If profits drop, then there is less strain on the business in
repaying loans and paying interest.
TASK 7.17  Consolidation of all major financial indicators
Gearing & risk

Operating ef-
Profitability
Solvency
No. Description Formula Liquidity
Returns
ficiency
Gross profit x 100
1. % gross profit on sales ✓ ✓
Sales 1
% gross profit on cost Gross profit x 100
2. ✓ ✓
of sales Cost of sales 1
% operating expenses Operating expenses x 100
3. ✓ ✓
on sales Sales 1
% operating profit on Operating profit x 100
4. ✓ ✓
sales Sales 1
Net profit x 100
5. % net profit on sales ✓ ✓
Sales 1
6. Net assets Assets – Liabilities ✓
7. Solvency ratio Total assets : Total liabilities ✓
8. Net current assets Current assets – Current liabilities ✓
9. Current ratio Current assets : Current liabilities ✓
10. Acid-test ratio (Receivables + Cash) : Current liabilities ✓
Cost of sales
11. Stock turnover rate ✓ ✓
Average stock
Average stock x 365
12. Stock holding period ✓ ✓
Cost of sales 1
Debtors x 365
13. Debtors collection period ✓ ✓
Credit sales 1

Gearing & risk
Operating ef-
Profitability
Solvency
Liquidity
No. Description Formula
Returns
ficiency
Creditors payment pe- Creditors x 365
14. ✓ ✓
riod Cost of sales* 1
Creditors x 365
OR: ✓ ✓
Credit purchases 1
Net profit x 100
15. % return on equity ✓
Average equity 1
Partners’ salary + Interest on capital +
Amount earned by a
16. Share of remaining profit or – Share of ✓
partner
remaining loss
% return earned by a Amount earned by partner x 100
17. ✓
partner Partner’s equity 1
18. Debt : equity ratio Non-current liabilities : Owners’ equity ✓
TASK 7.18  YO Gift Shop: Consolidation of all major financial

indicators
7.18.1 (a) Calculate the following financial indicators from the Income Statement for 20.6
(the percentage in brackets relate to the previous year):
Percentage gross profit on sales (20.5: 47.4%)
1 014 000 x 100 = 42.9%
2 366 000 1
Percentage gross profit on cost of sales (20.5: 90%)

1 014 000 x 100 = 75%
1 352 000 1
Percentage operating expenses on sales (20.5: 29.7%)

660 600 x 100 = 27.9%
2 366 000 1
Percentage operating profit on sales (20.5: 12.8%)

353 400 x 100 = 14.9%
2 366 000 1
Percentage net profit on sales (20.5: 10.1%)

313 000 x 100 = 13.2%
2 366 000 1
(b) You are told that the total sales increased by R500 000 in 20.6. Comment on the
financial indicators calculated in part (a) above. Should the partners be satisfied?
Explain, quoting financial indicators to support your answer.
The mark-up percentage dropped from 90% to 75% which led to an increase in customers and therefore
sales went up by R500 000. This strategy worked well for the business. Although the percentage gross
profit on sales decreased to 42.9% this was because of the lower mark-up percentage and increased total
sales.
The operating expenses were well-controlled. As a percentage of the bigger sales volume the expenses
decreased from 29.7% to 27.9%. This increase in efficiency consequently led to the business earning an
increased operating profit of 14.9% of sales, up from 12.8% in the previous year).

The net profit percentage on sales for 20.6 is 13.2% (up from 10.1%) due to the effect of the mark-up
strategy, the control of the expenses and the lower interest on the loan (due to the significant decrease in
the loan).
7.18.2 (a) Calculate the following financial indicators from the Balance Sheet for 20.6 (the
ratios in brackets relate to the previous year):
Solvency ratio (20.5: 2.9 : 1)
(1 641 000 + 140 000 + 400 000 : (240 000 + 218 000)
2 181 000 : 458 000 = 4.8 : 1
Current ratio (20.5: 5.4 : 1)

400 000 : 218 000 = 1.8 : 1
Acid-test ratio (20.5: 2.1 : 1)

(400 000 – 225 000) : 218 000 OR (170 000 + 5 000) : 218 000
175 000 : 218 000 = 0.8 : 1
(b) Comment on the financial indicators calculated in part (a) above. Should the
partners be satisfied? Explain, quoting financial indicators to support your an-
swer.
The solvency ratio increased from 2.9 : 1 to 4.8 : 1 due to the significant decrease in the liabilities. This
means that the business is in a much stronger solvency position as its assets outweigh the liabilities by
almost 5 times.
The current ratio has decreased significantly from 5.4 : 1 to 1.8 : 1 due to the decrease in all the current
assets and the high bank overdraft in 20.6. However, the business is still liquid as the current assets are
almost double the current liabilities. The business has financial assets which can be cashed in, or it can
increase loans in the event of an emergency.
The acid-test ratio has reduced from 2.1 : 1 to 0.8 : 1 but the business might be a lot more efficient in
managing its resources now because the debtors have decreased significantly despite the increase in sales.
The business should be able to manage as the liquid assets are 80% of the current liabilities, and it does
have other assets that it can use in the medium to long-term to repay the bank overdraft.
7.18.3 (a) Calculate the following financial indicators relating to working capital (net cur-
rent assets) for 20.6 (the days in brackets relate to the previous year):
Stock holding period (20.5: 44 days)
½[225 000 + 285 000) x 365
1 352 000 1
255 000 x 365 = 68,8 days
1 352 000 1
Debtors' collection period (20.5: 69 days)

½[170 000 + 405 000) x 365
2 366 000 x 50% 1
287 500 x 365 = 88,7 days
1 183 000 1
Creditors' payment period (20.5: 60 days)

½[162 000 + 138 000) x 365 OR
352 000 1 ½[162 000 + 138 000) x 365
1 292 000 1
150 000 x 365 = 405 days 150 000 x 365 = 42.4 days
1 352 000 1 1 292 000 1

(b) Comment on the financial indicators calculated in part (a) above. Should the
partners be satisfied? Explain, quoting financial indicators to support your an-
swer.
The stock holding period increased from 44 days to 69 days, which means that more stock is being kept in
relation to goods sold. This business should not run out of stock.
The debtors collection increased from 69 days to 89 days. This means that debtors are not being well-
controlled despite the increase in sales. The partners can still try to get this figure down to the normal
credit terms of 30 days.
The creditors are being paid faster, now in 40 (or 42) days compared to the 60 days of the previous year.
The creditors will be happier with this, and it might be the reason for the bank overdraft in 20.6.
7.18.4 (a) Calculate the debt / equity ratio for 20.6 (the ratio for the previous year was 0.4
: 1).
240 000 : (1 520 000 + 203 000) = 0.1 : 1
(b) Comment on the debt / equity ratio. Should the partners be satisfied? Explain,
quoting financial indicators to support your answer.
The debt/equity ratio has dropped from 0.4 : 1 to 0.1 : 1 which indicates a lower degree of financial risk in
20.6. The R400 000 decrease in the loan has led to a significant saving on interest expense. However the
interest on the loan is 11.5% and as the business is earning a bigger return than this, it might be profitable
to make use of more loans, particularly if these can be used to replace the overdraft where interest rates
are a lot higher. The business could gear up profits even further if they make use of loans.
7.18.5 (a) Calculate the following financial indicators relating to the percentage returns for
20.6 (the percentage in brackets relate to the previous year):
% Return earned by the business (20.5: 16.5%)
313 000 x 100
½[1 520 000 + 1 400 000 + 203 000 + 70 000] 1
313 000 x 100 = 19.6%
1 596 500 1
% Return earned by Young (20.5: 16%)

196 000 x 100 = 19.6%
½[800 000 + 800 000 + 126 000 + 50 000] 1
196 000 x 100 = 22.1%
888 000 1
% Return earned by Old (20.5: 17%)

117 000 x 100
½[720 000 + 600 000 + 77 000 + 20 000] 1
117 000 x 100 = 16.5%
708 500 1
(b) Comment on the percentage returns calculated in part (a) above. Should the part-
ners be satisfied? Explain, quoting financial indicators to support your answer.
Yes, they should be satisfied because all of these returns exceed returns on alternative investments.
The business’ return increased from 16.5% to 19.6% which indicates a positive trend. Young’s return has
improved from 16% to 22.1% which is now a very good return. Old’s return decreased slightly from 17%
to 16.5% and he is now earning a significantly lower return than Young. This is probably due to the increase
in his capital investment of R120 000 as the interest on capital appears to be low (5%).
The profit-sharing ratio is 3 : 2 while there is only a 10% difference in their capital. Old is earning a
significantly lower salary and bonus than Young is, which might be based on the hours worked by them,
but he might want to ask for a change in the profit sharing ratio to approximately 1 : 1 to address the
imbalance in their returns.

TASK 7.19 M & M Toy Shop: Analysis & interpretation, Inter-
nal control and Business ethics
7.19.1
Calculation 20.6 20.5
Percentage of gross profit on 311 040 x 100
40% ↑ 30%
cost of sales 777 600 1
Percentage of operating ex- 320 140 x 100

29.4% ↑ 26%
penses on sales 1 088 640 1
Percentage of operating profit 78 900 x 100

7.2% ↑ 6%
on sales 1 088 640 1
Percentage of net profit on 54 270 x 100

5% ↑ 3%
sales 1088 640 1
Percentage of return on own- 54 270 x 100

ers’ equity ½[220 000 + 196 000 + 12 600 + 6 000] 1
54 270 x 100
25% ↑ 17%
217 300 1
6 385 x 100
Percentage return: Mickey
½[160 000 + 130 000 + 5 000 + 1 385] 1
6 385 x 100
4.3% ↓ 12%
148 193 1
47 885 x 100
Percentage return: Minnie
½[36 000 + 90 000 + 1 000 + 11 215] 1
47 885 x 100
69.3% ↑ 30%
69 108 1
Solvency ratio 592 200 : 359 600 1.6 : 1 1.5 : 1
Debt-equity ratio 230 000 : 232 600 1:1 ↓ 1.3 : 1
Current ratio 342 200 : 129 600 2.6 : 1 ↓ 3.1 : 1
Acid-test ratio (22 000 + 61 000) : 129 600

83 000 : 129 600 0.6 : 1 ↓ 1.1 : 1
777 600
Stock turnover rate
½[259 200 + 247 500]
777 600
3 times 3 times
253 350
259 200 x 365

122 days 126 days
777 600 1
OR
Period of stock on hand
259 200 x 365
789 300 1 120 days 126 days
22 000 x 365
Debtors collection period 74 days ↑23 days
108 864 1

Calculation 20.6 20.5
129 600 x 365
Creditors payment period 61 days 61 days
777 600 1
7.19.2 Employee unhappiness about the increases in remuneration.

R206 800 compared to R163 000 represents a 27% increase – this significantly exceeds the inflation rate.
The employees might mention that their salaries in the past were low, or that the profits went up by more
than 87%. The owners will probably mention that that the employees earned more out of this business
than the owners did, and that if this business does not earn a better return for the owners it might as well
close down in which case they will lose their jobs.
7.19.3 The business changed its mark-up % in 20.6. Was this a good strategy? Explain.
Mark-up percentage in 20.6 is 40% compared to 30% in 20.5. This is a good strategy because the cost of
sales increased from R714 000 to R777 600. Increasing the mark-up percentage did not negatively affect
the operating profit.
7.19.4 Comment on the operating efficiency and internal control exercised by the business
• Compare operating expenses of 20.5 to 20.6 (26% → 29.4%, unfavourable / unsatisfactory.)
• Compare operating profits of 20.5 to 20.6 (6% → 7%, favourable / satisfactory.)
• There is an improvement in the expenses.
• There is an improvement due to the mark-up strategy.
• The control of debtors declined (23 days → 74 days)
• Control of stock and creditors has generally remained constant.
• Comment on specific concerns, e.g. stock written off, control of individual expenses, etc.
7.19.5 Quote the appropriate indicators and comment on the returns. Should the partners
be satisfied?
• Compare the business’ return in 20.5 to 20.6 (17% → 25%, favourable.)
• Compare to alternative returns (25% exceeds interest rates from fixed deposits).
• Compare Mickey’s return in 20.5 to 20.6 (12% → 4.3%, unfavourable.)
• Compare Minnie’s return in 20.5 to 20.6 (30% → 69.3%, favourable.)
Mickey should not be happy. His return is very low in relation to the amount he has invested. The part-
nership agreement should possibly be re-negotiated. Although Minnie earned a high return, she is not
earning much if her partners’ salary is excluded.
7.19.6 In your opinion, is this advisable based on the figures in the financial statements?
Explain.
The following points should be considered:
• The profits are too low at the moment.
• Decide on strategies to increase profits.
• Decide on strategies to decrease expenses.
7.19.7 Comment on the liquidity situation of the business.

Consider:
• Current ratio = 3.1 : 1 → 2.6 : 1 (favourable)
• Acid-test ratio = 1.1 : 1 → 0.6 : 1 (favourable, but this is a concern.)
• Stock turnover rate = 3 times → 3 times (the business should try and improve this rate.)
• Debtors collection period = 25 days → 74 days (unfavourable, there should be tighter control on the
debtors.)
• Collection payment period = 61 days → 61 days (this is not a problem if there are credit terms.)
Liquidity will be a concern if the stock cannot be sold. The current ratio is high while the acid-test ratio is
low.

7.19.8 Quote the appropriate indicator/s and comment on the solvency situation of the busi-
ness. Is this satisfactory?
Assets are higher than liabilities by 1.6 : 1. The solvency has remained satisfactory and the business should
have no problem in paying off all the debts.
7.19.9 Should this business continue to rent their premises, or should they buy the property?
The owner of the property might sell for R410 000.
If the premises are rented:
• No repairs and maintenance need to be paid for.
• Rent is less costly than the interest on a bond.
If the premises are bought:

• Bond on R410 000 will be approximately R4 100 p.m. (R49 200 p.a.)
• Repairs and maintenance costs will increase.
• However, the business will earn capital growth on the value of the premises.
TASK 7.20 Dullstroom CD Shop: Analysis & interpretation,

Internal control & Business ethics
Group member A
20.9 20.8 Comment
There was a decline, however, this led to an increase
Gross profit on cost of
72.0% 82.0% in sales and gross profit. This worked well. More cus-
sales
tomers due to lower prices.
There was an improvement, indicating that the oper-
Operating expenses on ating expenses were well controlled. Although the op-
24.4% 29.4%
sales erating expenses increased, relative to sales the busi-
ness economised.
There was an increase in the profit by R185 920 (34%
Operating profit on sales 21.7% 20.6% increase) due to improved mark-up and economies in
the operating expenses.
There has been an improvement due to increased
Net profit on sales 16.1% 13.2% profitability and efficiency and the positive gearing ef-
fect.
The increase in Salaries & wages was only 4%
whereas the sales increased by 27%. The Salaries &
Salaries and wages on
15.5% 18.9% wages did not increase at the same rate as the Sales.
sales
The workers are being given an increase lower than
the inflation rate.
Favourable trends Unfavourable trends Relatively constant

Repairs (- 28.8%) Rates (+ 12.8%) Salaries and wages
Advertisements (- 15.8%) Telephone (+ 6.5%) Insurance
Interest expense (- 2.8%) Packing material (+ 69.2%) Bank charges
Sundry expenses (- 46.4%) Depreciation (+ 32.4%) Trading stock deficit
Staff training (+ 36.4%)

Ability to select No or few pertinent Some pertinent in- Most of the perti-
All pertinent indica-
the appropriate in- indicators were se- dicators were se- nent indicators
tors were selected.
dicators. lected. lected. were selected.
Ability to calculate No or few calcula-
Some calculations Most calculations All indicators cor-
all indicators accu- tions correctly
correctly done. correctly done. rectly calculated.
rately. done.
Ability to interpret
Some interpreta-
the indicators and None or few inter- Most interpreta-
tions are valid and All interpretations are
communicate valid pretations are valid tions are valid
communicated in a valid and convinc-
conclusions in a – poorly communi- and well commu-
satisfactory man- ingly communicated.
convincing and in- cated. nicated.
ner.
teresting manner.
Internal control mat-
Some matters and
Ability to assess None or few mat- Most matters and ters and concern for
concerns are valid
sustainability in a ters or concerns concerns are the interests of all
and communicated
convincing and in- are valid – poorly valid and well stakeholders is con-
in a satisfactory
teresting manner. communicated. communicated. vincingly communi-
manner.
cated.
Group member B
20.9 20.8 Comment
This has been constant and there are no solvency
Solvency ratio 2.3 : 1 2.2 : 1
problems.
Favourable. This was too high in 20.8 but has im-
Current ratio 3.4 : 1 10.5 : 1 proved. Although, it has improved it is still too
high.
Unfavourable. This is still acceptable but it must
Acid-test ratio 0.8 : 1 1.1 : 1
not decline any further.
Stock turnover rate 3.2 times 1.8 times Favourable. More efficient levels.
Stock holding period 114 days 199 days Favourable. More efficient levels.
45 (on year-
end debtors) Becoming unfavourable. Some debtors are start-
Debtors collection
34 days (on 29 days ing to take too long to settle their debts. Must not
period
average allow this to increase beyond 30 days.
debtors)
45 days (us-
ing COS)
Creditors payment Or Acceptable as it is still within 60 days credit terms,
50 days
period 56 days but could still make full use of the 60 day period).
(using credit
purchases)
See suggested marking grid above.
Group member C
20.9 20.8 Comment
Percentage return – busi- Positive trend. Compare to alternative returns
26.5% 18.5%
ness (e.g. fixed deposit.)
Percentage return – Dozi 27.4% 14.0% Increased significantly.
Percentage return – Idle 24.8% 25.0% Almost no change.
Debt equity 0.7 : 1 0.8 : 1 Positive gearing compares favourable to 26.5%.
Decreased. Very little being reinvested in the busi-
Income retained 1.0% 8.0%
ness (mainly due to Idle over-drawing).
Drawings: Dozi 79.4%
Drawings: Idle 139.3%
See suggested marking grid above.

TASK 7.21 E & L Paint Shop: Analysis & interpretation, In-
ternal control & Business ethics
7.21.1 Consider the change in the mark-up.
(a) Calculate the mark-up percentage for 20.4 (the mark-up % for 20.3 was 70%).
2 160 000 x 100 = 80%
2 700 000 1
(b) The change in the mark-up percentage obviously caused a problem for the busi-
ness. Explain what happened and how the problem can be solved.
The extra 10% on the mark-up has apparently caused customers to shop elsewhere.
The sales decreased significantly in total from R5 950 000 to R4 860 000, which caused the gross profit to
drop by R290 000.
7.21.2 Apart from selling paint the partners decided to offer a painting service since 20.3
(a) Calculate the profit made from the painting contracts for 20.4 (the corresponding
figure for 20.3 was R90 000).
R720 000 – 54 000 – 144 000 = R522 000
(b) The painters are threatening to resign. What appears to be the problem? What
advice would you offer to the partners?
The business has taken advantage of the painters they have employed.
Although the fee income has risen 4 times from R180 000 to R720 000, they are each earning only R27 000
(up from R18 000).
The painters’ wages were 40% of the profit earned on the painting contracts in 20.3, but despite their
increases, this percentage dropped to 10.3% in 20.4.
These financial statements are probably not published, so the painters are probably sensing from the size
of the jobs they are doing that they are not being fairly paid or they are being over-worked.
Advice:
Consider employing another 2 or 3 painters and determine a more reasonable way of paying the painters,
e.g. if painting contract income goes up by a certain percentage, so should the wages paid to the painters
in total.
(c) In March 20.4 the municipality levied a fine on the partners of R200 000. The
painters had been disposing of the paint waste in the local river and the fish and
plant life had died. What would you say to the partners?
The partners have been negligent.
They should not allow their business to abuse the environment as someone else (i.e. the municipality) would
have to clean up the mess, and someone else might be bearing the cost of the clean-up (i.e. the residents
who pay rates to the municipality).
The municipality has done the right thing by levying the fine.
The partners must ensure that their employees clean up their mess properly and responsibly, even if it costs
more to dispose of the waste in the proper way.
7.21.3 Consider the salaries and wages to the manager and shop assistants. There were 4
shop assistants in 20.3. One of them resigned and was not replaced.
(a) Are the partners likely to experience any problem relating to these employees?
The salaries per assistant increased from R50 000 to R53 000, an increase of 6%.
They might not be happy with this despite the fact that it approximately equal to the inflation rate in current
times.
The goods sold in 20.4 were 77% of those sold in 20.3 (judging from cost of sales), so the partners should
make them understand that if customers decline, then workers might have to be retrenched accordingly.
The manager received only a 2% increase so it is clear he will not be happy.
These financial statements might not be published for all to see, but the partners are earning substantial
profits despite not working at the shop.
If the employees sense that they are not being fairly treated, they might well resign or become de-motivated
and less efficient.

(b) Explain the advice you would give to the partners in this regard.
Assess the work that is being done by the manager and the assistants.
If they do not deserve bigger increases, they must know what is expected of them in future.
They cannot be blamed for results that are beyond their control, e.g. the increase in the mark-up percentage
was probably decided by the partners.
If so, the manager cannot be blamed for the drop in the number of customers.
However, if poor service is the reason for the decline in sales, then they must be reprimanded.
If the employees have all done their best, they need to be fairly rewarded.
7.21.4 Consider the donations made by the partners through this business.
(a) Why would the partners have made a sizable donation to Toti Primary School in
20.3?
It is appropriate for businesses to support the local community as the community in turn supports the
business, especially if profits are significant.
It is disappointing that something similar has not happened in 20.4.
Maybe this is what is causing a drop in goodwill from the community in 20.4.
(b) GodfreyProjects.com is an organisation controlled by Gary Godfrey who is the

campus manager of a local university. He has promised to buy paint exclusively
from E & L Paint Shop when they paint the university. What comment would you
make on the R100 000 in the Income Statement?
This is obviously a bribe which is unethical.
The partners and Gary Godfrey can face criminal charges.
The other paint suppliers in the area have a right to complain bitterly about this situation.
7.21.5 Consider the working capital items, i.e. stock, debtors and creditors. Have these items
been efficiently controlled or not? Explain.
The stock turnover rate has increased from 8 to 12 times, which means they have enough stock to last 1
month.
Whilst this means the stock is being efficiently controlled, they must ensure that the stock does not run out,
especially if suppliers have production problems.
The trading stock deficit dropped from R70 000 to R54 000 which indicates better control but is still not
ideal, especially for large items like paint.
The debtors are not being properly controlled.
The collection period has worsened from 35 days to 50 days, whereas they should be paying in accordance
with normal credit terms of 30 days.
Bad debts increased from R36 800 to R66 300 which indicates poor control.
Discount allowed dropped from R13 000 to R5 000 and this could be used as a strategy to make debtors
pay more quickly.
The creditors need not be paid so quickly. They are being paid after 15 days whereas normal credit terms
of 30 days were applied in 20.4.
7.21.6 Consider the other operating expenses not mentioned above.

(a) Identify those that have been well-controlled and provide evidence in each case.
Electricity & water dropped from R19 500 to R17 300.
Telephone dropped from R14 600 to R13 200.
Property expenses dropped from R64 000 to R53 000 (but not wise if they are not maintaining the property
properly, if rates are included here, note that these are beyond the control of the business).
Sundry expenses have not shown a significant increase, so there does not appear to be a problem in this
regard.
(b) Identify those that have not been well-controlled and provide evidence in each
case.
Entertainment of clients has increased from R8 000 to R35 000.
Security guards dropped from R36 000 to R18 400 (probably not wise).
Motor vehicle expenses increased from R32 000 to R56 000.
Depreciation probably due to extra assets bought, so does not get controlled in the same way as expenses
which affect cash.

(c) What advice would you offer the partners?
Keep up the good control of those items that have been well-controlled.
Compliment the manager and the employees on their roles in this regard, especially as they will have used
the electricity and telephone.
Investigate reasons for the worsening situation of those expenses that have not been well controlled, e.g.
are the entertainment expenses genuine, are partners’ private car expenses being legally included in these
figures, what new assets caused the increase in depreciation, are they needed for the business to operate?
TASK 7.22 Bezerk Clothing: Interpretation of information,

Internal control & Business ethics
Expected responses:
Mark-up and profitability
• Prices have been increased. Mark-up percentage has increased from 50% to 100%.
• Sales increased by 22% in 20.7, probably because of increased advertising (from 8% to 15% on
sales), the higher mark-up or the change in the lines of clothing sold, or a combination of these factors.
• Operating profit has increased by 30%, so the overall effect has been positive.
• Operating expenses on sales has a favourable trend from 40% to 30% indicating good control despite
the increase in sales volume.
• Certain individual line items showed good control, e.g. electricity & water (3% to 1% on sales), trading
stock deficit (4% to 1%).
• A remuneration policy needs to be investigated and implemented as the managers and the assistants
are not being treated equally (10% increase compared to 4%).
• Interest is having a positive gearing effect on the net profit. Although, the operating profit on sales
decreased from 15% to 12%, there was a positive trend in the net profit on sales from 8% to 10%.
Solvency
• The business is solvent. Assets are higher than liabilities by 2.4 : 1.
Liquidity and working capital
• The current ratio has improved from the previous year as it has declined from 3.5 : 1 to 2 : 1.
• The acid-test ratio has decreased from 1.6 : 1 to 0.7 : 1. Although this is relatively acceptable for the
moment, it could also lead to liquidity problems if this declines further.
• The stock turnover rate (1.5 to 3.6 times p.a.), and stock levels (240 to 100 days) have improved,
although for a clothing store keeping more than 3 months’ stock could be risky.
• Debtors are extremely well controlled (paying in 22 days which is lower than 30 days’ normal credit
terms).
• Payment of creditors is slow. This has improved from 90 days to 70 days, but this could still lead to
a bad reputation.
Returns and gearing
• The business’ return has increased from 18% to 24%.

• This exceeds rates in alternative investments, such as fixed deposits and shares in companies.
• Beeson’s return is exceptionally high, while Zerkov’s has declined. The partnership agreement has to
be renegotiated or the salaries must be removed from this calculation to get a clear indication.
• The business has retained 40% of the profits earned which help the debt-equity ratio and this is good
for future expansion of the business.
• Positive gearing effect obviously exists. The interest rates on the loans (approximately 12% these
days) are lower than the profitability rates within the business (with bottom line return on equity now
being 24% which is good).
• The debt-equity ratio is not a problem under these conditions although it has increased from 0.2 : 1
to 0.5 : 1 thereby increases the degree of potential financial risk.

Governance issues, e.g. other matters relating to whether or not the business has been well run by the
partners, internal control, business ethics, treatment of other stakeholders (employees, customers, the com-
munity) or the environment.
• Consider change in mark-up (re customers). This is now 100%,

• Consider the fact that the business is now selling locally-made clothes (84%) compared to only 36%
in the previous year. This helps local industries and helps provides jobs for South Africans.
• Consider increases granted to managers and assistants (re employees)
• Consider economies in electricity and water. These are scarce resources in this country.
• Consider donations made to the HIV Aids Clinic. These would benefit local communities but it is
disappointing that this appears to have been discontinued (now 0% compared to 2% in the previous
year).

Ability to select the No or few pertinent Some pertinent in- Most of the perti-
All pertinent indica-
appropriate indica- indicators were se- dicators were se- nent indicators
tors were selected.
tors. lected. lected. were selected.
Ability to calculate No or few calcula-
Some calculations Most calculations All indicators cor-
all indicators accu- tions correctly
correctly done. correctly done. rectly calculated.
rately. done.
Ability to interpret
Some interpreta-
the indicators and None or few inter- Most interpreta- All interpretations
tions are valid and
communicate valid pretations are valid tions are valid and are valid and con-
communicated in a
conclusions in a – poorly communi- well communi- vincingly communi-
satisfactory man-
convincing and in- cated. cated. cated.
ner.
teresting manner.

TASK 7.23 Simzama Sports: Composite Task on preparing,
analysing and interpreting financial statements
7.23.1 SIMZAMA SPORTS SHOP
INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 20.2
Note
Sales (1 462 500 – 23 900 – 4 320) 1 434 280
Cost of sales (1 000 000 – 3 200[3]) (996 800)
Fee income (101 500 - 208) 101 292
Other income 64 094
Rent income (70 000 – 10 000) 60 000
Commission income (3 000 + 720) 3 720
Less: Operating expenses (431 699)
Wages: repairman (54 000 + 1 375) 55 375
Salaries & wages: shop workers (210 000 + 2 300) 212 300
Consumable stores (60 000 - 600) 59 400
Advertising 26 250
Delivery expenses (2 050 - 275) 1 775
Discount allowed (750 - 20) 730
Stationery & printing (9 250 - 450) 8 800
Bank charges (9 100 + 540 + 21) 9 661
Sundry expenses (16 000 - 225 + 38) 15 813
Loss on disposal of asset (6 400 -1 973 - 3 000) 1 427
Depreciation (533[1] + 5 960[2] + 29 000) 35 493
Loss due to theft (2 250 – 1 750) 500
Bad debts 750
Interest expense 2 (57 391)
[1]
6 400 x 10% x 10/12
[2]
66 000 – 6 400 x 10%
[3]
4 320 x 100/90 = 4 800
4 800 x 100/150 = 3 200

SIMZAMA SPORTS SHOP
BALANCE SHEET AS AT 28 FEBRUARY 20.2
ASSETS Note
Fixed assets 3 942 720
Financial assets 27 500
Trade & other receivables 5 57 791
Cash & cash equivalents 6 3 750
TOTAL ASSETS 1 337 361
EQUITY & LIABILITIES

Owners' equity 817 726
Capital 7 825 000
Current accounts 8 (7 274)
Mortgage loan
(388 240 + 4 206 – 5 900 – 12 960) 373 586
Trade & other payables 9 106 823
Bank overdraft
(33 750 + 540 + 21 + 485 + 5 900 + 280 – 1 750) 39 226
TOTAL EQUITY & LIABILITIES 1 337 361
SIMZAMA SPORTS SHOP

NOTES TO THE FINANCIAL STATEMENTS ON 28 FEBRUARY 20.2
1. INTEREST INCOME
from investments 3 250
from current bank account 1 000
4 250
2. INTEREST EXPENSE
on mortgage loan (48 600 + 4 206) 52 806
on overdraft (4 100 + 485) 4 585
57 391

buildings
Cost 820 000 119 000 66 000 1 005 000
Movements 38 400 2 000 (10 920) 29 480
Additions at cost 38 400 31 000 - 69 400
Disposals at carrying value* - - (4 427) (4 427)
Depreciation - (29 000) ( 6 493) (35 493)
Cost 858 400 150 000 59 600 1 068 000
*6 400 – (1 440 + 533) = 6 400 – 1 973 = 4 427

4. INVENTORIES
Trading stock (308 000 + 3 200 - 2 250 - 800 + 275 – 3 425) 305 000
305 600
Trade debtors (62 500 – 4 320 - 208 + 300 – 750) 57 522
Provision for bad debts (3 250 – 374) 2 876
Income receivable (720 + 1 750) 2 470
Prepaid expenses (450 + 225) 675
57 791
Cash float 750
Petty cash 500
3 750
7. CAPITAL Simm Zama Total

Contribution of capital during the
100 000 50 000
year 150 000
Withdrawal of capital during the year 0 0 0
8. CURRENT ACCOUNTS Simm Zama Total

Net profit for the year 38 684 79 342 118 026
Final distribution of profits (46 316) (23 158) (69 474)
Drawings during the year[1] (48 500) (79 300) (127 800)
Retained income for the year (9 816) 42 (9 774)
Retained income at beginning of year (17 500) 20 000 2 500
Retained income at end of year (27 316) 20 042 (7 274)
[1]
Simm: 45 500 + 3 000 = 48 500
Zama: 78 500 + (1 200 x 100/150 = 800) = 79 300
[2]
Simm: (450 000 x 5% x 6/12] + (550 000 x 5% x 6/12]
11 250 + 13 750 = 25 000
Zama: (225 000 x 5% x 6/12] + (275 000 x 5% x 6/12]
5 625 + 6 875 = 12 500

Trade creditors (72 500 + 1 750) 74250
Current portion of loan 12960
Deferred income 10000
Creditors for salaries (1 375 + 2 300 - 813 - 38) 2824
SARS (PAYE) (5 500 + 813) 6313
UIF (400 + 38 + 38) 476
106 823

7.23.2
20.2 20.1
(a) % Gross profit on sales 31% 29%
437 480 x 100
1 434 280 1
(b) % Gross profit on cost of sales 44% 40%

437 480 x 100
1 434 280 1
(c) % Operating profit on sales 12% 14%

171 167 x 100
1 434 280 1
(d) % Operating expenses on sales 30% 23%

431 699 x 100
1 434 280 1
(e) % Net profit on sales 8% 11%

118 026 x 100
1 434 280 1
(f) Net assets R817 726 R677 500
(g) Solvency ratio 2.6 : 1 2.8 : 1

1 337 361 : (373 586 + 146 049)
1 337 361 : 519 635
(h) Net current assets R221 092 R145 000

367 141 – 146 049
(i) Current ratio 2.5 : 1 1.5 : 1

367 141 : 146 049
(j) Acid-test ratio 0.4 : 1 0.6 : 1

(367 141 – 305 600) : 146 049 OR
(57 791 + 3 750) : 146 049
61 541 : 146 049
Rate of stock turnover (note that stock at the begin- 3.8 times 6.2 times
(k)
ning of the year was R221 000)
996 800~
½(305 000 + 221 000)
996 800
263 000
(l) Debt : equity ratio 0.5 : 1 0.6 : 1

373 586 : 817 726
S = R432 500 Not needed

(m) Each partner’s equity at beginning of year
Z = R245 000
Simm: 450 000 – 17 500
Zama: 225 000 + 20 000
S = R522 684 Not needed

(n) Each partner’s equity at end of year
Z = R295 042
Simm: 550 000 – 27 316
Zama: 275 000 + 20 042

20.2 20.1
(o) % Return on equity for the business 16% 20%
Average equity:
(432 500 + 245 000 + 522 684 + 295 042) ÷ 2 = 747 613
118 026 x 100
747 613 1
S = R38 684 Simm: R61 000

(p) Total amounts earned by each partner
Z = R79 342 Zama: R92 000
(q) % Returns earned by each partner

Simm:
Average equity = (432 500 + 522 684) ÷ 2 = 477 952
38 684 x 100 S = 8.1% Simm: 17%
477 592 1
Zuma:
Average equity = (245 000 + 295 042) ÷ 2 = 270 021
79 342 x 100 Z = 29.4% Zama: 23%
270 021 1

No or few perti- Some pertinent Most of the per- All pertinent in-
Ability to select the appropriate in-
nent indicators indicators were tinent indicators dicators were se-
dicators.
were selected. selected. were selected. lected.
No or few calcu- Some calcula- All indicators

Ability to calculate all indicators Most calculations
lations correctly tions correctly correctly calcu-
accurately. correctly done.
done. done. lated.
PROFITABILITY & OPERATING

Some interpreta-
EFFICIENCY: None or few in- Most interpreta- All interpreta-
tions are valid
Ability to interpret the indicators terpretations are tions are valid tions are valid
and communi-
and communicate valid conclu- valid – poorly and well com- and convincingly
cated in a satis-
sions in a convincing and interest- communicated. municated. communicated.
factory manner.
ing manner.
SOLVENCY & LIQUIDITY:

Some interpreta-
Ability to interpret the indicators None or few in- Most interpreta- All interpreta-
tions are valid
and communicate valid conclu- terpretations are tions are valid tions are valid
and communi-
sions in a convincing and interest- valid – poorly and well com- and convincingly
cated in a satis-
ing manner. communicated. municated. communicated.
factory manner.
GEARING & RISK: Some interpreta-

None or few in- Most interpreta- All interpreta-
Ability to interpret the indicators tions are valid
terpretations are tions are valid tions are valid
and communicate valid conclu- and communi-
valid – poorly and well com- and convincingly
sions in a convincing and interest- cated in a satis-
communicated. municated. communicated.
ing manner. factory manner.

RETURNS OF THE BUSINESS &
Some interpreta-
THE OWNERS: None or few in- Most interpreta- All interpreta-
tions are valid
Ability to interpret the indicators terpretations are tions are valid tions are valid
and communi-
and communicate valid conclu- valid – poorly and well com- and convincingly
cated in a satis-
sions in a convincing and interest- communicated. municated. communicated.
factory manner.
ing manner.
REPAIR SERVICE OFFERED:

Most of the rele- All income and
Ability to appreciate that there are Some aspects
Few or no as- vant aspects are expenses for the
costs which should be matched identified, con-
pects identified, identified, but repair service
against the income, and conclude clusion satisfac-
conclusion un- conclusion not correctly identi-
that this business is losing on this tory but not
satisfactory. entirely convinc- fied, with valid
aspect, but may be used as a complete.
ing. conclusion.
loss-leader to attract customers.
Suggestions are
well thought out
and are valid
Suggestions are with convincing
Suggestions are
Suggestions satisfactory but explanation, in-
OVERALL ADVICE FOR IMPROVE- valid, but not
have little or no might not focus cluding points on
MENT & SUSTAINABILITY entirely convinc-
validity. on the major as- internal control
ing.
pects. and concern for
stakeholders and
wider commu-
nity.
TASK 7.24 Kalahari Traders: Preparing financial statements

from financial indicators
KALAHARI TRADERS
NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 28 FEBRUARY 20.7
CAPITAL A. Alley B. Bhengu Total
Contribution of capital on 1 Sept 20.6 0 100 000 100 000
Withdrawal of capital 31 Dec 20.6 (50 000) 0 (50 000)
Balance at the end of the year 310 000 [2]
340 000 650 000
CURRENT ACCOUNTS A. Alley B. Bhengu Total

Partners’ salaries[1] 72 000 96 000 168 000
Drawings during the year (120 000) (154 000) (274 000)
Retained income for year (1 360) 15 360 14 000
Retained income at end of year 17 240 4 760 [3]
22 000

[1]
Alley: 6 000 x 12 =72 000 Bhengu: 6 000 x 120/90 x 12 = 96 000
[2]
Interest on capital of Bhengu:
(9% x 240 000 x 6/12) + (9% x 6/12) = R26 100
10 800 + 0.045X = R26 100
0,045X = R15 300
X = R340 000
Extension: It is also possible to work out the figures using partners’ equity:
288 000 x 100/45 = R640 000 (Average equity)
Total equity = 640 000 x 2 = R1 280 000
600 000 + 650 000 + 8 000 + 22 000 = 1 280 000
TASK 7.25 Nokwe Stores: Preparing financial statements

from financial indicators
NOKWE STORES
INCOME STATEMENT (STATEMENT OF COMPREHENSIVE INCOME)
FOR THE YEAR ENDED 28 FEBRUARY 20.6
20.6 20.5
Sales [1] 1 152 000 960 000
Cost of sales [2] (768 000) (640 000)
Gross profit 384 000 320 000
Other income 55 680 62 800
Rent income [4] 50 400 48 000
Commission income 5 280 14 800
Operating expenses (278 400) (267 600)
Salaries & wages [5] 184 320 153 600
Other operating expenses 94 080 114 000
Operating profit [6] 161 280 115 200
Interest income 6 075 6 075
Profit before interest expense 167 355 121 275
Interest expense (13 355) (8 275)
Net profit [8] 154 000 113 000

BALANCE SHEET (STATEMENT OF FINANCIAL POSITION) ON 28 FEBRUARY 20.6
ASSETS 20.6 20.5
Non-current assets 555 500 468 950
Fixed assets 488 000 401 450
Investment (Fixed deposit matures in 20.8) [7] 67 500 67 500
Current assets [10] 237 500 210 800
Inventories (all trading stock) [3] 123 500 80 000
Trade & other receivables (all trade debtors) [11] 47 500 72 300
Cash & cash equivalents 66 500 58 500
793 000 679 750
Owners' equity 580 000 520 000
Capital 550 000 500 000
Current accounts 30 000 20 000
Non-current liabilities 118 000 78 000
Loan from Bestbank (repayable 20.9) [9] 118 000 78 000
Current liabilities 95 000 81 750
Trade & other payables (all trade creditors) [12] 95 000 81 750
793 000 679 750
Working:
[1] 1 152 000 x 100/120

[2] 1 152 000 x 100/150; 960 000 x 100/150
[3] 320 000 ÷ 8 = 40 000; 40 000 x 2 = 80 000
[4] 4 000 x 12 = 48 000
[4 000 x 6] + [(4 000 + 10%) x 6] = 50 400
[5] 16% x 1 152 000 = 184 320; 14.5% x 960 000
[6] 960 000 x 12/100 = 115 200; 1 152 000 x 14/100 = 161 280
[7] 6 075 x 100/9 = 67 500
[8] [580 000 + 520 000] ÷ 2 = 550 000
550 000 x 28/100 = 154 000; 154 000 – 41 000 = 113 000
[9] 520 000 x 0.15 = 78 000; 78 000 + 40 000 = 118 000
[10] 95 000 x 2.5 = 237 500
[11] 95 000 ÷ 1.2 = 114 000; 114 000 – 66 500 = 47 500
[12] 72 300 + 58 500 = 130 800 ÷ 1.6 = 81 750

CHECKLIST
Requires
Yes – profi-
cient
tion
Identify information in the financial statements that is
relevant to partners in a business.
Identify information in the financial statements that is
relevant to other stakeholders.
Understanding the need to use financial indicators in
interpreting financial statements.
Understand the concepts of mark-up, profitability, sol-
vency, liquidity, gearing and return.
Understand what is meant by internal control, business
ethics and sustainability.
Use logical reasoning to calculate financial indicators for
mark-up and profitability from the Income Statement.
Use logical reasoning to calculate the financial indicator
for solvency from the Balance Sheet.
Use logical reasoning to calculate the financial indica-
tors for liquidity and control of working capital items
from the Balance Sheet.
Use logical reasoning to calculate the financial indica-
tors for returns earned by the business as a whole and
by each partner from the current account note.
Use logical reasoning to calculate the debt/equity ratio
from the Balance Sheet.
Basic and simple interpretation of the results of the fi-
nancial statements of a partnership enterprise using fi-
nancial indicators.
More advanced analysis and interpretation of financial
statements, including sustainability of a business.

MODULE 8
FINANCIAL ACCOUNTING OF NON-PROFIT ORGANI-
SATIONS (CLUBS)
The learners have already learnt the Accounting entries for sole trader and partnership businesses. It is
important that they realise that a club is just another form of entity but now the profit motive is not important.
Rather they aim to provide facilities to members. The costs that are incurred need to be offset against the
income of the club. Generally, individuals or partners do not own clubs and the profits made are channelled
back into the club.
While the majority of the entries are the same as what have already been learnt, you need to focus on what
is different, i.e. some different ledger accounts, surplus as against a profit or deficit as against a loss, Receipts
and Payments Statement, Income and Expenditure Statement, etc.
You can branch out from clubs to other forms of non-profit corporations, e.g. schools, charity concerns, etc.
The learners can all relate to schools with their school fees, government grants and the expenses that have
to be run. This could be a good opportunity to show the learners what it costs to run a school and that if
textbooks, stationery, desks, etc. are destroyed, there needs to be an income to buy more – their parents
have to pay increased school fees. Try to reinforce on the learners the need to be accountable and responsible
for facilities they have the use of.
TASK 8.1  Definitions of Accounting concepts unique to non-

profit organisations
The purpose of this Task is to enable the learners understand the accounting concepts unique to non profit
organisations. It may be necessary after completion of this activity to go over the concepts again, especially
with those learners who shy away from reading.
COLUMN “X” COLUMN “Y”

1. Accumulated funds F The surplus that the club makes for the year is transferred to
this account at the end of the year.
2. Affiliation fees D The amount of money that the club must pay to another or-
ganising body to take part in a competition against other clubs.
3. Annual general meeting I The chairperson for the next year is elected at this compulsory
meeting by the majority of the members.
4. Constitution A The set of rules by which the club is governed.
5. Deficit G When the expenses of the club exceeds the income.
6. Entrance fees B The once-off amount paid by a member to join the club at the
time of registering his / her membership with the club.
7. Honorarium J A cash gift from club funds given to the hardworking secretary
as decided by the members at the AGM.
8. Membership fees C The annual fees that each member must pay to the club to
maintain his / her membership.
9. Non-profit organisation E A club that operates with no intention of making a profit.
10. Surplus H When the income of the club exceeds the expenses.

TASK 8.2 Group research on a non-profit organisation
The purpose of this Task is to enable the learners a chance to interview members from a local club so that
they can determine for themselves the similarities and differences between a club and a business concern.
You could also simplify the process, if it is more appropriate, to arrange for somebody to come to the school
to address the learners. If there are no clubs in your area, then allow the learners to interview the bookkeeper,
bursar of the school or any other non-profit making concern.
As an alternative, you may also help learners to interview a member of your school staff (or any Teacher) who
is a member of his / her club in another area.
The skills of interviewing somebody in order to conduct a research is important for the learners to experience,
so we advise you not to ignore this Task.
Suggested marking grid for the research

Criteria Level 1 Level 2 Level 3 Level 4
Some attempt with Some aspects of Comprehensive
Evidence of Inadequate
aspects that are the research are and in-depth re-
research research is evident
thorough in-depth search evident
Very little Some attempt with Research was
Relevance of Relevant research
relevance to the about half the highly relevant and
research was conducted
research research relevant comprehensive
Excellent
Assumptions
Generally, good assumptions due
Ability to make inadequate due to Some assumptions
assumptions made to in-depth
assumptions based incomplete adequate based on
on research research of
on research research been research
evident relevant
conducted
information
TASK 8.3 An opportunity to plan your own club

This Task allows the learners a chance to plan their own club. The information they have gained from the
research should help them in deciding what is best for their needs. This is a very important skill you will be
giving the learners, as they will have to digest what they learnt in their research, consider the implications
thereof and make their own decisions.
The cash budget will be a good revision of that section of work which was introduced in Grade 10 and will be
added to in Grade 11.
In this Module, learners will need to apply the GAAP principle of Matching in order to make the necessary
adjustments. Allow them to do this baseline Task individually to ensure that they have the necessary
knowledge and skills as this will be applied in clubs, particularly in connection with Membership Fees and
Tennis Balls / Refreshments accounts. If they have the necessary skills and knowledge, it will be a simple
adaptation to apply this same principle to the new types of accounts when doing the books of non-profit
organisations.
Before proceeding onto the membership fees account, it may be necessary to revise the REVERSAL CONCEPT
from Grade 10 work. This can be done as a separate lesson or informally, depending on your class.
You can use the following illustrative activity to revise this aspect:

Baseline assessment – Activity on Reversal
Information:
You are furnished with the following information of Cato Ridge Stores for the year ended 28 February 20.5:
Extract from the Pre-Adjustment Trial Balance on 28 February 20.5

Rent income 39 000
Stationery 2 400
Adjustments:
1. An unused storeroom has been let for the whole of the financial year at a rent of R3 000 per month.
Make the necessary adjustment entry to the rent income figure.
2. R1 200 is still owing for commission to Cato Ridge Stores. This is for cleaning materials sold on consign-
ment basis.
3. Stationery on hand on 28 February 20.5 is R180.
Required:
• Open all necessary accounts to record the balances / totals and the adjustments.
• Journalise the adjustment entries in the general journal and post to the ledger.
• Close off all necessary accounts on 28 February 20.5
• Process the reversal entries in the general journal on 1 March 20.5 and post to the ledger.
Solution:
GENERAL LEDGER OF CATO RIDGE STORES
Dr ACCRUED INCOME/INCOME RECEIVABLE B Cr
20.5 20.5
Feb 28 Commission income GJ 1 200 Mar 1 Commission Income GJ 1 200
DEFERRED INCOME/INCOME RECEIVED IN ADVANCE B

20.5 20.5
Mar 1 Rent income GJ 3 000 Feb 28 Rent income GJ 3 000
CONSUMABLE STORES ON HAND B

20.5 20.5
Feb 28 Stationery GJ 180 Mar 1 Stationery GJ 180

RENT INCOME N
20.5 20.5
Feb 28 Deferred income GJ 3 000 Feb 28 Total b/f 39 000
Profit and Loss a/c GJ 36 000
39 000 39 000
Mar 1 Deferred income GJ 3 000
COMMISSION INCOME N
20.5 20.5
Feb 28 Profit and loss a/c GJ 25 000 Feb 28 Total b/f 23 800
Income receivable GJ 1 200
25 000 25 000
Mar 1 Income receivable GJ 1 200

Dr STATIONERY N Cr
20.5 20.5
Feb 28 Total b/f 2 400 Feb 28 Consumable stores on GJ 180
hand
Profit and Loss a/c GJ 2 220
2 400 2 400
Mar 1 Consumable stores on GJ 180
hand
GENERAL JOURNAL OF CATO RIDGE STORES - FEBRUARY 20.5 GJ

Adjustment journal entries:
28 Rent income N 3 000
Deferred income/Deferred in- B 3 000
come
Rent received in advance for
one month
Accrued income/Income receiv- B 1 200
able
Commission income N 1 200
Commission income owing
Stationery N 180
Stationery on hand at year-end
Reversal journal entries –

March 20.5
1 Income received in ad- B 3 000
vance/Deferred income
Rent income N 3 000
Reversal entry
Commission income N 1 200
Consumable stores on hand B 1 200
Reversal entry
Stationery N 180
Reversal entry
Suggestion: Photostat the following diagram, enlarging it to A3 size and pin it up on your classroom
wall or let a group of learners design their own poster.

Difference between a sports club and a business concern
SPORTS CLUB
Members – pay subscription Cash receipts and

to belong payments
Money used to run
the club and benefit
the
Members
Income more than expenses = surplus income expenses

Expenses more than income = deficit
Should NOT make a profit
BUSINESS
Owner provides money =

capital
Uses capital money to buy
stock and rent premises
Adds on profit and

sells stock
Draws up an Income
Owner entitled to profits –
statement to determine
reward for investment
PROFIT or LOSS
TASK 8.4  Pro Soccer Club: Membership fees account

A Accrued income/Income receivable F 15 200 + 1 400 + 800 – 600 – 14 400 – 200 =
B R800 2 200
C Income received in advance/Deferred income G 76 x 200 = R15 200
D R600 H R14 400
E Income received in advance/Deferred income I 800 – 600 = R200
J 800 + 1 400 + 15 200 = R17 400

TASK 8.5 Margate Angling Club: Membership fees account
GENERAL LEDGER OF MARGATE ANGLING CLUB
Dr INCOME RECEIVABLE / ACCRUED INCOME B Cr
20.5 20.6
Dec 31 Membership fees GJ 600 Jan 1 Membership fees GJ 600
20.6
Dec 31 Membership fees GJ 200
INCOME RECEIVED IN ADVANCE / DEFERRED INCOME B

20.6 20.5
Jan 1 Membership fees GJ 800 Dec 31 Membership fees GJ 800
20.6
Dec 31 Membership fees GJ 1 200

MEMBERSHIP FEES N
20.6 20.6
Jan 1 Accrued income GJ 600 Jan 1 Deferred income GJ 800
Dec 31 Deferred income GJ 1 200 Dec 31 Bank CRJ 19 800
Income & Expenditure GJ 19 400 Accrued income GJ 200
Membership fees writ- GJ 400
ten off
21 200 21 200
MEMBERSHIP FEES WRITTEN OFF N

20.6 20.6
Dec 31 Membership fees GJ 400 Dec 31 Income & Expenditure GJ 400
TASK 8.6  Prestige Tennis Club: Membership fees account

and Entrance fees
GENERAL LEDGER OF PRESTIGE TENNIS CLUB
Dr MEMBERSHIP FEES N Cr
20.6 20.6
Dec 31 Deferred income GJ 1 500 Dec 31 Bank[2] CRJ 22 550
Income & Expend.[1] GJ 22 050 Accrued income[3] GJ 500
M/fees written off GJ 250
23 800 23 800
[1]
Income & Expenditure: (79 x 250) + (8 x 250) + (2 x 150) = 19 750 + 2 000 + 300 = 22 050
[2]
Bank: (8 x 250) + (2 x 150) + [(80 – 1 – 2 – 2) x 250] + (6 x 250) = 2 000 + 300 + 18 750 + 1 500 = 22
550
[3]
2 x 250 = 500

Dr ENTRANCE FEES N Cr
20.6 20.6
Dec 31 Income & Expenditure GJ 2 000 Dec 31 Bank (10 x R200) CRJ 2 000
Note:
Either the Bank or the Income and Expenditure figure has to be calculated; the other becomes a balancing
figure.
CALCULATION OF BANK:
8 new members x R250
80 old members minus 1 expelled minus 2 still owing; minus 2 who paid last year x R250
6 members already paid for next year
CALCULATION OF INCOME AND EXPENDITURE FIGURE (generally the easier calculation)

80 – 1 expelled = 79 members x R250
The Bank figure shows the actual cash received for this year, last year plus next year. Any amounts not paid
are not included and the amounts received in advance at the beginning of the year would have appeared in
the Bank last year.
The Income and Expenditure figure shows the amount that should have been received for this year. One
member was expelled, leaving 79 from last year plus the 10 new members - of which some paid R250 and
some R150.
As there is no instruction concerning the Entrance Fees account, it is closed off to Income and Expenditure
Account. If the instruction was to capitalise, then the account would have been closed off to the Accumulated
/ Capital Fund account.
TASK 8.7 SC Recreation Club: Membership fees account

and Entrance fees
GENERAL LEDGER OF SC RECREATION CLUB
20.7 20.7
Jan 1 Accrued income[1] GJ 2 400 Jan 1 Deferred income[3] GJ 1 200
Dec 31 Deferred income [2]
GJ 960 Dec 31 Bank CRJ 46 860
Income & Expend.[5] GJ 48 900 Accrued income[4] GJ 3 600
ten off
52 260 52 260
[1]
8 x 300 [2]
4 x 240 [3]
5 x 240 [4]
12 x 300
[5]
(50 x 240) + (6 x 300) + (90 x 300) + (10 x 210) + (25 x 120) + (4 x 240)
= 12 000 + 1 800 + 27 000 + 2 100 + 3 000 + 960 = 48 900
ENTRANCE FEES N
20.7 20.7
Dec 31 Income & Expenditure GJ 10 500 Dec 31 Bank (35 x 300) CRJ 10 500

TASK 8.8  Ixopo Badminton Club: Membership fees account
and Interpretation
8.8.1 GENERAL LEDGER OF IXOPO BADMINTON CLUB
20.4 20.4
Nov 1 Accrued income GJ 1 200 Nov 1 Deferred income GJ 1 400
20.5 20.5
Oct 31 Deferred income[1] GJ 600 Oct 31 Bank CRJ 42 600
Income & Expend. GJ 44 000 Accrued income[2] GJ 1 000
Refreshments GJ 200
Honorarium GJ 200
ten off
45 800 45 800
[1]
3 x 200 = 600 [2]
5 x 200 = 1 000
8.8.2 How many members does the badminton club have on 31 October 20.5?
R44 000 ÷ R200 = 220 members
8.8.3 If there were 250 members last year, do you think the committee should be concerned
and why?
Yes.
Membership has dropped by 30, i.e. from 250 to 220 – less revenue (income).
TASK 8.9 Membership fees and Interpretation

8.9.1 Why is the contra account “Deferred income” on both the debit and credit side of the
membership fees account?
Debit on 31 December:
This is the year-end adjustment for the amount received by members for next year.
Credit on 1 January:
This is the reversal entry for the amount that was received in the previous year (last year) and is relevant
to the current financial year.
8.9.2 Give a reason for the amount of R2 000 on the debit side.
Refund to members due to resignation or overpayment.
8.9.3 Calculate the amount received this year from members who owed money for last year.
12 000 – 4 000 = R8 000
8.9.4 Explain the following entries on the credit side:

• R1 000
Member’s honorarium contra against membership fees.
• R500
The club has received refreshments in lieu of membership fees.
8.9.5 The membership fees for the last two years were R500 per member per year and is
unchanged for the current year as well as next year.
• Calculate the number of members in the club at the end of the current year.
113 500 ÷ 500 = 227 members
• Calculate the number of members at the beginning of the year.
4 000 ÷ 500 = 8
8 + 227 = 235

TASK 8.10 Durban Sailing Club: Membership fees and Inter-
nal control
This Task allows learners an opportunity to try and work out the Membership fees account and the appropriate
figures. They will need to draw on their knowledge of Income receivable/Accrued income and Income received
in advance/Deferred income and reversal entries. Allow them time to engage with the topic – this is far more
important than an accurate figure at this stage.
Suggested answer – not expected in this format.
20.5 20.5
Jan 1 Accrued income GJ 0 Jan 1 Deferred income GJ 3 300
Income & Expenditure GJ 277 200 Accrued income GJ 5 500
278 300 278 300
8.10.1 How much of the money that is reflected in the bank statement was for entrance fees?
R276 000 – R6 500 = R269 500 (note there were 13 new members: 240 at the beginning, -1 left and 252
at the end = 13 new members.)
Therefore entrance fees amount to R6 500, i.e. (13 x R500).
8.10.2 How much of the money that is reflected in the bank statement was for membership
fees?
R269 500
8.10.3 How much is still outstanding for membership fees at the end of the year?
R5 500
8.10.4 How much should the club have earned for membership fees this year?
R277 200
8.10.5 What measures should the treasurer introduce to ensure that the members pay at the
beginning of the year?
• Make an appeal at the AGM – at the end of this year or before the start of next financial year.
• Send out written notices.
• Send SMS messages to members, etc.
8.10.6 What control measures should be introduced next year in order to ensure that accu-
rate records are being kept of all membership fees?
• A pre–numbered receipt book should be used only for membership fees received.
• A reconciliation must be done at least once a month and then reminders sent out.
Any other valid answer.
TASK 8.11  Internal control and problem solving

8.11.1 Identify TWO areas of concern that members of Health and Racquet may have.
• Accumulated funds – the amount of R2 400 000 is very high for a non-profit organisation.
• Membership has decreased significantly from 330 to 200 over the past year.

8.11.2 As the chairman of the Health and Racquet club, what would you say to members at
the Annual general meeting to quell their fears? State and explain 4 areas that the
club can improve on.
• Plans to improve the buildings and equipment by using some of the Accumulated funds.
• Implement an advertising and marketing campaign in order to increase membership.
• Moving forward in order to bring the club to be as competitive as other newer clubs, e.g. the introduction
of internet and Wi-Fi facilities.
• A feasibility study into the building of an indoor pool.
• The addition of other programmes, e.g. an abdominal exercise programme.
8.11.3 The members of the Health and Racquet club have complained that some equipment
appears to be missing making their workouts difficult. Suggest two ways to rectify
this situation from happening again.
• CCTV cameras.
• Metal detectors (or scanners) for individuals who enter or leave the premises.
• Visibility of security guards at strategic areas within the premises.
TASK 8.12  Ace Tennis Club: Ledger accounts

GENERAL LEDGER OF ACE TENNIS CLUB
Dr ACCUMULATED DEPRECIATION ON EQUIPMENT B Cr
20.6 20.6
Sept 30 Asset disposal[3] GJ 6 200 Jan 1 Balance b/d 5 000
Dec 31 Balance c/d 600 Sept 30 Depreciation[1] GJ 1 200
Dec 31 Depreciation[2] GJ 600
6 800 6 800
Jan 1 Balance c/d 600
[1]
8 000 x 20% x 9/12 [2]
12 000 x 20% x 3/12 [3]
5 000 + 1 200

ASSET DISPOSAL N
20.6 20.6
Sept 30 Equipment GJ 8 000 Sept 30 Acc dep on equipment GJ 6 200
Profit on sale of asset GJ 1 000 Bank CRJ 2 800
9 000 9 000
MEMBERSHIP FEES N
20.6 20.6
Dec 31 Deferred income GJ 200 Dec 31 Bank CRJ 9 560
Income & Expenditure GJ 9 880 Accrued income GJ 195
[76 x 130] Honorarium GJ 130
M/fees written off GJ 390
10 730 10 730
Note:
Accrued income/Income receivable on 31 December is the balancing figure.

Dr TENNIS BALLS N Cr
20.6 20.6
Jan 1 Tennis Balls on hand / GJ 125 Dec 31 Honorarium GJ 100
Expenses prepaid
Dec 31 Bank CPJ 3 750 Tennis balls on hand / GJ 149
Expenses prepaid
Income & Expenditure GJ 3 626
3 875 3 875
TASK 8.13 Mountain Sports Club: Refreshments and other

ledger accounts
GENERAL LEDGER OF MOUNTAIN SPORTS CLUB
20.5 20.5
Jan 1 Accrued income GJ 1 000 Jan 1 Deferred income GJ 1 400
Dec 31 Deferred income GJ 1 120 Dec 31 Bank GJ 53 980
Income & Expend.[2] GJ 54 600 Accrued income GJ 560
Refreshments GJ 280
M/fees written off[1] GJ 500
56 720 56 720
[1]
2 x 250 = 500 [2]
177 + 20 – 2 = 195 x 280 = 54 600
Note: Accrued income/Income receivable on 31 December is the balancing figure.
SOCCER BALLS N
20.5 20.5
Jan 1 Soccer balls on hand GJ 100 Dec 31 Donation GJ 550
Dec 31 Bank CPJ 3 600 Soccer balls on hand GJ 195
Creditors control CJ 2 800 Income & Expenditure GJ 5 755
6 500 6 500
REFRESHMENTS N
20.5 20.5
Jan 1 Stock of refreshments GJ 750 Dec 31 Donation GJ 230
Dec 31 Bank CPJ 1 200 Bank (sales) CRJ 24 700
Creditors control CJ 19 200 Stock of refreshments GJ 520
Membership fees GJ 280
Income & Expenditure GJ 4 020
25 450 25 450
ENTRANCE FEES N
20.5 20.5
Dec 31 Accumulated fund GJ 5 000 Dec 31 Bank (20 x R500) CRJ 10 000
Income & expenditure GJ 5 000
10 000 10 000

TASK 8.14  Overport Social Club: Ledger and Trial Balance
8.14.1 GENERAL LEDGER OF OVERPORT SOCIAL CLUB
Dr BANK B1 Cr
20.8 20.5
Dec 31 Membership fees 15 000 Dec 31 Rent paid 8 800
Entrance fees 12 000 Refresh. purchases 4 200
Refreshment sales 17 600 Creditors for refresh. 3 800
Affiliation fees 2 700
Club equipment 4 000
Creditors for equip. 9 000
Bank charges 480
CREDITORS FOR REFRESHMENTS B2

20.8 20.5
Dec 31 Bank 3 800 Dec 31 Refresh. purchases 5 200
CLUB EQUIPMENT B3
20.8
Dec 31 Bank 4 000
Creditors for equip. 16 000
CREDITORS FOR EQUIPMENT B4

20.8 20.5
Dec 31 Bank 9 000 Dec 31 Club equipment 16 000

MEMBERSHIP FEES N1
20.5
Dec 31 Bank 15 000
ENTRANCE FEES N2
20.5
Dec 31 Bank 12 000
REFRESHMENT SALES N3
20.5
Dec 31 Bank 17 600
RENT PAID N4
20.8
Dec 31 Bank 8 800
REFRESHMENT PURCHASES N5
20.8
Dec 31 Bank 4 200
Creditors for refresh. 5 200

Dr AFFILIATION FEES N6 Cr
20.8
Dec 31 Bank 2 700
BANK CHARGES N7
20.8
Dec 31 Bank 480
8.14.2 PRE–ADJUSTMENT TRIAL BALANCE AS AT 31 DECEMBER 20.8

BALANCE SHEET ACCOUNTS SECTION Fol. Debit Credit
Bank B1 11 620
Creditors for refreshments B2 1 400
Club equipment B3 20 000
Creditors for equipment B4 7 000
Membership fees N1 15 000
Entrance fees N2 12 000
Refreshment sales N3 17 600
Rent paid N4 8 800
Refreshment purchases N5 9 400
Affiliation fees N6 2 700
Bank charges N7 480
R53 000 R53 000
Note to Teacher:
The following are TWO additional Tasks on interpretation of Membership fees account.
EXTRA TASK 1: Relax Social Club
Information:
Study the ledger accounts below and answer the questions which follow:
GENERAL LEDGER OF RELAX SOCIAL CLUB

20.8 20.8
Jan 1 Income receivable 260 Jan 1 Deferred income 195
Dec 31 Deferred income 390 Dec 31 Bank 7 025
Bank 35 M/fees written off 130
Profit and Loss a/c 7 150 Refreshments 30
Income receivable 455
7 835 7 835
ENTRANCE FEES N
20.8 20.8
Dec 31 Accumulated fund 1 050 Dec 31 Bank 1 050
Note:
The membership fee is R65 per member per year. Each new member pays an entrance fee of R150 before
being accepted as a member. All the new members joined at the beginning of the year and no members
resigned from the club.

Questions:
1. How many new members joined the club at the beginning of the 20.8 financial year?
2. How many members does the club have, excluding those written off?
3. What will the figure be for ‘Membership fees’ in the Receipts and Payments Statement?
4. There is a figure of R7 150 on the debit side of the Membership Fees Account. Explain why the detail
of this contra account (profit and loss) is incorrect and explain what the correct details should be.
5. Give one possible explanation for the entry of R35 on the debit side of the Membership Fees account.
6. Give one possible explanation for the entry of R30 on the credit side of the Membership Fees account.
7. How many members paid their 20.9 membership fees during 20.8?
8. Explain why there is an Income Receivable entry on both sides on the Membership fees account.
9. Explain why it is unlikely that there will be an Income Receivable entry in the Entrance fees account.
SOLUTION: EXTRA TASK 1
1. How many new members joined at the beginning of the 20.8 financial year?
7 (R1 050 ÷ 150)
2. How many members does the club have, excluding those written off?
R7 150 ÷ 65 = 110 members
3. What will the figure be for ‘Membership fees’ in the Receipts and Payments Statement?
R7 025 Receipt and R35 Payment (Receipts and payments shows the bank figures).
4. There is a figure of R7 150 on the debit side of the Membership Fees Account. Explain why
the detail of this contra account (Profit and Loss) is incorrect and explain what the correct
details should be.
Income and Expenditure – as this is a club. Profit and Loss is used for trading concerns.
5. Give one possible explanation for the entry of R35 on the debit side of the Membership
Fees account.
Refund, dishonoured cheque.
6. Give one possible explanation for the entry of R30 on the credit side of the Membership
Fees account.
Refreshments donated in lieu of membership fees
7. How many members paid their 20.9 membership fees during 20.8?
R390 ÷ R65 = 6 members
8. Explain why there is an Income Receivable entry on both sides on the Membership fees
account.
On the Dr side on the 1 January: This is a reversal entry from last year.
On the Cr side on 31 December: This is the adjustment entry for this year.
9. Explain why it is unlikely that there will be an Income receivable entry in the Entrance fees
account.
New members generally have to pay in full before they become members.

EXTRA TASK 2: Fun Sailing Club
Information:
Study the ledger account below and answer the questions that follow:
GENERAL LEDGER OF FUN SAILING CLUB

Dr SUBSCRIPTIONS N Cr
20.5 20.5
Jan 1 Income receivable GJ 780 Jan 1 Deferred income GJ 420
Dec 31 Deferred income GJ 300 Dec 31 Bank CRJ 33 740
Bank CPJ 110 Income receivable GJ 980
Income & Expenditure GJ 34 440 Subscriptions written GJ
off 520
35 660 35 660
The club increases the subscriptions by R10 each year. The subscriptions for 20.5 amounted to R140 per
member. The committee writes off accrued subscriptions that are not received during the following year.
Questions:
1. What figures, together with their descriptions, would appear in the Statement of Receipts and Payments?
2. What figures, together with their descriptions, would appear in the Income and Expenditure account?
3. How many members, who were in arrear in 20.4, paid their outstanding subscriptions?
4. Give 2 possible reasons for the Bank figure of R150 on the debit side.
5. How many members settled their 20.5 subscriptions during 20.5?
6. Explain why Income receivable appears on the debit side on the 1 January but on the credit side on 31
December.
7. How many members did the club have during 20.5?

1. What figures, together with their descriptions, would appear in the Statement of Receipts
and Payments?
R33 740 under Receipts – Subscriptions
R140 under Payments – Subscriptions
2. What figures, together with their descriptions, would appear in the Income and Expenditure
account?
R34 440 under Income – Subscriptions
R520 under Expenses – Subscriptions written off
3. How many members, who were in arrear in 20.4, paid their outstanding subscriptions?
R780 – R520 = R260 ÷ R130 (subs in 20.4) = 2 members paid
4. Give 2 possible reasons for the Bank figure of R150 on the debit side.
Refund, dishonoured cheque.
5. How many members settled their 20.5 subscriptions during 20.5?

R33 740 – R260 – R300 = R33 180 ÷ 140 = 237 members
6. Explain why Income receivable appears on the debit side on the 1 January but on the credit
side on 31 December.
On 1 January on the Dr side – reversal from the previous year.
On the 31 December on the Cr side – adjustment for the current year.
7. How many members does the club have during 20.5?

R34 440 ÷ 140 = 246 members

TASK 8.15  Difference between Receipts and Income
No. Amount Receipts Income
E.g. R6 520 R6 520 R520
1. 9 000 9 000 Nil
2. 1 020 1 020 120 (profit)
3. 400 400 400
4. 1 000 1 000 1 000
5. 1 700 1 700 1 700
6. 360 360 240
7. 50 50 50
8. 1 500 1 500 1 500
9. 350 Nil 350
10. 80 Nil 80
TASK 8.16  Difference between Payments and Expenditure

No. Amount Payment Expenditure
E.g. R9 200 R9 200 R1 200
1. 80 000 80 000 Nil
2. 112 800 112 800 12 800
3. 3 000 3 000 3 000
4. 1 600 1 600 1 600
5. 960 960 960
6. 5 280 5 280 Nil
7. 430 430 430
8. 1 450 1 450 1 450
9. 1 000 Nil 1 000
10. 32 Nil 32
TASK 8.17 NB Sports Club: Capital and Current income, Ex-

penditure, Receipts and Payments
There are 3 aspects to this Task:
1. Is there actual cash received or paid?
2. Is the receipt of a capital or current nature? (i.e. is it for an asset or for income)
3. Is the expenditure of a capital or current nature?
Receipts Expenditure
No. Receipts Payments
Capital Current Capital Current
(i) 850 625 225
(ii) 66 250 58 750 7 500
1. 8 000 8 000
2. 900 900
3. 800 800
4. 2 500 2 500
5. 140 140
6. 540 540
7. 3 750 3 750
8. 5 752 5 752
9. 5 012 5 012
10. 1 500 3 200
11. 2 900 2 900

Receipts Expenditure
No. Receipts Payments
Capital Current Capital Current
12. 750 375
13. 750 750
14. 3 000 3 000
15. 2 500 2 500
16. 750 1 500
ACCOUNTING PROCEDURES
Suggestion: Photostat the following diagram, enlarging it to A3 size and pin it up on your class-
room wall or let a group of children to design their own poster.
The Accounting procedures to be followed can be summarised as follows:
Daily and monthly

3. General
1. Receipts issued Ledger
for cash received 2. Journals
CRJ, CPJ,
GJ, PCJ
Purchase vouchers 4. Trial
for any payments Balance
made
At financial year end:

9. 5.
Post closing Adjustments
Trial
7.
Balance
Closing entries
10.
Income & Expen. 8.
Statement 6.
Income & Post adjustment
Balance sheet Expenditure Trial Balance
Account

TASK 8.18 Protea Wrestling Club: Analysis Cash Book
ANALYSIS CASH BOOK OF PROTEA WRESTLING CLUB – RECEIPTS 20.1 Fol CB1
Member- Entrance Dona-
Doc no. Day Details Fol of Bank
ship fees fees tions Amount Fol Details
receipts
Jan
1 Balance b/d 2 308.20 2 308.20
251 8 J. Smith 300.00 300.00 300.00
252 25 K. Grant 500.00 500.00 300.00 200.00
Feb
253-276 15 Cash 7 200.00 7 200.00 7 200.00
277-292 28 Cash 4 800.00 4 800.00 4 800.00
Mar
293-295 15 Cash 600.00 600.00
296-305 Cash 3 000.00 3 600.00 3 000.00
May
306–340 31 Cash 1 750.00 1 750.00 1 750.00 Entry fees
June
341 25 K. Angus 500.00 500.00 500.00
Oct
342 4 J. Grey 275.00 275.00 75.00 200.00
343 24 H. Nicol 950.00 950.00 950.00
Dec
344 31 K. Louw 250.00 250.00 250.00
22 433.20 15 675.00 1 000.00 1 700.00 4 058.20
20.2
Jan 1 Balance b/d 6 742.40

ANALYSIS CASH BOOK OF PROTEA WRESTLING CLUB – PAYMENTS 20.1 Fol CB1
Doc Consum- Sundry accounts
Day Details Fol Bank Wages
no. able stores Amount Fol Details
Jan
321 31 AB Sports Shop 724.80 724.80
Feb
322 26 BK Sports 756.00 756.00 Equipment
Mar
323 31 Cash 1 200.00 1 200.00
Apr
324 23 BK Sports 1 401.50 1 401.50
June
325 15 BA Jewellers 700.00 700.00 Tournament prizes
326 30 Cash 1 200.00 1 200.00
Sept
327 30 Cash 1 200.00 1 200.00
Oct
328 15 AB Builders 6 200.00 6 200.00 Repairs
Nov
329 21 AB Sports Shop 356.00 356.00
Dec
330 30 City Treasurer 647.50 647.50 Water and lights
331 31 Cash 1 200.00 1 200.00
BS AB Bank 105.00 105.00 Bank charges
Balance c/d 6 742.40 6 742.40
22 433.20 2 482.30 4 800.00 15 150.90

PROTEA WRESTLING CLUB
STATEMENT OF RECEIPTS & PAYMENTS FOR YEAR ENDED 31 DECEMBER 20.1
RECEIPTS 20 125.00
Membership fees 15 675.00
Entrance fees 1 000.00
Donations 1 700.00
Entry fees 1 750.00
Less PAYMENTS (15 690.80)
Consumable stores 2 482.30
Wages 4 800.00
Equipment 756.00
Tournament prizes 700.00
Repairs 6 200.00
Water and lights 647.50
Bank charges 105.00
Cash surplus for the year 4 434.20
Balance in bank on 1 January 20.1 2 308.20
Balance in bank on 31 December 20.1 6 742.40

TASK 8.19  Panorama Bowling Club: Analysis Cash Book with Bank Reconciliation
ANALYSIS CASH BOOK OF PANORAMA BOWLING CLUB – DECEMBER 20.2
RECEIPTS Fol CB1
Doc Member- Entrance Dona- Refresh-
Day Details Fol of Bank
no. ship fees fees tions ments Amount Fol Details
receipts
1 Totals b/f 26 260 12 376 1 000 500 10 300 2 084
426 4 S. Lewis 100 100 100
Central Bowls Union
813 6 (stale cheque) 500 500 500 Affiliation fees
427-
430 31 Cash 800 800 800
431 S. Nel 300 300 200 100
Balance c/d 22 537 22 537
50 497 13 376 1 000 700 10 300 25 121
ANALYSIS CASH BOOK OF PANORAMA BOWLING CLUB – DECEMBER 20.2

PAYMENTS Fol CB1
Doc Station- Rent Refresh- Sundry accounts
Day Details Fol Bank Wages Bowls
no. ery expense ments Amount Fol Details
1 Totals b/f 45 412 22 000 562 11 000 2 400 7 670 1 780
889 5 Cash 640 640
890 6 Central Bowls Union 500 500 Affiliation fees
891 28 Cash 1 000 1 000
892 31 Cash 2 000 2 000
BS AB Bank 45 45 Bank charges
BS DS Insurers 900 900 Insurance
50 497 24 000 562 12 000 3 040 7 670 3 225
Jan 01 Balance b/d 22 537 22 537
New Era Accounting: Grade 11 253 Teacher’s

Guide
BANK RECONCILIATION STATEMENT ON 31 DECEMBER 20.2
Debit Credit
Debit balance as per bank statement 22 441
Credit outstanding deposit 800
Debit outstanding cheque: No. 891 1 000
Cr cheque wrongly debited 104
Credit balance as per Cash Book 22 537
23 441 23 441
NAME OF CLUB: PANORAMA BOWLING CLUB

STATEMENT OF RECEIPTS AND PAYMENTS FOR YEAR ENDED 31 DECEMBER 20.2
RECEIPTS 26 276
Membership fees 13 376
Entrance fees 1 000
Donations 700
Refreshment sales 10 300
Affiliation fees 500
Interest income 400
Less PAYMENTS (50 497)
Wages 24 000
Stationery 562
Rent expense 12 000
Bowls 3 040
Refreshment purchases 7 670
Affiliation fees (500 + 500) 1 000
Bank charges 45
Insurance 900
Equipment 1 280
Cash surplus for the year (24 221)
Balance in bank on 1 January 20.1 1 684
Balance in bank on 31 December 20.1 (22 537)

TASK 8.20  Social Dancing Club: Income and Expenditure
Statement and Balance Sheet
SOCIAL TENNIS CLUB
INCOME & EXPENDITURE STATEMENT FOR YEAR ENDED 31 DECEMBER 20.2
Note
Income from membership fees [44 250 + 300 – 2 100 +
900] 43 350
Other income: 24 220
Donations 4 890
Dance proceeds 6 300
Refreshment profit: 13 030
Refreshment purchases [21 820 – 2 620] (19 200)
Gross income 67 570

Expenditure (45 689)
Affiliation fees 4 000
Bank charges 500
Repairs 3 150
Consumable stores [1 014 – 125] 889
Wages 25 680
Honorarium 1 500
Stationery 820
Water and electricity [3 570 + 330] 3 900
Membership fees written off 300
Depreciation 4 950
Surplus from general activities 21 881
Interest income 1 84
Surplus before interest expense/financing cost 21 965
Interest expense/financing cost 2 (11 250)
Net surplus for the year 7 10 715
BALANCE SHEET ON 31 DECEMBER 20.2

ASSETS Note
Inventories 4 2 745
Receivables 5 984
FUNDS AND LIABILITIES

Accumulated fund 7 190 940
Loan from B. Bank (60 000 – 20 000) 40 000
Payables 8 28 050
Total funds and liabilities 258 990

Notes to the financial statements for the year/period ended 31 December 20.2
1. INTEREST INCOME
from investments 84
84
2. INTEREST EXPENSE
on loans [5 630 + 5 620]* 11 250
11 250
*75 000 x 15% = R11 250
3. FIXED/TANGIBLE ASSETS Tennis courts

Equipment Total
& clubhouse
Cost 240 000 33 000 273 000
Movements - (4 950) (4 950)
Cost 240 000 33 000 273 000
4. INVENTORIES
Refreshments 2 620
2 745
5. RECEIVABLES
Income receivable/Accrued income [900 + 84] 984
984
Bank 867
2 061
7. ACCUMULATED FUND
Balance at beginning of financial year 162 225
Net surplus for the year 10 715
Entrance fees capitalised 18 000
Balance at the end of the financial year 190 940
8. PAYABLES
Expenses payable/Accrued expenses [5 620 + 330] 5 950
Deferred income/Income received in advance 2 100
28 050

TASK 8.21  Berg Tennis Club: Income and Expenditure State-
ment and Balance Sheet
NAME OF CLUB: BERG TENNIS CLUB
INCOME AND EXPENDITURE STATEMENT FOR YEAR ENDED 31 DECEMBER 20.7
Note
Income from membership fees* 43 320
Other income: 6 728
Donations 888
Tournament profit: 2 520
Tournament receipts 4 860
Tournament expenses (2 340)
Refreshment purchases (1 900)
Gross income 50 048

Honorarium to secretary 1 200
Wages of groundsman 5 760
Water and electricity 1 860
Tennis balls [7 800 – 55 + 30 – 38] 7 737
Stationery [1 040 + 18 – 43] 1 015
Membership fees written off (1 080 – 960) 120
Depreciation 907
*42 840 – 1 080 + 840 + 960 – 360 + 120 = 43 320
BERG TENNIS CLUB

ASSETS Note
Inventories 4 81
Receivables 5 960

Loan from B. Gold [84 000 – 12 000 – 36 000] 36 000
Payables 8 39 180

Notes to the financial statements for the year/period ended 31 December 20.2
1. INTEREST INCOME
from investments 58
58
2. INTEREST EXPENSE
on loan 9 360
9 360
3. FIXED/TANGIBLE ASSETS Site & Court

Courts Total
Buildings Equipment
Cost 96 400 29 600 11 200 137 200
Movements - 13 944 (67) 13 877
Additions at cost - *13 944 840 14 784
Depreciation - - (907) (907)
Cost 96 400 43 544 12 040 151 984
Accumulated depreciation - - (3 037) (3 037)
*7 500 + 4 464 + 1 980
4. INVENTORIES
Consumable stores on hand [48 – 48 + 38 + 43] 81
81
5. RECEIVABLES
Accrued income/Income receivable
(1 080 – 1 080 + 960] 960
960
Savings account at X Bank [948 + 2 400 + 58] 3 406
Bank [1 250 + 71 183 – 57 924] 14 509
17 915
7. ACCUMULATED FUND
Entrance fees capitalised 17 320
8. PAYABLES
Creditors [300 – 300 + 1 980 + 840] 2 820
Deferred income [840 – 840 + 360] 360
Current portion of loan (84 000 – 12 000 ÷ 2) 36 000
39 180

TASK 8.22 AM Sports Club: Income and Expenditure State-
ment and Balance Sheet
GENERAL LEDGER OF AM SPORTS CLUB
Dr MEMBERSHIP FEES N1 Cr
20.6 20.56
Oct 1 Income receivable GJ 1 440 Oct 1 Deferred income GJ 2 160
20.7 20.7
Sept 30 Deferred income GJ 1 800 Sept 30 Bank CRJ 110 250
Income & Expendi- GJ M/fees written off GJ
ture* 115 500 1 080
Income receivable GJ 5 250
118 740 118 740
*[300 – 3 x 360] + [20 x R360] + [6 x 6 x R30] + [2 x 5 x R30] = 106 920 + 7 200 + 1 080 + 300 = 115
500
NAME OF CLUB: AM SPORTS CLUB

INCOME & EXPENDITURE STATEMENT FOR YEAR ENDED 30 SEPTEMBER 20.7
Note
Income from membership fees 115 500
Entrance fees [21 000 x /5]
2
8 400
Donations [1 237 + 750] 1 987
Refreshment purchases (9 750)
Gross income 138 412
Membership fees written off 1 080
Honorarium [1 500 – 1 500 + 1 500] 1 500
Wages [27 000 – 900] 26 100
Postage and stationery [1 270 + 23] 1 293
Water and electricity [2 690 + 310] 3 000
Depreciation [9 000 + 750] 9 750

NAME OF CLUB: AM SPORTS CLUB
BALANCE SHEET ON 30 SEPTEMBER 20.7
ASSETS Note
Financial assets:
Fixed deposit at ABC Bank [9 000 + 3 000 – 2 000] 10 000
Receivables 4 6 426

Loan from municipality [15 000 – 1 500 – 1 500] 12 000
Payables 7 4 060
Notes to the financial statements for the year ended 30 September 20.7
1. INTEREST INCOME
from investments [(900 – 450 + 720*] 1 170
from savings account (21 – 21 + 66) 66
from municipality 20
1 256
2. INTEREST EXPENSE
on loan 1 050
1 050
*(9 000 x 12% x 6/12) + (3 000 x 12% x 6/12)
3. FIXED/TANGIBLE ASSETS Land & Equip-

Vehicles Total
Building ment
Cost 500 000 120 000 180 000 800 000
Movements 6 900 28 500 (750) 34 650
Additions at cost 6 900 37 500 - 44 400
Depreciation - (9 000) (750) (9 750)
Cost 506 900 157 500 180 000 844 400
4. RECEIVABLES
Deposit for water and electricity [670 – 280] 390
Prepaid expenses [23 – 23] -
Income receivable [5 250 + 66 + 720] 6 036
[or 1 911 – 1 440 – 450 – 21 + 5 250 + 66 + 720 ]
6 426

Savings account [645 + 1 800 ] 2 445
Fixed deposit 2 000
Bank [1 500 + 155 683 – 93 435] 63 748
68 193
6. ACCUMULATED FUND
Entrance fees capitalised (21 000 x 3/5) 12 600
7. PAYABLES
Creditors [375 – 375] -
Expenses payable
[1 500 – 1 500 + (1 500 – 750) + 310 - 300] 760
Deferred income [2 160 – 2 160 + 1 800] 1 800
4 060
NOTE TO TEACHER:
The following is an extra Task involving financial statements of clubs.
EXTRA TASK 3: Lions Sports Club
Required:
From the following information extracted from the books of the Lions Sports Club draw up:
1. The Membership fees account.
2. The Income and Expenditure Statement for the year ended 31 December 20.5.
3. The Balance Sheet at 31 December 20.5.
Information:
LIONS SPORTS CLUB
POST-CLOSING TRIAL BALANCE ON 31 DECEMBER 20.4
Fol Debit Credit
Accumulated fund 138 532
Club property and buildings at cost 109 204
Equipment at cost 50 800
Accumulated depreciation on equipment 12 160
Loan from the City Council (16% p.a.) 14 400
Creditors 540
Income received in advance (membership fees) 1 440
Accrued income (membership fees) 1 080
Accrued expenses (interest on loan) 576
Prepaid expenses (stationery and stamps) 24
Club blazers in stock (at cost) 4 800
Bank 1 740
167 648 167 648

SUMMARY OF RECEIPTS AND PAYMENTS FOR THE YEAR ENDED 31 DECEMBER 20.5
Receipts Payments
Entrance fees 3 600 Rent expense 7 200
Membership fees 61 560 Affiliation fees 600
Interest on Savings account 81 Sundry creditors 540
Sales of club blazers 3 460 Repairs 8 400
Donations 4 373 Wages 18 960
Grant (Local Board) 3 000 Equipment 3 360
Refreshment sales 39 000 Instalment and accrued interest on
Proceeds of the annual dance 13 420 loan (1 Jan 20.5) 4 176
Honorarium 3 000
Stationery and stamps 720
Interest on loan 2 592
Fixed deposit at AB Bank 3 600
Refreshment purchases 17 000
Dance expenses 6 290
Additional information:
1. Entrance fees amounted to R180 per member. Entrance fees must be used to defray current expenses.
2. On 31 December 20.4, 150 members were registered. A further 20 members enrolled during January
20.5. Membership fees amounted to R360 per member per year.
3. A member still owing R360 for 20.4 disappeared and the amount must be written off. This member’s
membership was terminated as from 1 January 20.5. The balance of the outstanding membership
fees for 20.4 was received, but there were still membership fees outstanding for 20.5.
4. On 31 December 20.5, the membership fees received in advance amounted to R2 160.
5. The grant from the Local Board must be used by the club to defray current expenses.
6. Included in the amount for wages was R2 960 which was paid for the erection of a storeroom.
7. An account for R720 in respect of the annual dance must still be paid. No entry has as yet been made
for this.
8. The refreshments stock was sold to the members for R180 and still had to be paid for by them. No
entry has been made in this regard.
9. Club blazers in stock (at cost) on 31 December 20.5, R1 920.
10. Provision must be made for depreciation at 10% p.a. on the diminished balance of the equipment.
Equipment for R3 360 was bought on 1 April 20.5.
11. Interest at 16% p.a. on the balance of the loan was prepaid for 6 months. A loan repayment of R3
000 will be made on 30 June 20.6.
12. The investment of R3 600 was made on 31 December 20.5 at 15% p.a. at the AB Bank. Interest is
payable half-yearly. R2 000 of this investment matures on 30 September 20.6.

NAME OF CLUB: LIONS SPORTS CLUB

INCOME & EXPENDITURE STATEMENT FOR YEAR ENDED 31 DECEMBER 20.5
Note
Entrance fees 3 600
Profit on club blazers: 580
Sale of blazers 3 460
Cost of blazers [4 800 – 1 920] (2 880)
Donations 4 373
Grant from Local Board 3 000
Refreshment purchases [17 000 – 180] (16 820)
Dance profit: 6 410
Dance expenses [6 290 + 720] (7 010)
Gross income 100 983

Rent expense 7 200
Affiliation fees 600
Repairs 8 400
Wages [18 960 – 2 960] 16 000
Honorarium 3 000
Stationery and stamps [720 + 24] 744
Depreciation [3 864 + 252]* 4 116
*(50 800 – 12 160 x 10%) + (3 360 x 10% x 9/12)

NAME OF CLUB: LIONS SPORTS CLUB
ASSETS Note
Financial assets – Fixed deposit (3 600 – 2 000) 1 600
Inventories 4 1 920
Receivables 5 1 764

Loan from City Council [14 400 – 3 600 – 3 000] 7 800
Payables 8 5 880
Notes to the financial statements for the year ended 31 December 20.5
1. INTEREST INCOME
from savings 81
81
2. INTEREST EXPENSE
on loan [576 – 576 + 2 592 – 864] 1 728
1 728
3. FIXED/TANGIBLE ASSETS Club prop-

erty & build- Equipment Total
ings
Cost 109 204 50 800 160 004
Movements 2 960 (756) 2 204
Additions at cost 2 960 3 360 6 320
Cost 112 164 54 160 166 324
4. INVENTORIES
Club blazers [4 800 – 4 800 + 1 920] 1 920
1 920
5. RECEIVABLES
Prepaid expenses [24 – 24 + 864] 864
Income receivable [1 080 – 1 080 + 720 + 180] 900
1 764

Bank [1 740 + 128 494 – 76 438] 53 796
Fixed deposit 2 000
55 796
7. ACCUMULATED FUND
8. PAYABLES
Creditors [540 – 540] -
Expenses payable [576 – 576 + 720] 720
Deferred income [1 440 – 1 440 + 2 160] 2 160
5 880
GENERAL LEDGER OF LIONS SPORTS CLUB

20.5 20.5
Jan 1 Accrued income GJ 1 080 Jan 1 Deferred income GJ 1 440
Income & Expenditure* GJ 60 840 M/fees written off 360
Accrued income GJ 720
64 080 64 080
*[150 – 1 + 20] x 360
DIFFERENTIATE BETWEEN FINANCIAL STATEMENTS OF CLUBS

AND PARTNERSHIPS
Note to Teacher:
Tasks 8.23 and 8.24 are used to demonstrate to learners the differences between the financial statements
of a CLUB and a PARTNERSHIP. It maybe necessary, therefore, to briefly recap the purposes and motives of
a non–profit organisation and a trading business.
Some of the following notes maybe helpful to you.
The main purpose of a non-profit sports club is to provide facilities for its members, while the main
purpose of a business, whether a trading or a service business, is to make a profit. A sports club does
not intend to make a profit. However, the income received should cover the expenses incurred.
The formation of a non-profit club

A group of persons who have similar interests would get together and discuss how to set up a club. This group
of persons maybe interested in playing tennis. There will be work done by some members of this group but
no one gets paid. This group will meet, say, every Saturday afternoon to play tennis and maybe meet once a
month, possibly first Monday evening of every month, to discuss matters in respect of tennis. These members
will need a set of rules by which every member must abide. Once this set of rules is formally accepted by
every member at a meeting this set of rules becomes known as the Constitution of the club.

TASK 8.23  Partnerships and Clubs: Differences Income
Statement and Income & Expenditure Statement
8.23.1 Write down the largest amount found in the CLUB. Explain in detail from where the
club received this money.
R100 983
• Club members contributed R60 840 as membership fees ( subscriptions) so that the club can pay nec-
essary expenses
• The members again contributed additional funds by buying blazers and refreshments from the club which
originally purchased these from outside businesses.
• It is likely that members tried to raise funds by buying tickets and also selling tickets to friends to attend
a dance organised by the club.
8.23.2 Write down the largest amount found in the PARTNERSHIP. Explain in detail from
where the partnership received this money.
R436 520
• Stock was purchased from wholesalers at cost price and the owners (partners) instructed their sales
manager to mark up these costs by 240% so as to make a gross profit of R308 320
• These goods were most likely purchased every month and sales to the public took place every working
day of the year.
• The main purpose of this huge gross profit is to offset the operating expenses and leave a sufficient
amount as net profit for the owners to share at the end of the year.
8.23.3 Write down two items (together with their amounts) found in the Income and Expendi-
ture Statement of the club that are unlikely to be found in an Income Statement of a
partnership. Explain why these two items would not appear in a partnership Income
Statement.
• Membership fees of R60 840 – this is the voluntary amounts agreed by the members at a meeting to
give to the club so that the club can meet its regular expenses.
• Grant from local town board R3 000 – this amount is generally allowed to non-profit organisations who
render some service to members of that town.
• Honorarium of R1 000 – is generally a small gift given as a token of appreciation for free services
rendered throughout the year by a member of the club.
8.23.4 Write down two items (together with their amounts) found in the Income Statement
of the partnership that are unlikely to be found in an Income and Expenditure State-
ment of the club. Explain why these two items would not appear in the club Income
and Expenditure Statement.
• Sales of R436 520 – a club’s main objective is to maintain its status as a non-profit organisation to render
service to its members. If it does sell some item, then that is a side issue, generally to raise funds to
pay for expenses.
• Medical aid contributions of R790 – almost all persons associated with the club do not get paid. Payment
is sometimes made to a part-time worker – and it is most unlikely to have medical aid contribution for
this part-time worker.
8.23.5 Explain what will happen to the net surplus of R58 916 of the club.
This amount will be transferred to the accumulated funds account. Funds from this account are generally
used to purchase assets such as furniture and equipment.
8.23.6 Explain what will happen to the net profit of R219 556 of the partnership.
This amount will be transferred to the Appropriation account. This account is used to distribute the profit
to the two (or more) partners according to the terms of the partnership agreement. The partners may
agree to distribute the monies for the interest on partners’ investment (capital); partners’ salaries and
share the remainder as per agreed ratio.

TASK 8.24  Partnerships and Clubs: Differences in Balance
Sheet of each
Study the Balance Sheet together with the notes of the Lions Sports Club and the Balance Sheet (inclusive
of notes) of the Partnership business of Clinbush Hardware and answer the following questions:
8.24.1 Examine Note 5 (Receivables) of the CLUB and compare this to Note 5 (Trade and other
receivables) of the PARTNERSHIP and explain why one is just called “Receivables” and
the other “Trade and other Receivables”.
• A partnership is generally a trading business, i.e. it buys goods at low price and sells these same goods
at higher price. Hence they are in the business of “trading”. Customers who buy goods on credit and
pay later are termed “Trade debtors” – therefore the heading Trade and other receivables for a partner-
ship.
• In a club the “profit motive” is absent because the club is a “non-profit organisation”
8.24.2 Examine the amount for “Creditors” in Note 8 of the CLUB and compare the amount
for “Trade Creditors” in Note 9 of the PARTNERSHIP. Explain why the details and
amount appear to be reasonable.
• Creditors are similar to the case of debtors. The creditors of a partnership business sell their goods on
credit and the partnership understands that the price of the goods was the selling price of the creditors
– hence larger amount.
• The partnership business must have sufficient stocks for their own customers who buy from them. Since
these goods are for trading purposes, the amount owing for these goods are termed “Trade Creditors”.
8.24.3 Note 7 (CAPITAL) and Note 8 (CURRENT ACCOUNTS) have substantial amounts as final
balances in the Partnership. Explain why Capital and Current account notes would
never appear in the Balance Sheet of a club.
• The note for Capital and Current accounts comes under the heading “Equity and Liabilities” on the face
of the Balance Sheet. This equity is really the “Owners equity” and the Owners equity represents how
much of the business is “owned” by the partners.
• In the case of a Club no one individual can lay claim to “ownership” of the club. The club does not
belong to any person. In the event of a club closing down, or stops functioning, the constitution may
provide for selling the assets and donating the proceeds to another non-profit organisation such as local
senior citizens club or a religious organisation.
8.24.4 Explain why you would expect to see that the “Non-Current Liabilities” amount for a
Partnership would generally be much larger than that of a Club.
• The partnership business may take a loan to expand its future business activities. The size of the loan
will depend on the size of the guarantees given to the bank. Since the partnership is in the business of
making a profit it may take a large loan and pay off the loan from expected profits.
• In the case of a club, income in the form of membership fees and fund-raising activities is not guaran-
teed. Therefore the management of the club cannot take large loans unless it has sufficient guarantees
for repayment.
TASK 8.25 Bloem Sports Club: Interpretation of financial

statements
8.25.1
Compare the surpluses of the two years and comment briefly
Surplus has increased considerably by 620% (2 590/418 x 100/1).
8.25.2
Outline the factors responsible for the increase in the surplus of 20.3 compared to 20.2
Refreshment sales have increased; increase in membership fees; increase in fund-raising activities, e.g.
concert.

8.25.3
The membership fee for 20.3 is R60 per member. Comment on the collection policy
with regard to the membership fees.
Decline in collection – in 20.2, four members did not pay (240  60) while in 20.3, eleven members are in
arrears (660  60).
8.25.4
Do you consider it necessary to raise the membership fee per member? Give 3 reasons
for your answer.
Yes – expenses have increased, therefore, more income is needed; the club can accumulate funds for
expansion or improving facilities for members; very few members would be unable to afford R60 per
annum.
No – surplus has improved; low fees result in increased membership; collection policy is unsatisfactory –
this situation could worsen if fees are increased.
8.25.5
The secretary suggested that R1 000 should be invested at the current fixed deposit
rate of 12% p.a. Would you support him or would you rather recommend that this
amount be used to reduce the loan? Why?
The interest on the loan is 10% while the return on fixed deposit is 12% - positive gearing.
The secretary’s suggestion is therefore supported.
8.25.6
The employees of the club received an increase on 1 January 20.3. What was the
percentage increase? Show workings.
R3 766 – 3 424 = R342
342 x 100 = 10%
3 424 1
TASK 8.26 Sung Young Sports Club: Internal control and

problem solving
This Task is for the learners to consider control measures that need to be taken in a club and also how to deal
with a crisis. There is no right or wrong answer, but the importance is for them to engage with the topic and
to discuss the various options in class. You could have a few learners reporting back to the class, as if they
were the club members and then opening the topic up for questions and finally a vote to be taken.

Reveals great in-
Identifies most of
Consideration of Fails to identify op- Considers all op- sight in identifying
the obvious op-
various options. tions available. tions available. the options availa-
tions.
ble.
Discusses the vari-
Measures that can Identifies most of Considers all the
Fails to identify the ous measures with
be taken to placate the obvious op- measures availa-
measures. great insight and
the members. tions. ble.
understanding.
Discusses the con-
Identifies most of
Fails to identify Identifies all the trol measures with
Control measures. the obvious op-
control measures. control measures. great insight and
tions.
understanding.

TASK 8.27 Astroturf Hockey Field: Report
Excellent motiva-
Motivated one op-
Motivated one option in which the 2
Motivation for tion but without
Fails to give a mo- tion in which all options are com-
which option to identifying the
tivation. the benefits are pared and dis-
choose. main benefits of
highlighted. cussed in great de-
this option.
tail.
Identifies about Excellent insight
Identification of Fails to identify ex- Identifies all the
half of the extra shown in identify-
extra costs. tra costs. extra costs.
costs. ing the extra costs.
Identifies all three
Discusses all three
Proposal for raising Fails to identify Identifies 2 but discusses only
methods with
the extra money. measures. methods. one method with
great insight.
insight.
TASK 8.28 Clanville Bowls Club: Internal control & ethical

scenarios
The objective of this Task is to allow learners to see the need for internal control and ethics in all forms of
business and in everyday life. The Task can be approached in various ways, i.e. every learner does all 10
aspects or you can choose to divide the class into groups and assign 2 or 3 to each group with a report back
from each group.
Ensure that learners commit answers for every aspect.
With reference to ethics and internal control – encourage or draw out responses such as need for one to one
discussion with relevant member as well as for voluntary disclosure of problem by individual at a formal meet-
ing of members.
Members of a club need to know about incorrect procedures and or violation of good ethical behaviour. In
most cases executive committee members (such as chairman, treasurer, etc.) need to be aware of conscious
and unconscious actions on their part.
Internal
No. Problem control What should be done
OR Ethics
8.28.1
8.28.2
8.28.3
8.28.4
8.28.5
8.28.6
8.28.7
8.28.8
8.28.9
8.28.10

CHECKLIST
Requires
Yes – profi-
cient
tion
Explain Accounting concepts unique to a non-profit or-
ganisation.
Distinguish between a sports club and a business con-
cern.
Identify how the bookkeeping entries need to be
adapted to make the necessary recordings for a club.
Complete a membership fees / subscriptions account in
the General Ledger.
Post accounts to ledger and draw up a Trial Balance.
Distinguish between receipts and income.
Distinguish between payments and expenditure.
Prepare the Analysis Cash Book of clubs.
Prepare the Financial Statements of clubs.
Differentiate between Financial Statements of partner-
ships and clubs.
Introduce and discuss control measures to be used in a
sporting club.
Analyse and interpret ledger accounts and financial
statements.

MODULE 9
COST ACCOUNTING
Costing was introduced in Grade 10 so it is important to determine the learners’ prior knowledge before pro-
ceeding. In the Grade 10 book initial Tasks focussed on the differences between retail and manufacturing
businesses and definitions and explanations of basic cost concepts.
If learners are experiencing difficulties with costing concepts, it would be advisable to go over the basics again
(even if it is for only one lesson or one work period). An understanding of simple, basic fixed and variable
costs is essential.
TASK 9.1  Woza Manufacturers (1): Baseline assessment

This Task is meant as a baseline assessment to determine the learners’ prior knowledge. Allow them to
complete the answers individually and then to complete the assessment form to determine if they have the
necessary skills. Before proceeding with Grade 11 work it is essential that they all understand the concepts
thus far learnt.
9.1.1 Write down the details of the above costs (from Column A only) into the appropriate
sections as set out in the table below:
Direct (Raw) Materials Direct Labour Factory Overheads

Wood Labour Factory electricity
Brass screws Rent
Sand paper Consumable stores
Varnish Cleaning aids
Factory manager’s salary
Factory cleaner’s salary
9.1.2 Calculate the raw material cost for 1 table.
Wood (10 x 1.8 = 18m x R8) R144.00

Wood (6 x 2m x R10) 120.00
Brass screws 1.50
Sand paper (3 x R4) 12.00
Varnish 15.00
TOTAL R292.50
9.1.3 Calculate the direct labour cost for 1 table.

R18 x 5 hours = R90.00
9.1.4 Calculate the prime/direct cost for 1 table.

292.50 + 90.00 = R382.50
9.1.5 Calculate the prime cost for 230 tables.

R382.50 x 230 = R87 975.00

9.1.6 Calculate the total factory overhead costs.
Electricity R2 000
Rent 3 000
Consumable stores 150
Cleaning aids 100
Factory manager’s salary 7 000
Factory cleaner’s salary 1 800
TOTAL R14 050
9.1.7 Define fixed and variable costs.

Fixed costs remain constant over a period of time irrespective of the amount of goods produced.
Variable costs vary in proportion to the amount of goods produced.
Fixed costs stay the same - they are not affected by changes in volume or changes in the number of
products manufactured.
Variable costs – these change when the number of products manufactured changes – they are affected by
any change in the number of products manufactured.
9.1.8 Classify the factory overhead costs into fixed and variable costs.
Examples:
Fixed costs: Rent, Factory manager’s salary, Factory cleaner’s salary.
Variable costs: Factory worker wages, raw materials.
9.1.9 Calculate the total production costs for 230 tables.

R87 975 + R14 050 = R102 025
9.1.10 How much will one wooden table cost?

R102 025  230 = R443.59
9.1.11 If they make 30% profit, how much will they sell each table for?
R443.59 + 30% = R576.67
9.1.12 In your opinion do you think this is a realistic selling price? Explain.
Use discretion with learners’ answers - learners must give reasons for their answer.
9.1.13 Why is equipment not included in direct or indirect costs?

Equipment is an asset and not an expense to the business.
SELF-ASSESSMENT FORM
Learners are to complete the self-assessment form, after marking their work, by ticking off the appropriate
column, to determine their prior knowledge:
Knowledge and skills YES NO
Can identify direct material costs
Can identify direct labour costs
Can calculate the prime cost
Can identify factory overhead costs
Can define fixed and variable costs
Can divide overhead costs into fixed and variable costs
Can calculate the total cost of production
Can work out the unit cost
Can work out the selling price

Assess the learners’ responses. If there are learners who are experiencing gaps in their knowledge ensure
that they make an attempt to catch up.

COSTING CONCEPTS
Suggestion: Let the class make a large poster with each group finding pictures (use newspaper
or magazines) to depict the specific cost per group.
TASK 9.2  Break-even point calculations

Break-even
Selling price per Variable cost per Contribution Fixed costs (in
point (no. of
item item per item total)
items)
R10 R8 R2 R60 30
R24 R16 R8 R160 20
R50 R30 R20 R1 000 50
R75 R45 R30 R900 30
R40 R25 R15 R750 50
R80 R68 R12 R144 12
R80 R54 R26 R624 24
TASK 9.3  Woza Manufacturers (2): Break-even point calcu-

lation and interpretation
When reviewing answers of learners (possibly the next day), ask learners to EXPLAIN the reasons for their
answers, especially for 9.3.3.
9.3.1 Refer to Task 9.1 and calculate Woza Manufacturer’s break-even point.
14 050
576.67 – 382.50
14 050 = 72.4 tables / 73 tables
194.17
9.3.2 Does this mean that Woza Manufacturer’s makes a profit? Explain your answer?
Yes.
They are selling 230 tables, which is more than the break-even. They will, therefore, make a profit.
9.3.3 State whether the effect would be an INCREASE or DECREASE or NO CHANGE on the
break-even point when each of the following situations listed below occur.
EFFECT ON
SITUATIONS
BREAK-EVEN POINT
Labour cost per hour increased. Increase
Raw material cost decreased. Decrease
Rent increased. Increase
Selling price decreased. Increase
Loan was taken out interest free. No change
Loan was taken out at 12% p.a. interest. Increase (Extra cost)
Equipment was bought on credit. No change
Depreciation was written off. Increase (Extra cost)
Extra labourers were hired but quantity produced was the same. Increase
Electricity cost per kilowatt increased. Increase

TASK 9.4 Woza Manufacturers (3): Written report
CALCULATIONS:
230 tables (Pre-
2 000 tables 2 230 tables
sent produc-
(New order) (Total)
tion)
Direct labour per unit R90 R90 R90
Direct (raw) material per unit R292.50 R266.10* R266.10**
Total variable cost per unit R382.50 R356.10 R356.10
Fixed costs (Total) R14 050 R41 500 R55 550
Electricity R 2 000 R3 000 R5 000
Rent 3 000 R7 000 R10 000
Consumable stores 150 R300 R450
Cleaning materials 100 R400 R500
Factory manager’s salary 7 000 R7 000 R14 000
Factory cleaner’s salary 1 800 R1 800 R3 600
Interest on loan Nil R2 000 R2 000
Transport Nil R20 000 R20 000
Selling price per unit R576.67 R445 -
Total income from sales R132 634.10 R890 000 R1 022 634.10
Break-even point 72.4 (73) 466.82 (467) -
Profit R30 608.40 R136 300 R172 981.10
Note:
*10% trade discount on the wood.
**The total cost of the wood would decrease.
As there are two different selling prices for the articles you cannot work out a combined selling price per unit
or break-even – the separate figures have to be used in the comments.

Appropriate figures Comprehensive cal- Comprehensive cal-
Calculation of ap- Fails to identify ap-
identified but not culations showing culations of figures
propriate figures propriate figures
all accurate some insight showing insight
Generally good ad- Outstanding advice
Advice on whether Inappropriate ad- Good advice show-
vice based on fig- showing deep in-
to accept the order vice ing some insight
ures sight
Good suggestions Outstanding sug-
Suggestions for im- Inappropriate sug- Generally good
showing some in- gestions showing
provement gestions suggestions made
sight deep insight
Generally good Very good presen- Outstanding
Presentation Poor presentation
presentation tation presentation
Some suggested comments:

➢ Selling price per unit for the order for 2 000 tables is less than the local order.
➢ Due to the large number of tables the total revenue and profit has increased.
➢ The larger order will require a loan with interest which adds to the risk of the business.
➢ If the order was to be cancelled then Woza would be left with higher costs – rent and salaries.
➢ The break-even point is a lot higher for the new order.
➢ Etc.

Suggestions for improvement:
➢ Negotiate a higher selling price.
➢ Pass the transport cost on to the debtor.
➢ Try to negotiate for cheaper premises.
➢ Negotiate a higher trade discount on the purchase of wood.
➢ Try to cut down on extra staff and rather given incentives for improved productivity.
➢ Negotiate a cheaper loan, etc.
TASK 9.5 Woza Manufacturers (4): Understanding produc-

tivity
9.5.1 What factors influence labour productivity? Discuss at least five.
• An employee is physically incapable of carrying out the job.
• The employee does not have the personality or talent to do the job.
• Inadequate training.
• Lack of job satisfaction.
• Standard of productivity expected is too high.
• Poor working conditions – lighting, temperature, humidity, noise, number of hours worked.
• Etc.
9.5.2 What measures could the business introduce in order to improve the productivity
level of the workers?
• Improve working conditions
• Incentive bonuses.
• Training.
• Profit sharing schemes.
• Time off.
• Forum in which to voice their grievances.
• Etc.
Check your knowledge:

Stop and ensure that the learner’s understand the term productivity.
Learners to assess themselves on the following criteria:

CRITERIA YES NO
Understand the term productivity.
Understand why an increased productivity is of benefit to the economy.
Can discuss at least 5 factors that influence the level of productivity.
Can discuss measures that businesses can introduce to improve productivity.
Conduct a self-analysis test to determine where they can personally improve.
NOTE TO TEACHER:
1. Explain difference aspects of manufacturing business and retail business as per diagram and flow chart
in learner book.
2. Highlight the flow of the goods from the storeroom to the factory to the finished and then to be sold to
the customer.
RECORDING OF COST ELEMENTS IN THE GENERAL LEDGER
Suggestion: Photostat the following illustrations, enlarging them to A3 size and pin them up on
your classroom wall.
Allow learners time to study the flowchart and to see the links. Giving them time to explain also
helps to consolidate their thinking.
1. The costs incurred – raw materials bought, labour used and factory overheads incurred.
2. The manufacturing costs are transferred to the Work-in-progress account so that the total cost of pro-
duction can be calculated.

3. Goods that are completed in the production process are moved to the storeroom in order that they can
be sold – Finished goods stock account.
4. The cost price of the goods sold is credited to the Finished goods stock account (stock is decreased) and
the Cost of sales account is debited.
5. Goods are sold on credit.
6. Cost of sales is transferred to the Trading account (Income Statement).
7. The Sales amount is transferred to the Trading account (Income Statement).
RECORDING OF COST ELEMENTS IN THE GENERAL LEDGER

Key: Step 1: Step 2a: Step 2b
RETAIL BUSINESS
Purchase / buy Sales of stock
stock
Bank Cost (price) of (goods) sold
Trading Stock
Cost price
Trading Stock a/c
Sales
Cost of sales
Cost Cost price

Selling
price
price
MANUFACTURING BUSINESS
1. Stock of raw materials a/c Sales of finished goods
Cost (price) of (goods) sold
Finished goods a/c

Cost price
2. Work-in-progress a/c
Raw materials
Direct labour
Factory overheads Sales
3. Stock of finished goods a/c Selling

price
Suggestion:
Allow the learners time to work through the example. Draw their attention to the fact that the prin-
ciples are exactly the same as they are used to:
1. Work-in-progress is the new account and is used to calculate the cost of production. It also shows the
value of goods that are still on the production line.
2. Finished goods stock account has the same function as the Trading stock account.
3. Raw materials stock account is the same as Direct materials cost account and works on the same concepts
as the Trading stock.
4. All factory expenses are debited to the respective expense accounts. These expense accounts are then
closed off to the Factory overhead cost account.

TASK 9.6  Sal Manufacturers: Drafting ledger accounts
GENERAL LEDGER OF SAL MANUFACTURERS
Dr RAW MATERIALS STOCK B Cr
20.5 20.6
Mar 1 Balance b/d 40 000 Feb 28 Raw materials issued GJ 165 000
20.6 Balance c/d 20 000
Feb 28 Creditors control CJ 100 000
Bank CPJ 30 000
Bank CPJ 15 000
185 000 185 000
WORK-IN-PROGRESS STOCK B
20.5 20.6
Mar 1 Balance b/d 20 000 Feb 28 Finished goods stock GJ 390 000
20.6 Balance c/d 22 000
Feb 28 Raw materials cost GJ 165 000
Direct labour cost GJ 50 000
Factory overhead GJ 177 000
412 000 412 000
FINISHED GOODS STOCK B

20.5 20.6
Mar 1 Balance b/d 60 000 Feb 28 Cost of sales GJ 395 000
20.6 Balance c/d 55 000
Feb 28 Work-in-progress stock GJ 390 000
450 000 450 000
FINAL ACCOUNTS / COST ACCOUNTS SECTION

DIRECT MATERIALS COST C
20.6 20.6
Feb 28 Raw materials issued GJ 165 000 Feb 28 Work-in-progress stock GJ 165 000
DIRECT LABOUR COST C

20.6 20.6
Feb 28 Salaries and wages GJ 50 000 Feb 28 Work-in-progress stock GJ 50 000
FACTORY OVERHEAD COST C

20.6 20.6
Feb 28 Consumable stores* GJ 9 000 Feb 28 Work-in-progress stock GJ 177 000
Salaries and wages GJ 30 000
Rent (90 000 x 2/3) GJ 60 000
Electricity GJ 60 000
177 000 177 000
*12 000 – 3 000

TASK 9.7 VUKA Manufacturers: Drafting ledger accounts
GENERAL LEDGER OF VUKA MANUFACTURERS
BALANCE SHEET ACCOUNTS SECTIONS
20.7 20.8
Mar 1 Balance b/d 15 000 Feb 28 Creditors control CAJ 6 000
20.8 Raw materials issued GJ 178 000
Feb 28 Creditors control CJ 180 000 Balance c/d 11 000
195 000 195 000
20.7 20.8
Mar 1 Balance b/d 12 000 Feb 28 Finished goods stock GJ 434 000
20.8 Balance c/d 6 000
Factory overhead cost GJ 160 000
440 000 440 000

20.7 20.8
Mar 1 Balance b/d 22 000 Feb 28 Cost of sales GJ 414 000
20.8 Balance c/d 42 000
Feb 28 Work-in-progress GJ 434 000
stock
456 000 456 000
COST ACCOUNTS SECTION

20.8 20.8
Feb 28 Consumable stores GJ 8 000 Feb 28 Work-in-progress stock GJ 160 000
Salaries and wages GJ 20 000
Lease GJ 45 000
Rent (80 000 x 700/1 000) GJ 56 000
Elect. (40 000 x 70%) GJ 28 000
160 000 160 000
Note:
Calculate the Cost of sales (mark-up of 25% on sales of R517 500). As the closing balance in the Finished
goods account is given, the Work-in-progress can be calculated and substituted into the Work-in-progress
account and the closing balance calculated.

TASK 9.8  FOX Manufacturers: Drafting ledger accounts with
calculations
GENERAL LEDGER OF FOX MANUFACTURERS
20.5 20.6
20.6 Raw materials issued GJ 651 000
Feb 28 Creditors control CJ 300 000 Balance c/d 32 000
Bank CPJ 230 000
Creditors control CJ 75 000
695 000 695 000
20.5 20.6
Mar 1 Balance b/d 120 000 Feb 28 Finished goods stock GJ 1 205 000
20.6 Balance c/d 14 880
Feb 28 Direct materials cost GJ 651 000
1 219 880 1 219 880

20.5 20.6
Mar 1 Balance b/d 35 000 Feb 28 Cost of sales GJ 1 200 000
20.6 Balance c/d 40 000
Feb 28 Work-in-progress GJ 1 205 000
stock
1 240 000 1 240 000

20.6 20.6
Feb 28 Raw materials issued GJ 651 000 Feb 28 Work-in-progress stock GJ 651 000

20.6 20.6
Feb 28 Salaries and wages[1] GJ 90 900 Feb 28 Work-in-progress stock GJ 90 900

Dr FACTORY OVERHEAD COST C Cr
20.6 20.6
Feb 28 Consumable stores[2] GJ 26 000 Feb 28 Work-in-progress stock GJ 357 980
Salaries and wages[3] GJ 50 500
Depreciation[4] GJ 36 480
Rent[5] GJ 150 000
Electricity[6] GJ 80 000
Sundry expenses[7] GJ 15 000
357 980 357 980
[1]
90 000 + 900 [2]
7 000 + 22 000 – 3 000 [3]
50 000 + 500
[4]
500 000 – 120 000 x 12% x 80% [5]
250 000 x 60% [6]
160 000 x 3/6
[7]
30 000 x 3/6
SELLING AND DISTRIBUTION COST C

20.6 20.6
Feb 28 Rent expense[1] GJ 50 000 Feb 28 Profit and Lossca/c GJ 205 333
Commission GJ 90 000
Bad debts GJ 2 000
205 333 205 333
[1]
250 000 x 20% [2]
160 000 x 2/6 [3]
30 000 x 2/6
ADMINISTRATION COST C
20.6 20.6
Feb 28 Salaries[1] GJ 40 400 Feb 28 Profit and Loss a/c GJ 131 187
Depreciation[2] GJ 9 120
Rent expense[3] GJ 50 000
131 187 131 187
[1]
40 000 + 400 [2]
500 000 – 120 000 x 12% x 20% [3]
250 000 x 20%
[4]
160 000 x 1/6 [5]
30 000 x 1/6
Note:
Using the sales figure the cost of sales can be calculated (50% mark up) and thus the Work-in-progress figures
in the Finished goods account, as you have the closing balance. This figure can then be substituted into the
Work-in-progress stock account and the closing balance calculated.

TASK 9.9 Fairbreeze Manufacturers: Completion of ledger
accounts with calculations
GENERAL LEDGER OF FAIRBREEZE MANUFACTURERS
20.6 20.7
Jul 1 Balance b/d 120 000 Jun 30 Raw materials issued GJ 495 000
20.7 Balance c/d 60 000
Jun 30 Creditors control CJ 300 000
Bank CPJ 135 000
555 000 555 000

Jul 1 Balance b/d 60 000
20.6 20.7
July 1 Balance b/d 60 000 June 30 Finished goods stock GJ 1 170 000
20.7 Balance c/d 66 000
June 30 Direct materials cost GJ 495 000
Factory o/head cost GJ 531 000
1 236 000 1 236 000
July 1 Balance b/d 66 000

20.6 20.7
June 1 Balance b/d 180 000 June 30 Cost of sales GJ 1 185 000
20.7 Balance c/d 165 000
July 30 Work-in-progress GJ 1 170 000
stock
1 350 000 1 350 000

20.7 20.7
June Raw materials is- GJ 495 000 June 30 Work-in-progress stock GJ 495 000
30 sued

20.7 20.7
June 30 Salaries and wages GJ 150 000 June 30 Work-in-progress GJ 150 000
stock

Dr FACTORY OVERHEAD COST C Cr
20.7 20.7
June 30 Consumable stores GJ 27 000 June 30 Work-in-progress
Salaries and wages GJ 90 000 stock GJ 531 000
Rent GJ 180 000
531 000 531 000
TASK 9.10  Mac Bicycle Manufacturers: Interpretation of a

ledger account
9.10.1 Explain the 2 balance amounts, i.e. R80 000 and R79 000.
R80 000 is the value of stock that is still in the production process at the beginning of the year and the
R79 000 is the equivalent at the end of the year.
9.10.2 Name 3 items that could be included in the R162 000.

Handles, chains, seats, wheels, etc.
9.10.3 What is the difference between direct and indirect labour cost?
Direct labour: The people who are making the bicycles – they are directly involved in the manufacturing
process.
Indirect labour: Those people who work in the factory but are not directly involved in the manufacturing
process, e.g. cleaners, maintenance, etc.
9.10.4 Name 5 items that could be included in the Factory overhead cost account.
Electricity, rent, indirect labour, consumables stores, depreciation, petrol, etc.
9.10.5 What GAAP principle governs that Factory overhead cost should be shown as one fig-
ure?
Concept of materiality – not important to know the individual details in the Work-in-progress account – they
are reflected in the ledger accounts.
Matching concept – all overhead costs are transferred to the Factory overhead cost so that the total can be
shown.
9.10.6 If the business made 450 bicycles, calculate the cost price of each bicycle.
R360 000  450 = R800.
9.10.7 If the business wishes to make a profit of 50% on cost when each bicycle is sold, what
would the selling price be?
R800 + 50% (R400) = R1 200.
9.10.8 What is the difference between Finished goods and Trading stock accounts?
Finished goods are produced by the business while Trading stock is bought for resale.
9.10.9 Why is the folio reference GJ (General Journal) used in the ledger account?
These are transfer entries.

TASK 9.11 Bongi Sweet Manufacturers: Interpretation of a
ledger account
9.11.1 Write down the letters (A) – (D) and fill in the missing details.
Answer Explanation
A R27 500 5 500 x R5
B R3 500 Balancing figure
C Raw materials cost Only cost item missing
D GJ Transfer entries
9.11.2 Explain why the stock figure from the beginning of the year to the end of the year has
decreased.
There are fewer goods on the production line at the end of the year than there was at the beginning of the
year.
9.11.3 At present it is taking 2.45 days for the sweets to emerge from the factory. Bongi
believes that this time should be 2.1 days. Give her 3 suggestions as to how she could
speed up the process without reducing the quality of the sweets.
Offer incentive bonuses to the staff.
Training for the staff.
Streamline activities – prevent duplications and waiting.
Invest in better (quicker) equipment.
Etc.
9.11.4 On an average, 8% of the sweets are ‘ruined’ in the production process and are, there-
fore, sold below cost at the factory shop. This results in a loss of profits. Give Bongi
3 suggestions as to how to improve this ‘spoilt’ rate.
Incentive bonuses.
Introduce checkpoints.
Making people personally responsible above an acceptable level.
Streamline activities.
TASK 9.12  Springbok Manufacturers: Cost calculations

9.12.1 Direct material cost per unit
Direct material cost ÷ No. of units made
240 000 ÷ 5 000 = R48
9.12.2 Direct labour cost per unit

Direct labour cost ÷ No. of units made
180 000 ÷ 5 000 = R36
9.12.3 Prime cost per unit

Direct materials cost (DMC) + Direct labour cost (DLC)
48 + 36 = R84
9.12.4 Factory overhead cost per unit

Factory overhead costs (FOC) ÷ No. of units made
330 000 ÷ 5 000 = R66
9.12.5 Cost of production of finished goods per unit

Cost of production of finished goods ÷ Number of units made OR
DMC per unit + DLC per unit + OR Prime cost + FOC per unit
48 + 36 + 66 = R150

9.12.6 Selling and distribution cost per unit
Selling & distribution cost (SDC) ÷ No. of units sold
80 000 ÷ 5 000 = R16
9.12.7 Administration cost per unit

Administration cost (AC) ÷ No. of units sold
150 000 ÷ 5 000 = R30
9.12.8 Variable cost per unit

DMC + DLC + SDC or Prime cost + SDC
48 + 36 + 16 = R100
9.12.9 Selling price per unit

Cost x /100
200
150 x 200/100= R300
9.12.10 Total fixed costs

FOC + AC = R330 000 + 150 000 = R480 000
9.12.11 Contribution per unit

SP per unit – VC per unit = 300 – 100 = R200
9.12.12 Break-even point

Total fixed costs
SP per unit – VC per unit
480 000 = 2 400 units
300 - 100
TASK 9.13  BOSS Manufacturers: Cost calculations and inter-

nal control
9.13.1 Direct material cost per unit
576 000 ÷ 18 000 = R32
9.13.2 Direct labour cost per unit

468 000 ÷ 18 000 = R26
9.13.3 Prime cost per unit

32 + 26 = R58
9.13.4 Factory overhead cost per unit

342 000 ÷18 000 = R19
9.13.5 Cost of production of finished goods per unit

58 + 19 = R77
9.13.6 Selling and distribution cost per unit

270 000 ÷ 18 000 = R15
9.13.7 Administration cost per unit

189 000 ÷ 18 000 = R10.50
9.13.8 Variable cost per unit

32 + 26 + 15 = R73

9.13.9 Selling price per unit
2 520 000 ÷ 18 000 = R140
9.13.10 Total fixed costs

342 000 + 189 000 = R 531 000
9.13.11 Contribution per unit

140 – 73 = R67
9.13.12 Break-even point

531 000 = 7 925.4 units = 7 926 units
140 – 73
9.13.13 Management is not fully satisfied with the CONTROL over the five cost accounts dur-
ing the year. Compare the costs to the previous year and give reasons (quoting com-
parative figures) for the changes to the following five cost accounts. Suggest ways
to improve efficiency, where applicable.
• Direct materials cost.
Decreased from R36.80 to R32.
Less wastage.
Economical use of raw materials.
Cheaper supplier found to supply specified quality materials.
Raw materials purchased in bulk – lower cost.
Training of employees to use materials efficiently, etc.
• Direct labour cost.

Increased from R20 to R26.
Increased by 30% - above the inflation rate of 6%.
Annual salary increase.
Increase in overtime wages to cope with the increase demand of 3 000 units.
Increase in the number of workers , etc.
• Factory overhead cost.

Decreased from R20.50 to R19.
Larger number of units made and sold, resulted in a decrease of fixed cost.
Expenses well-controlled – no abuse evident, etc.
• Selling and distribution cost.

Increased from R13 to R15 (15.4% increase).
Commission on sales increased which resulted in 3 000 more units being sold.
Cost of packaging , advertising increased , etc.
• Administration cost.
Increased from R9.70 to R10.50 (8% increase).
Increase in office expenses – electricity, salaries, petrol, etc.
Could be abuse of stationery, telephone usage, vehicle used for personal use, etc.
Total costs increased from R100 to R102.50.

TASK 9.14 CAPS Manufacturers: Interpreting ledger accounts
9.14.1 GENERAL LEDGER OF CAPS MANUFACTURERS
20.4 20.5
Apr 1 Balance b/d 30 000 Mar 31 Creditors control CAJ 4 000
20.5 Raw materials
Mar 31 Creditors control CJ 70 000 issued GJ 91 000
Bank CPJ 6 500 Balance c/d 11 500
106 500 106 500
Apr 1 Balance b/d 11 500
20.4 20.5
Apr 1 Balance b/d 32 000 Mar 31 Finished goods GJ 431 800
stock
20.5 Balance c/d 41 000
Mar 31 Raw materials cost GJ 91 000
Factory o/head cost GJ 293 800
472 800 472 800

20.4 20.5
Apr 1 Balance b/d 120 000 Mar 31 Cost of sales GJ 500 000
20.5 Balance c/d 51 800
Mar 31 Work-in-progress GJ 431 800
stock
551 800 551 800
FINAL ACCOUNTS /COST ACCOUNTS SECTION

20.5 20.5
Mar 31 Wages GJ 56 000 Mar 31 Work-in-progress
stock GJ 56 000

20.5 20.5
Mar 31 Factory maintenance GJ 8 000 Mar 31 Work-in-progress
Factory electricity GJ 30 000 stock GJ 293 800
Factory rent GJ 235 800
Depreciation on equip. GJ 15 000
Consumable stores GJ 5 000
293 800 293 800

Dr TRADING ACCOUNT F Cr
20.5 20.5
Mar 31 Cost of sales GJ 500 000 Mar 31 Sales GJ 800 000
800 000 800 000
9.14.2 What is the largest factory overhead expense?

Factory rent: R235 800
9.14.3 Suggest two ways that the expense mentioned above could be reduced or elimi-
nated.
• Approach the landlord and ask for reduction in annual rent.
• Try to obtain new premises where rent payment is cheaper.
• Take a loan and purchase own building – use present rental for repayment on loan.
9.14.4 There appears to be a big difference between the previous year’s closing balance and
the current year’s closing balance in the finished goods stock. Give one possible rea-
son for this. Fully explain your answer.
There appears to be a big difference between the previous years’ closing balance and the current years’
closing balance in the finished goods stock. Give one possible reason for this. Fully explain your answer.
• It is possible that industrial action negatively impacted on production process.
• It is possible that no planning was done last year for major national events, such as World Cup tourna-
ment or elections, which may result in many employees taking more leave than normal – thereby targets
could not be met.
9.14.5 Explain two ways in which the amount for the gross profit (to be transferred to profit
and loss) could be increased in future.
• The first way would be to increase mark–up from 60% to 70% provided cognizance is taken of compe-
tition and other market factors.
• An attempt should be made to reduce direct materials cost or factory overhead cost thereby reducing
cost of finished goods. Maintaining the selling price will result in increased profit.
TASK 9.15  SA Manufacturers (1): Calculations and problem

solving
9.15.1 Calculate the unit cost of producing one Bafana Bafana T-shirt.
R14 920 000 ÷ 100 000 = R149.20
9.15.2 Calculate the percentage gross profit that will be achieved if the order was completed
as per budget with no Work–in-progress stock either at the beginning or the end of
the project.
Gross profit = 20 000 000 – 14 920 000 = R5 080 000
5 080 000 x 100% = 34.05%
4 920 000
9.15.3 Do you think that the gross profit percentage is satisfactory? Give reasons for your
answer.
Yes – it is a large order, and the business placing the order would expect to receive a reduced rate for bulk
order such as this one.
9.15.4 Identify TWO possible problems that the present 40 permanent workers would have
with the current plans of management? Suggest a solution to the two problems that
you have identified.
Two possible problems:
• There would be unhappiness over obvious extra payment for the additional 25 staff.
• It appears that only managers are to receive a bonus and not ordinary employees on the factory floor.
Solution:
• At the very worst pay new staff at the same rate as the existing staff. In fact new staff ought to be paid
slightly lower rate, during training for about two weeks and then pay the same rate as the existing staff.

• No bonuses to workers but generous bonuses being awarded to managers is a recipe for disaster. It is
suggested that ALL workers be paid a bonus. Managers could receive a percentage higher than ordinary
staff members – e.g. 20% more. Half of the R900 000 allocated be set aside for bonus and the balance
set aside for staff refreshments and upgrading staff facilities such as furniture (chairs); microwave
ovens; fridges; etc.
TASK 9.16 SA Manufacturers (2): Business ethics

Refer to the details described in Task 9.14.
Even though the answers may appear to be obvious – it is good to see how learners react to temptation. The
human mind is clear on knowing what is right and what is wrong but the seat of motivation, the heart, often
has mixed emotions such as sense of justice, greed, love and envy.
Allow detailed answers (together with class discussion) on this scenario and similar case studies as per media
reports.
The following aspects must be mentioned in learners’ responses:
1. The legality and morality of “sewing” the tag “Made in South Africa” when the T–shirt was not made in
South Africa.
2. Why is it necessary to avoid paying import/custom duty? Is there fraud and bribery of officials involved?
3. The advance payment of R2 000 000 maybe part of a scam. What is the credibility of the businessman
concerned? How is it possible for him to give guarantees?
4. Is it possible for one government to give guarantees to a business organisation? Should not the South
African government be involved in guarantees from a foreign government?
5. If this order is sub–contracted to a foreign country, then money would be going out of the country at the
expense of local citizens, such as those in Port Elizabeth. It is better to have more local people employed
so as to strengthen the local economy.
TASK 9.17  Sharpe Shoe Manufacturers: Ethics & internal

control
9.17.1 This is both an ethical and internal control issue. He should offer his existing staff the opportunity
to earn more income if the business is doing well as it will earn their support and they might need
the extra money. It is also a control issue because the temporary workers will not be as skilled as
the permanent workers and the quality of the product is likely to be negatively affected. This could
seriously affect the reputation of the business and affect its long-term sustainability.
9.17.2 This is an ethical matter (and a legal matter). This amounts to exploitation of his workers. Sipho
cannot change the conditions of employment to make a higher profit. He must realise that happy
workers will tend to be more efficient. He cannot threaten them with losing their jobs if they do
not agree to unreasonable demands.
9.17.3 It is reasonable and ethical for Sipho to pass on the increased production cost to the retailers, who
will pass it on to the consumers. However, Sipho must realise that the raw materials make up only
part of the total cost of the product – there are also labour and overhead costs, plus he adds on a
reasonable profit. For example if the raw material cost accounts for R200 out of a total price of
R500 per pair of shoes, then the price should go up by only R20. On the R500 price this is only
4%.
9.17.4 This is unethical and dishonest. If he wants the support of his loyal retailers he should treat them
fairly. The retailers will get wise to the fact that if the price goes up because of petrol, then the
price should also go down if the petrol price decreases. If high prices are retained, this will affect
demand for the product and will affect the long-term prospects (sustainability) of the business.
9.17.5 This is an internal control matter. Obviously the wages clerk or the foreman is involved in this fraud.
As internal auditor you should do a full investigation and Sipho should take disciplinary action against
the culprits.

9.17.6 This is an internal control matter. Either the workers are making mistakes resulting in an increased
volume of off-cuts, or the quality of the raw materials is the problem. The reason must be inves-
tigated and resolved as this is effectively increasing the cost of the completed articles.
9.17.7 This is unethical and affects the quality of the shoes produced. The end-user will ultimately realise
that the quality has deteriorated and will not buy the shoes in future. Sipho should discontinue
the bonus as this is causing the foreman to make inappropriate decisions. Rather he should
establish quality checks as the batches of shoes are completed.
9.17.8 This may be an ethical issue. His business is doing well, so it is reasonable to assume that he
needs the full amount of factory space to continue the business. If he confines the workers to a
smaller area, this can affect their health and their efficiency. Sipho must not be greedy and should
focus on his core activity, i.e. making good shoes.
9.17.9 This is an ethical issue. Sipho should try to find another brand ambassador. The public will get
wise to the fact that the famous soccer player is not wearing the shoes at all times, and this will
affect the credibility of Sipho’s product.
9.17.10 This is an internal control matter. The quality of the shoes is apparently deteriorating and this
must be sorted out as soon as possible. Sipho must establish quality checks as the batches of
shoes are completed.
TASK 9.18 Knock-on effect of petrol prices

9.18.1 Explain in your own words how the petrol price increases affect the components (direct
materials, direct labour and factory overheads) of the cost of producing a finished good
in a manufacturing business.
Raw materials cost increases because of the increased cost of transporting them to the factory.
Direct labour cost increases because employers will have to ultimately pay higher wages because of inflation
(all goods will cost more).
Factory overheads (and also selling & distribution costs) will go up directly because of the increase in motor
vehicle expenses, and all overheads will increase due to the ‘knock-on’ effect.
9.18.2 Explain why this could also lead to a reduction in employment. What effect will this
have on the country?
The cost of all products will become more expensive. Consumers will ‘tighten their belts’ and reduce spending.
Fewer products will be sold and therefore fewer products will be manufactured, which mean manufacturing
businesses will cut the number of jobs they can offer.
9.18.3 Refer to the last quotation in the report above. In your opinion, will a lower fuel price
towards the end of the year solve the problem? Explain.
Teachers should allow debate on this, e.g. some learners might think that manufactures might be dishonest
and not reduce the prices when the petrol price decreases.
There might also be opinions on what manufacturers can do to minimise the impact on the consumer, e.g. find
cost-savings in other areas.

TASK 9.19 Accounting equation
No. A+ E+ D= C+ I+ L Reason
Raw materials stock increases (debit).
9.19.1 + +
Creditors control increases (credit).
Raw materials stock decreases (credit).
+ Raw materials issued is used as a temporary account and
9.19.2
- then transferred to Direct materials cost and then to
Work-in-process stock (WIPS) which is an asset (debit).
Creditors for wages increase (credit).
Direct wages account is debited and then transferred to
9.19.3 + +
Direct labour cost and then to WIPS which is an asset
(debit).
Creditors for salaries increase (credit).
Administration salaries are debited (expense) and then
9.19.4 + +
are transferred the Administration cost account and then
to the Profit & Loss account as an expense.
Bank decreases (credit).
+ The factory overhead expenses are debited and then
9.19.5
- transferred to the Factory overhead cost account and
then to WIPS which is an asset (debit).
Bank decreases (credit).
The S&D costs are debited and then transferred to the
9.19.6 - +
Selling & distribution cost account and then to the Profit
& Loss account as an expense.
+ WIPS decreases (asset, credit).
9.19.7
- Finished goods stock increases (asset, debit).
+ + Debtors control increases (debit).
Sales increases (credit).
9.19.8
- + Trading stock decreases (credit).
Cost of sales increases (debit).
CHECKLIST
Yes – Requires more

Skills Complete
proficient attention
Distinguish between the different cost items.
Calculate the cost of production.
Calculate the unit cost of production.
Calculate the break-even point.
Make appropriate entries in the general ledger.
Understand ethics.

MODULE 10
BUDGETING
The CAPS document still requires learners to complete a Cash Budget including the projected Debtors’ collec-
tion and the projected Creditors payment schedules. However, under the new curriculum learners are also
required to prepare the projected Income Statement for a sole trader business. Ethics and internal control
form an integral part of these two topics as it is primarily for control purposes that businesses complete both
the Cash Budget and the Projected Income Statement. Therefore it is essential that control and ethics is
integrated into these Tasks as well.
TASK 10.1  Alfred (1): A personal Cash Budget

10.1.1 CASH BUDGET OF ALFRED FOR THE PERIOD 01 AUGUST – 31 OCTOBER 20.9
RECEIPTS August September October Total
Salary 10 000 10 000 10 000 30 000
Housing subsidy 500 500 1 000
Rent income 800 800
Total receipts [A] 10 000 10 500 11 300 31 800
PAYMENTS
Rent expense 1 650 - - 1 650
Car instalment 1 900 1 900 1 900 5 700
Municipal charges 600 750 750 2 100
Mobile phone charges 457 466 600 1 523
Insurance 750 750 750 2 250
Motor expenses 984 1 014 1 044 3 042
Other expenses 1 501 1 546 1 592 4 639
Bond repayment 2 400 2 400 4 800
Transfer fees 6 500 6 500
Total payments [B] 7 842 15 326 9 036 32 204
Cash surplus (shortfall) [A – B] 2 158 (4 826) 2 264 (404)

Bank: opening balance 15 066 17 224 12 398 15 066
Bank: closing balance 17 224 12 398 14 662 14 662

Rent expense falls away in September as Alfred will now live in his own house.
Transfer fees are payable when property is purchased. This is a once-off payment.
The opening bank balance (R15 066) is brought forward from the previous month, i.e. the end of July.
10.1.2 Teacher:
If your school (and your learners) do not have access to computers, allow them to draw pie graphs
manually. Interact with the Mathematics department for assistance in this regard if necessary.

PIE-CHART SHOWING TOTAL EXPENSES ON 31 OCTOBER 20.9
The above chart could also be shown with percentages rather than monetary values:
5%
20% Rent expense
18% Car instalment
Municipal charges
Mobile phone charges
Insurance
7%
15% Motor expenses
5% Other expenses
Bond repayment
7% Transfer fees
14%
9%
TASK 10.2  Alfred (2): Analysing the personal Cash Budget

Alternate answers are possible.
10.2.1 Is Alfred’s decision to buy his own house a wise one? Explain.
Yes. He is the owner of a fixed asset – his net worth has increased substantially.
10.2.2 List two items that could be included under ‘Other expenses’.
Clothing, medication, cleaning services, etc.
10.2.3 Would you recommend that Alfred:

(a) Invest some money in a fixed deposit? Substantiate.
Yes. He has a fairly high bank balance. He may want to invest a portion in a fixed deposit where he can earn
interest.
(b) Invest some money on the stock exchange? Substantiate.

Yes, provided he obtains good advice from an Investment Manager. The degree of risk should be considered.
(c) Increase the repayment on the car? Substantiate.

Yes, he will save on finance charges.

(d) Increase the bond repayment? Substantiate.
Yes, he will save on interest. Paying off the bond quickly should be given top priority as this entails substantial
savings.
10.2.4 In September Alfred’s payments exceeded his receipts. What caused this?
The cost of purchasing the property, i.e. the transfer fees and other charges (R6 500).
TASK 10.3  Presenting a Cash Budget for school tour

10.3.1 SCHOOL TOUR: DURBAN TO RICHARDS BAY
CASH BUDGET
RECEIPTS
Total amount to be charged 40 300
Subsidy from school: 10 000  2 5 000
Total receipts 45 300
PAYMENTS
Transport costs 10000
Accommodation: 40 x 150 x 3 18000
Lunch and dinner: 40 x 100 x 3 12000
Entrance fees and other expenses: 40 x 120 4800
Gratuity 500
Total payments 45 300
10.3.2 Calculate the total amount that would have to be paid by each learner.
40 300  40 = R1 007.50
10.3.3 One of the learners, Joe Smart, has an aunt who lives in Richards Bay. She will provide
free lunch and dinner to Joe and two of his friends for two of the three days.
(a)
(a) Calculate the total amount saved by Joe and his two friends in respect of meals.
3 x 100 x 2 = R600.00
(b)
(b) Calculate Joe’s net cost of the tour.
1 007.50 – 200 = R807.50
10.3.4 Assume that Joe Smart and his friends opt not to take the R100 for meals and instead
request that the money be put back in the pool.
(a) Calculate the total cost of the tour.
Total payments will decrease by R600, i.e. R45 300 – 600 = R44 700
Total cost of the tour: 44 700 – 5 000 = R39 700
(b)
(a) How much less would each learner pay?
Cost per learner: 39 700  40 =R992.50
Difference per learner: R1 007.50 – R992.50 = R15

TASK 10.4 Presenting a Cash Budget for school Debs Ball
This Task can be given as an assignment – there has to be some prior discussion.
Remember that various answers (responses) are possible depending on the learner’s experience and exposure
at school and in the community.
10.4.1 The letter of motivation should include a detailed break-down of start-up expenses.
10.4.2 A detailed list of expected receipts and payments is to be shown. The loan must also be paid back.
The target should be a net taking higher than that of the previous year (R40 000).

Letter of motivation Good letter of
An excellent letter of
Either the letter or the which includes a motivation based on a
motivation that is
budget is included but budget showing most comprehensive list of
based on thorough,
not both income and expense income and expense
verifiable budget items
items items
TASK 10.5  Tulani Stores: Draw up a Cash Budget of a sole

trader
TULANI STORES
CASH BUDGET FOR THE PERIOD MARCH – MAY 20.8
RECEIPTS March April May Total
Cash sales [1] 270 000 297 000 311 850 878 850
Rent income 15 000 15 000 15 000 45 000
Total receipts [A] 285 000 312 000 326 850 923 850
PAYMENTS
Cash purchases of trading stock [2] 180000 198 000 207 900 585 900
Salaries [3] 56000 64 400 64 400 184 800
Drawings [4] 4000 4 000 4 800 12 800
Sundry other expenses [5] 21000 22 050 23 153 66 203
Bond repayment [6] 14800 16 300 16 300 47 400
New equipment - - 15 000 15 000
Total payments [B] 275 800 304 750 331 553 912 103
Cash surplus (shortfall) [A – B] 9 200 7 250 (4 703) 11 747

WORKINGS:
[1] March 270 000; April 270 000 x 110% = 297 000; May 297 000 x 105% = 311 850
[2] March sales x 150/100 = 180 000
April sales x 150/100 = 198 000
May sales x 150/100 = 207 900
[3] Salaries 15% increase, i.e. 56 000 x 115% = 64 400
[4] Drawings increase by 20%, i.e. 4000 x 120% = 4 800
[5] 20 000 x 105% = 21 000
21 000 x 105% = 22 050
22 050 x 105% = 23 153
[6] 14 800 + 1 500 = 16 300

TASK 10.6  Amod’s Corner Store: Cash Budget of a sole
trader and interpretation
10.6.1 AMOD’S CORNER STORE
CASH BUDGET FOR THE PERIOD JANUARY – MARCH 20.9
RECEIPTS January February March Total
Cash sales [1] 216 000 226 800 238 140 680 940
Commission income [3] - - - -
Old equipment sold [5] 6 450 6 450
Rent income 800 800
Total receipts [A] 216 000 227 600 244 590 688 190
PAYMENTS
Cash purchases of trading stock [2] 144 000 151 200 158 760 453 960
Salaries [4] 34 720 34 720 34 720 104 160
Deposit on vehicle 15 000 15 000
Instalment on vehicle 5 000 5 000
Drawings [6] 5 000 5 000 5 000 15 000
Sundry other expenses [7] 5 768 5 941 6 119 17 828
Total payments [B] 189 488 211 861 209 599 610 948
Cash surplus (shortfall) [A – B] 26 512 15 739 34 991 77 242

[1] 240 000 – 10% = R216 000
216 000 + 5% = R226 800
226 800 + 5% = R238 140
[2] Cost of sales = 240 000 – 80 000

= 160 000
Mark-up % = 80 000 x 100
160 000 1
= 50%
216 000 x 100 = R144 000

150
226 800 x 100 = R151 200
150
238 140 x 100 = R158 760
150
[3] Refer to Additional information No. 8: the arrangement with the dealer falls away from 1 January,
therefore, no commission income is receivable.
[4] 31 000 + 12% = R34 720
[5] Carrying value = R7 650

Loss on disposal = 1 200
Selling price = R6 450
Note: A loss of R1 200 was made; the equipment had to be sold at less than carrying value.
[6] Total drawings = R9 000

Less stock taken = 4 000
Cash drawings = R5 000
[7] 5 600 + 3% = R5 768

5 768 + 3% = 5 941
5 941 + 3% = 6 119

10.6.2 Amod has eight employees who each earn the same salary. They are unhappy with
the 12% increase and are demanding a further increase of 8% with effect from 1
January 20.9. The employees have the backing of their trade union.
(a) Is Amod in a position to pay the additional 8%?
Yes.
(b) Should the increase be granted calculate the new bank balance on 31 March 20.9.
Salary expense would increase to R37 200 (31 000 + 20%).
He would be paying R2 480 per month (37 200 – 34 720) extra.
Over the three months the extra amount will be R7 440 (2 480 x 3).
The bank balance would decrease to R82 822 (90 262 – 7 440).
(c) What effect would the payment of the additional 8% have on the net profit?
Net profit would decrease by R7 440.
(d) Amod decides to terminate the services of four of his employees with effect from
1 April 20.9. In their place he would employ his wife, his two sons and a nephew.
His wife will receive no pay; his sons and nephew will be paid R3 000 each.
• Calculate the new amount paid in respect of salaries in April 20.9.
34 720 ÷ 2 = 17 360 OR 34 720 ÷ 8 x 4 = 17 360
Salaries = 17 360 + (3 x 3 000)
= 17 360 + 9 000
= R26 360
• What is your view on Amod’s decision? Consider the legal and ethical issues
and also trade union reaction.
Legal issues – dismissal of workers may be against the law – Employment Equity Act.
Ethical issues – unfair dismissal; employing his wife for no pay; etc.
Trade unions – employees may have grounds to object to their dismissal; the trade union can take action
against Amod.
TASK 10.7  Calculation of credit sales and Debtors Collection

Schedule
10.7.1 – 10.7.3
OTTO STORES
DEBTORS COLLECTION SCHEDULE FOR THE PERIOD APRIL – SEPTEMBER 20.8
April May June July August September
Total sales 174 000 150 000 165 000 200 000 162 000 152 000
Cash sales [25%] 43 500 37 500 41 250 50 000 40 500 38 000
Credit sales [75%] 130 500 112 500 123 750 150 000 121 500 114 000
Debtors’ collections 111 000 130 500 112 500 123 750 150 000 121 500
TASK 10.8  Interpretation of Debtors Collection Schedule

10.8.1 Does Otto Stores have an effective credit policy? Explain.
Yes, 30 days is reasonable and debtors are paying within this time. No bad debts are being incurred.
10.8.2 Calculate the total sales for March 20.8.

111 000 x 100/75 = R148 000

10.8.3 The bulk of the trading is on credit. Explain ways in which Otto Traders can encourage
more cash sales.
Offer discounts; award loyalty points; etc.
10.8.4 Study the sales trend for the budget period. What are your observations?
Fairly consistent except in July when sales amount to R200 000 – it is possible that business improves during
the school vacation.
Alternative answers are possible.
TASK 10.9 Jacobus Hardware: Report on credit sales –

Internal control
Different interpretations are possible for this case study, however, the report should contain at least the
following:
• A detailed analysis of the information supplied:
- effect of the switch to credit trading on total turnover;
- calculations which show the growth in turnover;
- percentage credit sales;
- percentage cash sales;
- calculations in respect of collections from debtors;
- calculations in respect of amounts not recovered;
• A plan of action to improve the situation:
- Making using of credit bureaus/agencies for better screening of prospective debtors;
- Other control measures, such as checking utility bills to verify ownership of property, banking details,
employer details, setting credit limits, etc.
• A Debtors Schedule for the period April – June 20.9 showing an improved debt recovery rate.

Very little attempt Some attempt to Comprehensive
Detailed data and
Data and to produce the produce the and thorough data
information
information. necessary data and necessary data and and information
produced.
information. information. produced.
Some attempt to Excellent
Suggestions that
relate the Good suggestions suggestions based
Suggestions on are not based on
suggestions to the based on the data on data and
how to improve the data and
data and and information information
the situation. information
information collected. collected showing
collected.
collected. great insight.
Some attempt to
Very little attempt Good debtors
produce a debtors Excellent debtors
Debtors collection to produce a collection policy
collection schedule collection policy
policy. debtors collection based on the
based on based on insight.
policy. information given.
information given.
Some attempt to A highly
Report – overall A vague report is A good report is
produce a professional report
impression. produced. produced.
reasonable report. is produced.

TASK 10.10  Sensation Outfitters: Debtors Collection Schedule
10.10.1 SENSATION OUTFITTERS
DEBTORS’ COLLECTION SCHEDULE FOR THE PERIOD 01 APRIL TO 30 JUNE 20.9
February March April May June
Credit sales 43 000 51 000 54 000 75 000 90 000
Debtors’ collections
February [13%] 5 590
March [55%; 13%] 28 050 6 630
April [30%; 55%; 13%] 16 200 29 700 7 020
May [30%; 55%] 22 500 41 250
June [30%] 27 000
Cash receipts from debtors 49 840 58 830 75 270
10.10.2 Total outstanding debtors on 30 June 20.9

[54 000 x 2%] + [75 000 x 15%] + [90 000 x 70%] = 1 080 + 11 250 + 63 000 = R75 330
TASK 10.11  Bazuko Traders: Calculations and Debtors

Collection Schedule
10.11.1 Calculate the total outstanding debtors on:
(a) 28 February 20.8
[20% x 112 000] + [50% x 84 000] = 22 400 + 42 000 = R64 400
(b) 31 March 20.8

[20% x 84 000] + [50% x 70 000] =16 800 + 35 000 = R51 800
10.11.2 Calculate the total bad debts amount written off up to 31 March 20.8.
[2% x 98 000] + [2% x 156 000] = 1 960 + 3 120 = R5 080
10.11.3 Calculate the total discount allowed for the period 1 January 20.8 to 31 March 20.8.
[5% x 56 000] + [5% x 42 000] + [5% x 35 000] = 2 800 + 2 100 + 1 750 = R6 650
10.11.4 How does Bazuko Traders benefit from offering their customers a 5% discount for
early settlement?
Their cash flow is improved; the discount promotes customer loyalty – customers will probably buy more,
thus increasing turnover.

10.11.5
BAZUKO TRADERS
DEBTORS COLLECTION SCHEDULE FOR THE PERIOD 01 APRIL – 30 JUNE 20.8
February March April May June
Total sales 210 000 175 000 150 000 130 000 160 000
Cash sales (60%) 126 000 105 000 90 000 78 000 96 000
Credit sales (40%) 84 000 70 000 60 000 52 000 64 000
February 15 120
March 21 000 12 600
April 17 550 30 000 10 800
May 15 210 26 000
June 18 720
TASK 10.12 Analysis of a Debtors Collection Schedule

DEBTORS COLLECTION SCHEDULE: OCTOBER – DECEMBER 20.9
Credit sales October November December
September R80 000 62 400[2] - -
October 85 000 16 150 66 300[1] -
November 82 000 - 15 580[3] 63 960[4]
December 120 000 - - 22 800[5]
Debtors collections 78 550 81 880 86 760
Calculations:
16 150 x 100/95 = R17 000
17 000
/85 000 x 100% = 20% (payable in the month of the sale less 5% discount)
80% - 2% (bad debts) = 78% is payable in the month after the sale.
[1]
85 000 x 78% = R66 300
[2]
80 000 x 78% = R62 400
[3]
82 000 x 20% - 5% = R15 580
[4]
82 000 x 78% = R63 960
TASK 10.13  Discussion on credit purchases

10.13.1 What are the advantages of buying stock for cash?
The business can obtain cash discounts; the trader is not restricted to buying from one supplier – he can
buy wherever he gets the better deal; freedom from debt as he has no creditors; etc.
10.13.2 What are the advantages of buying stock on credit?

Possible improvement in cash flow as he sells stock first then pays later, etc.
10.13.3 Wholesalers frequently advertise in newspapers.

(a) Study a few such advertisements and make a comparison of prices of a few
articles.
Various answers possible depending on the advertisements chosen.

(b) Calculate the unit price of a few items of your choice (the unit price is sometimes
supplied in the advertisement). Compare this price (i.e. the wholesale price) with
the retail price of these items. Calculate the mark-up percentage on these
articles.
Various answers possible depending on the advertisements chosen.
10.13.4 Ideally debtors should pay the trader before he (the trader) pays his creditors. Do
you agree with this statement? Explain why.
Yes – working capital is eased up as payment is received for the stock sold before the trader has paid the
supplier.
TASK 10.14  Gulip CC: Creditors Payment Schedule

10.14.1 GULIP CC
CREDITORS PAYMENT SCHEDULE FOR THE PERIOD 1 JANUARY – 30 APRIL 20.8
January February March April
Total sales 60 000 70 500 64 200 61 800
Cost of sales (40 000) (47 000)[2] (42 800) (41 200)
Gross profit 20 000 23 500 21 400 20 600
Cash purchases 10 000[1] 11 750[3] 10 700 10 300
Credit purchases 30 000 35 250[4] 32 100 30 900
Payments to creditors 34 200 29 250 34 369[5] 31 298
[1]
40 000 is cost of sales which is equal to total purchases: 40 000 – 30 000 = 10 000
[2]
Mark-up % = 20 000/40 000 x 100% = 50%
70 500 x 100/150 = 47 000
[3]
Percentage cash purchases = 10 000/40 000 x 100% = 25%
47 000 x 25% = R11 750
[4]
47 000 – 11 750 = R35 250 OR 47 000 x 75% = R35 250
[5]
Discount = 30 000 – 29 250 = R750
Percentage discount = 750/30 000 x 100% = 2.5%
35 250 – 2.5% = R34 369
10.14.2 Calculate the following for December 20.7.

(a) Cost of sales
34 200 is the amount paid to creditors after the deduction of the 2,5% discount, therefore:
34 200 = 97.5%.
34 200 x 100/97,5 = R35 077 (credit purchases in December 20.7)
35 077 = 75%
35 077 x 100/75 = R46 769 = Total purchases = Cost of sales
(b) Total sales

46 769 x 150
/100 = R70 154
(c) Gross profit

70 154 – 46 769 = R23 385
10.14.3 What is the outstanding creditors balance on 30 April 20.8?

R30 900

10.14.4 Gulip CC allows their customers 60 days credit. The majority of their customers make
use of this facility. It is possible that Gulip CC will experience cash flow problems.
Give possible reasons for this and also provide remedial measures which can be
implemented.
Creditors/suppliers are being paid after 30 days while debtors are taking 60 days to pay.
This can result in cash flow problems as the trader has to wait for 60 days for payment from debtors.
Remedial measures:
Offer incentives to debtors to settle their accounts before 60 days; negotiate with suppliers for extended
credit, i.e. more than 30 days; reduce the credit terms offered to debtors, i.e. less than 60 days; etc.
TASK 10.15  Maggies: Debtors Collection Schedule and Cash

Budget
10.15.1
DEBTORS COLLECTION SCHEDULE FOR THE PERIOD 1 JANUARY 20.8 – 28 FEBRUARY 20.8
20.7 20.7 20.7 20.8 20.8
October November December January February
Total sales 17 700 21 980 40 000 10 000 12 000
Cash sales 12 300 15 500 28 000 7 000 8 400
Credit sales 5 400 6 480 12 000 3 000 3 600
October 20.7 [15%] 810
November 20.7 [30%; 15%] 1 944 972
December 20.8 [50% less 5%; 30%] 5 700 3 600
January 20.8 [50% less 5%] 1 425
Cash receipts from debtors 8 454 5 997
10.15.2
MAGGIES
CASH BUDGET FOR THE PERIOD 1 JANUARY 20.8 – 28 FEBRUARY 20.8
RECEIPTS January February
Cash sales 7 000 8 400
Loan 20 000
Total receipts [A] 15 454 34 397
PAYMENTS
Cash payments to creditors 21 000 8 500
Salary 6 600 6 600
Rent expense[1] - 2 875
General expenses[2] 3 290 2 770
Total payments [B] 30 890 20 745
Cash surplus (shortfall) [A – B] (15 436) 13 652
Bank: opening balance 13 900 (1 536)
Bank: closing balance (1 536) 12 116
[1]
During December the rent for December (R2 500); the rent for January (R2 875) was also paid in December
(prepaid). Therefore the budgeted rent for January is nil.
[2]
In December general expenses (R1 300) was still owed; this is added to the January figure as it will be
paid during this month.

TASK 10.16  Alim Operations: Debtors Collection Schedule and
Cash Budget
10.16.1 ALIM OPERATIONS
CASH BUDGET FOR THE PERIOD 1 JANUARY 20.8 – 28 FEBRUARY 20.8
RECEIPTS January February
Sale of computer equipment [108 000 + 10 000] 118 000
Capital 50 000
Total receipts [A] 534 946 394 950
PAYMENTS
Cash purchases of trading stock 104 500[2] 87 500[3]
Cash payments to creditors 135 375[1] 148 913[2]
Lease payment 4 200
Loan instalment 26 000 26 000
Cash operating expenses 41 500[4] 45 650[5]
Drawings 15 000 15 000
Total payments [B] 322 375 327 263
Cash surplus (shortfall) [A – B] 212 571 67 687

Bank: opening balance (92 000) 120 571
Bank: closing balance 120 571 188 258
[1]
Mark-up: 1 125 000
/1 875 000 x 100/1 = 60%
December purchases: 380 000 x 100/160 = 237 500
Cash purchases: 40% x 237 500 = 95 000
Credit purchases: 60% x 237 500 = 142 500
Payment to creditors: 142 500 – 5% = 135 375
[2]
January purchases: 418 000 x 100/160 = 261 250
Cash purchases: 40% x 261 250 = 104 500
Credit purchases: 60% x 261 250 = 156 750
Payment to creditors: 156 750 – 5% = 148 913
[3]
February purchases: 350 000 x 100/160 = 218 750
Cash purchases: 40% x 218 750 = 87 500
[4]
498 000 ÷ 12 = 41 500
[5]
41 500 + 10% = 45 650
DEBTORS COLLECTION SCHEDULE FOR THE PERIOD 1 JANUARY 20.8 – 28 FEBRUARY 20.8
20.7 20.7 20.8 20.8
November December January February
Total sales (credit) 320 000 380 000 418 000 350 000
November 20.7 [7%] 22 400
December 20.7 [80%; 7%] 304 000 26 600
January 20.8 [10% less 3%; 80%] 40 546 334 400
February 20.8 [10% less 3%] 33 950

10.16.2 Study the information below and answer the following questions:
(a) Was the decision to lease computer equipment a wise one? Explain fully and
state the impact of this decision on the cash position of the business.
Yes, the sale enabled Alim Operations to pay off the R92 000 overdraft. Had the equipment not been sold
the cash surplus for January would have been R94 571 (212 571 – 118 000).
The lease agreement includes maintenance and insurance – these costs would otherwise have to be borne
by Alim Operations.
There will be no depreciation on the equipment as it does not belong to the business – the only business
expense is the monthly cost of the lease (R4 200).
(b) Does this business own or lease property? Provide a reason for your answer.
Own – they have a mortgage bond towards which monthly payments of R26 000 are made.
TASK 10.17  Easup Bargain Bazaar: Debtors and Creditors

Schedules and Cash Budget
10.17.1 EASUP BARGAIN BAZAAR
DEBTORS COLLECTION SCHEDULE: 1 OCTOBER 20.8 - 31 DECEMBER 20.8
August September October November December
Total sales 90 000 80 000 75 000 110 000 150 000
Cash sales 54 000 48 000 37 500 55 000 45 000
Credit sales 36 000 32 000 37 500 55 000 105 000
August [20%] 7 200
September [35%; 20%] 11 200 6 400
October [40% less 2½%; 35%; 20%] 14 625 13 125 7 500
November [40% less 2½%; 35%] 21 450 19 250
December [40% less 2½%] 40 950
CREDITORS PAYMENTS SCHEDULE: 1 OCTOBER 20.8 - 31 DECEMBER 20.8

August September October November December
Total sales 90 000 80 000 75 000 110 000 150 000
Cost of sales [75%] 67 500 60 000 56 250 82 500 112 500
Cash purchases [40%] 27 000 24 000 22 500 33 000 45 000
Credit purchases [60%] 40 500 36 000 33 750 49 500 67 500
Payments to creditors
August [90% less 5%; 10%] 34 628 4 050
September [90% less 5%; 10%] 30 780 3 600
October [90% less 5%; 10%] 28 856 3 375
November [90% less 5%] 42 323
Cash payments to creditors 34 830 32 456 45 698

10.17.2 CASH BUDGET FOR THE PERIOD 1 OCTOBER 20.8 TO 31 DECEMBER 20.8
RECEIPTS October November December Total
Cash sales 37 500 55 000 45 000 137 500
Cash receipts from debtors 33 025 40 975 67 700 141 700
Sale of old laptop computer[4] 5 000 5 000
Total receipts [A] 70 525 95 975 117 700 284 200
PAYMENTS
Cash purchases of trading stock 22 500 33 000 45 000 100 500
Cash payments to creditors 34 830 32 456 45 698 112 984
Salaries 30 000 30 000 30 000 90 000
Advertising 7 250[1] 3 300[2] 6 000[3] 16 550
Other cash operating expenses 16 000 16 000 16 000 48 000
Deposit on laptop computer 9 000 9 000
Instalment on laptop computer 4 500 4 500
Loan instalment 2 000 2 000 2 000 6 000
Cash drawings 12 000 12 000 12 000 36 000
Total payments [B] 124 580 137 756 161 198 423 534
Cash surplus (shortfall) [A – B] (54 055) (41 781) (43 498) (139 334)
Bank: opening balance 90 000 35 945 (5 836) 90 000
Bank: closing balance 35 945 (5 836) (49 334) (49 334)
[1]
3% x 75 000 + 5 000(September) [2]
3% x 110 000
[3]
4% x 150 000 [4]
6 000 – 1 000
10.17.3 Make a careful study of the budget. Prepare a report for submission to the owner
identifying the main problem areas; indicate if the business has a future and explain
how the situation can be improved.
Different answers are possible. Some observations are stated below:
- The favourable bank balance of R90 000 becomes unfavourable after three months.
- The overdraft will most probably increase further in the future as total receipts are less than total
payments for all three months.
- The owner does not seem to have considered interest on overdraft.
Remedial measures:
- Review the mark-up percentage – presently it is 331/3% (Gross profit = 90 000 – 67 500 = R22 500).
Mark-up is 22 500/67 500 x 100% = 331/3%). Profitability of this business needs to improve.
- Get the debtors to pay sooner.
- Obtain better credit facilities from suppliers.
- Review the amounts paid in respect of salaries and cash operating expenses.
- Review the monthly cash drawings made by the owner.
- Etc.
Suggested rubric for this activity:
Identification of
problem areas that
Identifies most of Identifies problem
Identification of Fails to identify are comprehen-
the main problem areas beyond the
problem areas. problem areas. sively discussed
areas. obvious.
showing great in-
sight.
Can identify be- Excellent discus-
Very little attempt Can identify future
Future prospects yond the obvious sion of the future
to identify future prospects of the
identified. with some discus- prospects of the
prospects. business.
sion evident. business.
Can make sugges-
Cannot make sug- Make obvious sug- Excellent sugges-
Suggestions for tions beyond the
gestions for im- gestions for im- tions showing
improvement. obvious with some
provement. provement. great insight.
discussion evident.

TASK 10.18 Allcats Traders: Interpretation of a Cash Budget
10.18.1 Does this business sell on credit? Provide a reason for your answer.
No – there are no collections from debtors.
10.18.2 Calculate the mark-up percentage applied by Allcats Traders.

Total purchases (cost of sales) in December = 45 000 x 100/90 = 50 000
Gross profit = 100 000 – 50 000 = R50 000
Mark-up = 50 000/50 000 x 100/1 = 100%
10.18.3 No loan instalment was paid in January and February. Provide a possible reason for
this.
The loan agreement probably stipulates that loan repayments be made quarterly – every three months.
10.18.4 In March a vehicle was sold.

(a) What would the closing bank balance in March be had the vehicle not been sold?
-63 098 – 50 000 = -R113 098 (overdraft)
(b) A profit of R2 700 was made on the disposal. Calculate the carrying value of the
vehicle.
50 000 – 2 700 = R47 300
(c) Does the profit of R2 700 have an effect on the closing March balance? Explain.
No, the profit is included in the selling price of R50 000. The carrying value is R47 300; it was sold for
R2 700 more than its carrying value: 47 300 + 2 700 = R50 000.
10.18.5 State why depreciation is not shown in the cash budget.

Depreciation is a calculation and no cash has been exchanged, no cash is involved.
10.18.6 Calculate the following for January 20.9.

(a) Total purchases
36 000 x 100/90 = R40 000
(b) Cost of sales

36 000 x 100
/90 = R40 000
10.18.7 Explain the meaning of the following statement: ‘A fixed base stock level is
maintained’.
The stock sold in a month is replaced by the same amount, i.e. cost price of goods sold is equal to the total
purchases of stock for that month.
10.18.8 The owner of Allcats Traders maintains that her business is doing well. Explain why
you disagree with her. State your observations and suggestions.
Observations
The loan of R40 000 was used to finance expenses in January.
The disposal of the vehicle reduced the shortfall in March.
Total payments are higher than total receipts for the entire budget period.
The overdraft would probably increase further in the subsequent months.
Suggestions:
Turnover needs a boost – sales promotions; mark-downs; sales; other incentives.
Extended credit terms with suppliers should be applied for.
The business may want to consider selling on credit – this would increase turnover and subsequently cash
receipts.
There is a need for more effective control over expenses – e.g. rent – obtain cheaper or smaller premises.
Alternate answers/interpretations are possible.

TASK 10.19 Dr Dougal: Case study to draw up a Cash Budget
Different answers are possible as learners may want to include other items which the doctor may not have
considered. The budget below is a suggested one without additional items.
CASH BUDGET OF DR DOUGAL FOR THE PERIOD 1 FEBRUARY 20.9 – 30 APRIL 20.9
February March April Total
CASH RECEIPTS
Interest income 1 400 1 400 1 400 4 200
Lump sum benefit 350 000 350 000
Fee income 20 000 30 000 40 000 90 000
Total receipts [A] 21 400 381 400 41 400 444 200
CASH PAYMENTS
Household expenses 10 400 10 400 10 400 31 200
School fees 500 500 500 1 500
Lease payment for car 3 450 3 450 3 450 10 350
Medical aid 1 300 1 300 2 800 5 400
Pension fund 2 000 2 000 - 4 000
Insurance 3 300 3 300 3 300 9 900
Bond repayment 300 000 300 000
Rent expense 6 000 6 000 6 000 18 000
Equipment 30 000 30 000
Payment to creditor 2 000 2 000
Salary 2 500 2 500 2 500 7 500
Medical supplies 5 000 5 000 5 000 15 000
Sundry other expenses 4 000 4 000 4 000 12 000
Total payments [B] 38 450 368 450 39 950 446 850
Cash shortfall [A - B] (17 050) 12 950 1 450 (2 650)

Opening bank balance 17 250 200 13 150 17 250
CLOSING BANK BALANCE 200 13 150 14 600 14 600
Pie-charts may be used to show monthly expenses, e.g. the monthly expenses for February is shown below.

MONTHLY EXPENSES: FEBRUARY
R 4 000 10% Household expenses

R 10 400 27% School fees
R 5 000 13% Lease payment for car
Medical aid
Pension fund
R 2 500 7% R 500 1% Insurance
R 3 450 9% Rent expense
Salary
R 6 000 16% R 1 300 3%
Medical supplies
R 2 000 5%
Sundry other expenses
R 3 300 9%
MONTHLY EXPENSES: MARCH

R 10 400 3%
R 4 000 1%
R 500 0%
R 5 000 1%
R 29 595 7%
R 2 500 1%
R 1 300 0%
R 30 000 8%
R 2 000 1%
R 6 000 2% R 3 300 1%
Household expenses
School fees
Lease payment for car
Medical aid
Pension fund
Insurance
Bond repayment
Rent expense
Equipment
Salary
Medical supplies
R 300 000 75%

MONTHLY EXPENSES: APRIL
Household expenses
R 4 000 10% School fees
R 10 400 26% Lease payment for car
R 5 000 13%
Medical aid
Insurance
R 2 500 6% R 500 1% Rent expense
R 2 000 5% R 3 450 9% Payment to creditor
R 2 800 7% Salary
R 6 000 15% Medical supplies
R 3 300 8%
Suggested rubric for this activity:

Budget Displays little skill Adequately skilled Highly skilful in Shows outstanding
in compiling a in compiling a compiling a skills in compiling a
budget. budget that is budget, well-pre- budget - well-pre-
fairly accurate. sented and accu- sented, accurate
rate. and contains all
the relevant detail.
Report Shows little under- Shows a reasona- Highly professional Shows a high de-
standing of a ble understanding with effective sug- gree of profession-
budget. of budgeting but gestions / com- alism with relevant
needs some im- ments supplied. and effective com-
provement. ments / sugges-
tions.

PROJECTED INCOME STATEMENT:
This section was covered in Grade 12 under the NCS but under the new curriculum it is now part of the Grade
11 work.
TASK 10.20  Viola’s Fashion Store: Projected Income State-

ment
10.20.1 VIOLA’S FASHION STORE
PROJECTED INCOME STATEMENT FOR THE PERIOD 1 DECEMBER 20.8 TO 28 FEBRUARY 20.9
Dec January February
Total
20.8 20.9 20.9
Sales 400 000 [1] 320 000 [2] 324 000 1 044 000
Cost of sales (200 000) [3] (160 000) [4] (180 000) [5] (540 000)
Gross profit 200 000 160 000 144 000 504 000
Other operating income
Rent income 2 500 2 875 [11]
2 875 [11]
8 250
Gross operating income 202 500 162 875 146 875 512 250
Operating expenses [123 900) [124 620) [124 718) [373 238)
Salaries 102 000 [9]
103 680 [10]
103 680 [10]
309 360
Depreciation 3 000 3 000 3 050 [12]
9 050
Stationery & consumables 900 900 900 2 700
Advertisements 7 200 7 200 7 200 21 600
Bad debts 4 800 [6]
3 840 [7]
3 888 [8]
12 528
Insurance 1 200 1 200 1 200 3 600
Sundry expenses 4 800 4 800 4 800 14 400
Operating profit 78 600 38 255 22 157 139 012
Interest income 100 100 100 300
Net profit for the year 78 700 38 355 22 257 139 312
[1]
250 000 + 60% = 400 000
[2]
400 000 – 20% = 320 000
[3]
Mark-up = 125 000 x 100
125 000 1
= 100%
400 000 x 100 = 200 000
200
OR 400 000  2 = 200 000
[4]
320 000  2 = 160 000
[5]
324 000 x 100 = 180 000
180
[6]
400 000 x 40% x 3% = 4 800
[7]
320 000 x 40% x 3% = 3 840
[8]
324 000 x 40% x 3% = 3 888
[9]
96 000 + [4 x 1 500] = 102 000
[10]
96 000 + 8% = 103 680
[11]
2 500 + 15% = 2 875
[12]
3 000 + [4 000 x 15% x 1/12] = 3 000 + 50 = 3 050
10.20.2 Refer to the Income Statement for November 20.8. State your observations on the
gross operating income and net profit. What can be done to improve the situation?
Huge difference between the gross and the net profit: operating expenses are high and needs to be con-
trolled – mainly salaries.
Viola needs to check how effective advertising is on turnover as the amount spent on advertising is quite
high.
An increase in mark-up will result in a higher gross profit – this could also improve the situation.

10.20.3 Refer to the Projected Income Statement for the three months ending 28 February
20.9. Is there an improvement in the profitability of the business? Explain.
Yes.
The projected turnover figures results in a high gross profit.
The owner should be pleased with the profitability of the business provided the expected turnover is
achieved.
TASK 10.21  Osman: Projected Income Statement and Ethics

10.21.1 Calculate his net profit for Week 1.
Sales [70 x 40] R2 800

Cost of sales [70 x 30] (2 100)
Gross profit 700
Expenses (75)
Net profit R625
10.21.2 Calculate his cash balance at the end of Week 1.
Opening balance R20 000

Sales [70 x 40] 2 800
Stock purchases [100 x 30] (3 000)
Expenses (75)
Cash balance R19 725
10.21.3 PROJECTED INCOME STATEMENT FOR WEEKS 1, 2, 3 AND 4 OF MAY

Week 1 Week 2 Week 3 Week 4 Total
Sales[1] 2 800 6 000 7 200 8 400 24 400
Cost of sales[2] (2 100) (4 500) (5 400) (6 300) (18 300)
Gross profit 700 1 500 1 800 2 100 6 100
Operating expenses (75) (325) (625) (625) (1 650)
Cash operating expenses 75 75 75 75 300
Wages - - 300 300 600
Rental 250 250 250 750
Net profit for the year 625 1 175 1 175 1 475 4 450
[1]
Sales are calculated as follows: Number of DVD’s x 40
[2]
Cost of sales is calculated as follows: Number of DVD’s sold x 30
10.21.4 Many of Osman’s competitors sell their DVDs for between R30 and R35 each.
Reliable sources informed him that competitors sell ‘fake’ or ‘pirate’ DVDs and are
making huge profits. Osman is also tempted to deal in illegal copies of DVDs because
of the substantial profit potential. What is your view on this? Consider the legal and
ethical issues involved.
Trading in illegal copies of DVDs is illegal – criminal action can be instituted against Osman and his com-
petitors as this constitutes an infringement of the copyright laws.
As a rule dealing with illegal products is unethical and immoral as one enriches oneself at the expense of
another.
In this case it would be the artists/singers or the producers of the film who are being cheated of their
rightful earnings.

TASK 10.22  Difference between Projected Income Statement
and a Cash Budget
10.22.1 State the main difference between a Projected Income Statement and a Cash Budget.
Projected Income Statement:
This statement shows the expected net profit; it includes all expenses paid and payable and income received
and receivable.
Cash budget:
This shows expected cash receipts/payments and the cash balance; non-cash items are excluded.
10.22.2 List two expenses that would appear in the Projected Income Statement but not in
the Cash Budget.
Depreciation; Bad debts; Provision for bad debts adjustment; Stock deficits.
10.22.3 List two items that would appear in the Cash Budget but not in the Projected Income
Statement.
Receipts from debtors; Payments to creditors; Purchase/sale of asset.

TASK 10.23  Applemash Stores: Projected Income Statement and a Cash Budget
10.23.1 APPLEMASH STORES
PROJECTED INCOME STATEMENT FOR THE PERIOD 1 MARCH - 31 AUGUST 20.9
March April May June July August Total
Sales 100 000 110 000 104 500 130 625 163 281 146 953 755 359
Cost of sales (66 667) (73 333) (69 667) (87 083) (108 854) (97 969) (503 573)
Gross profit 33 333 36 667 34 833 43 542 54 427 48 984 251 786
Other operating income:
Rent income 4 000 4 000 4 000 4 000 4 400 4 400 24 800
Gross operating income 37 333 40 667 38 833 47 542 58 827 53 384 276 586
Operating expenses (37 976) (39 339) (38 605) (37 874) (38 346) (38 822) (230 962)
Salaries and wages 20 000 20 000 20 000 20 000 20 000 20 000 120 000
Advertising 2 500 2 500 2 500 2 500 2 500 2 500 15 000
Bad debts[1] 3 300 4 500 3 600 2 700 3 000 3 300 20 400
Depreciation 4 050 4 050 4 050 4 050 4 050 4 050 24 300
Other operating expenses 8 126 8 289 8 455 8 624 8 796 8 972 51 262
Operating profit (643) 1 328 228 9 668 20 481 14 562 45 624
Interest expense (1 840) (1 840) (1 840) (1 840) (1 840) (1 840) (11 040)
Net profit for the year (2 483) (512) (1 612) 7 828 18 641 12 722 34 584
[1]
March: 66 000 x 5% =3 300
April: 90 000 x 5% =4 500
May: 72 000 x 5% =3 600
June: 54 000 x 5% =2 700
July: 60 000 x 5% =3 000
August: 66 000 x 5% =3 300

10.23.2 CASH BUDGET FOR THE PERIOD 1 MARCH - 31 AUGUST 20.9
March April May June July August Total
RECEIPTS
Cash sales 40 000 44 000 41 800 52 250 65 312 58 781 302 143
Debtors collection 65 700 53 400 57 900 61 740 62 865 77 592 379 197
Rent income 4 000 4 000 4 000 4 000 4 400 4 400 24 800
Total receipts [A] 109 700 101 400 103 700 117 990 132 577 140 773 706 140
PAYMENTS
Payments to creditors[1] 60 000 66 667 73 333 69 667 87 083 108 854 465 604
Salaries and wages 20 000 20 000 20 000 20 000 20 000 20 000 120 000
Advertising 15 000 15 000 30 000
Other operating expenses 7 026[2] 8 289 8 455 8 624 8 796 8 972 50 162
Loan instalment[3] 2 500 2 500 2 500 2 500 2 500 2 500 15 000
Total payments [B] 104 526 97 456 104 288 115 791 118 379 140 326 680 766
Cash shortfall [A - B] 5 174 3 944 (588) 2 199 14 198 447 25 374
Opening bank balance 23 400 28 574 32 518 31 930 34 129 48 327 23 400
CLOSING BANK BALANCE 28 574 32 518 31 930 34 129 48 327 48 774 48 774
[1]
Mark-up = 500 000/1 000 000 x 100/1 = 50% [2]
8 126 + 1 200 – 2 300 = 7 026
March = 90 000 x 100/150 = 60 000 [3]
Interest on the loan is included in the loan instalment.
DEBTORS COLLECTION SCHEDULE FOR THE PERIOD 1 MARCH - 31 AUGUST 20.9

20.8 20.9
Nov. Dec. January February March April May June July August
Total sales 110 000 150 000 120 000 90 000 100 000 110 000 104 500 130 625 163 281 146 953
Cash sales (40%) 44 000 60 000 48 000 36 000 40 000 44 000 41 800 52 250 65 312 58 781
Credit sales (60%) 66 000 90 000 72 000 54 000 60 000 66 000 62 700 78 375 97 969 88 172
December 20.8 [5%] 4 500
January 20.9 [70%; 5%] 50 400 3 600
February 20.9 [20%; 70%; 5%] 10 800 37 800 2 700
March 20.9 [20%; 70%; 5%] 12 000 42 000 3 000
April 20.9 [20%; 70%; 5%] 13 200 46 200 3 300
May 20.9 [20%; 70%; 5%] 12 540 43 890 3 135
June 20.9 [20%; 70%] 15 675 54 863
July 20.9 [20%] 19 594

Cash receipts from debtors 65 700 53 400 57 900 61 740 62 865 77 592

TASK 10.24 Portobello Stores: Interpretation of a Projected
Income Statement
PORTOBELLO STORES
PROJECTED INCOME STATEMENT FOR 3 MONTHS ENDED 31 DECEMBER 20.9
October November December Total
Turnover 86 400[1] 120 600 150 300 357 300
Cost of sales (48 000) (67 000)[10] (83 500)[11] (198 500)
GROSS PROFIT 38 400 53 600 66 800 158 800
Other operating income
Rent income 1 250[2] 1 250 1 500 4 000
GROSS OPERATING INCOME 39 650 54 850 68 300 162 800
Operating expenses (19 908) (21 486) (22 383) (63 777)
Salaries and wages 11 500[3] 12 075[4] 12 075 35 650
Advertising 2 160 3 015 [5]
3 758 8 933
Insurance 800 800 800 2 400
Depreciation 1 750[6] 1 750 1 750 5 250
Other operating expenses 3 698[8] 3 846[7] 4 000 11 544
OPERATING PROFIT 19 742 33 364 45 917 99 023
Interest expense 200[9] 200 200 600
PROJECTED NET PROFIT 19 942 33 564 46 117 99 623
[1]
48 000 x 180/100 = 86 400
[2]
1 500 x 100/120 = 1 250
[3]
36 650 = 310% [(Oct: 100%) + (Nov: 105%) + (Dec: 105%)]
x = 100%
x = 35 650 x 100/310 = 11 500
[4]
11 500 + 5% = 12 075
[5] 2 160
/86 400 x 100% = 2.5%
2.5% x 120 600 = 3 015
[6]
84 000 x 25%  12 = 1 750
[7]
4 000 x 100/104 = 3 846
[8]
3 846 x 100/104 = 3 698
[9]
2 400  12 = 200
[10]
120 600 x 100/180 = 67 000
[11]
66 800 x 100/80 = 83 500

TASK 10.25  Internal audit and control
• Learners can take any expenses and discuss these.
• You can also increase the expenses if you so desire.
• You may also want learners to comment on expenses that appear to be well-managed.
Use the following grid to summarise your concerns and suggested solution:
10.25.1 Expense 1: Telephone Negative Variance:
January : - 2000 ( 2000 – 4000)
February: -3000 ( 2000 – 5000)
Reason: Suggested solution:

• It appears that unauthorised personal • There should be a register and each call must
telephone calls are being made, possibly be recorded i.r.o. time; person; name; du-
by employees. OR ration and reason for call. Personal calls must
• The actual budget for business tele- be charged to the account of the employees.
phone calls were grossly under-budg- • The management and internal auditor should
eted. sit together and rework a realistic budget for
telephone.
Expense 2: Trading stock deficit Negative Variance:

January: -15 500 (500 – 16 000)
February: -11 500 (500 – 12 000)
It appears that there is very high shrinkage Improve security immediately.
(shortfall of stock). It appears that there is Use of visible security(officers) in the store and at
theft of stock in a large way. all exits.
Closed circuit TV and or scanners used to
monitor goods not scanned leaving the store.
Expense 3: Bad debts Negative Variance:
January: -7 000 (2 000 – 9 000)
February: -9 000 (2 000 – 11 000)
Many debtors are just not paying their debts • Debtors must be screened for credit-worthi-
and it appears that there is no control. ness before authorising goods to be sold on
credit.
• Timeous reminders and statement of ac-
counts must be sent to debtors.
• Could make use of electronic media such as
SMSs and emails as additional reminders.
10.25.2 Expense 1: Security expenses Positive Variance:

Both January and February had positive variances
5 500 (9 000 – 2 500)
It might appear good on paper, but reality Trading stock deficit is very high in both months
is that less money is spent on security – and this can be linked to insufficient funding for
possibly to cut back on expenses. May not security. Look at suggestions above for more
be a wise decision. “beefed up” security measures.
Expense 2: Positive Variance:

Discount allowed Both months had no discount allowed – therefore
positive variance remains at 1 500 and 2 000 for
January and February.

It appears that no debtor qualifies for After screening of debtors for creditworthiness,
discount that is traditionally allowed on emphasise benefits of discount – possibly also
early settlement of debts. allow competition for early payers.
CHECKLIST
Requires
Yes –
Skills more Complete
proficient
attention
Can explain a budget and its use.
Draw up a personal budget for more than one
month.
Prepare a business Cash Budget.
Explain how credit terms affect a budget.
Draw up a Cash Budget where goods are bought and
sold on credit.
Prepare and analyse a Debtor’s Collection Schedule.
Describe a debtor collection policy.
Analyse sales trends using budget information.
Prepare a Monthly Income Forecast.
Draw up a Projected Income Statement.
Ability to use budgets for effective control over
expenses.

MODULE 11
INVENTORY SYSTEMS
TASK 11.1  Analysis of Perpetual stock system
The emphasis in our Accounting curriculum has focussed on the perpetual stock system, as in modern day
times it is generally the more likely method to be used. However, there are still businesses, particularly small
businesses and sport clubs that make use of the periodic stock system. Therefore it is important that the
learners are exposed to this stock system. The emphasis should be on the differences between the two
systems and thus the effect this has on the internal control exercised in the operation.
11.1.1 Transaction analysis

Owner’s
Assets Liabilities
Date Account debit Account credit equity*
Dr Cr Dr Cr Dr Cr
1 Trading stock Bank +2 000 -2 000
4 Trading stock Creditors control +6 000 +6 000
12 Bank Sales +500 +500
Cost of sales Trading stock -375 -375
15 Drawings Trading stock -150 -150
21 Debtors control Sales +1 200 +1 200
Cost of sales Trading stock -900 -900
23 Loss due to theft Trading stock -180 -180
25 Debtors allowances Debtors control -52 -52
Trading stock Cost of sales +39 +39
28 Trading stock Bank +80 -80
29 Donation Trading stock -210 -210
30 Creditors control Trading stock -290 -290
*Owner’s equity is made up of Capital, Drawings and Net profit (Income – expenses).
11.1.2 Calculate the mark-up percentage on cost.

Learners can use any of the sales and cost of sales transactions for this calculation.
Gross profit = 500 – 375 = R125
Mark-up % = 125 x 100 = 331/3%
375 1
11.1.3 Calculate the balance of the Trading stock account.

2 000 + 6 000 – 375 – 150 – 900 – 180 + 39 + 80 – 210 - 290 = R6 014
11.1.4 Calculate the total gross profit made.

Sales = 500 + 1 200 – 52 = R1 648
Cost of sales = 375 + 900 – 39 = R1 236
Gross profit = 1 648 – 1 236 = R412

11.1.5 GENERAL LEDGER
Dr TRADING STOCK B Cr
20.6 20.6
Jan 1 Bank CPJ 2 000 Jan 12 Cost of sales CRJ 375
4 Creditors control CJ 6 000 15 Drawings GJ 150
25 Cost of sales DAJ 39 21 Cost of sales DJ 900
28 Bank CPJ 80 23 Loss due to theft GJ 180
29 Donation GJ 210
30 Creditors control CAJ 290
31 Balance c/d 6 014
8 119 8 119
Feb 1 Balance b/d 6 014

SALES N
20.6 20.6
Jan 31 Debtors allowances GJ 52 Jan 12 Bank CRJ 500
Trading account GJ 1 648 21 Debtors control DJ 1 200
1 700 1 700
COST OF SALES N
20.6 20.6
Jan 12 Trading stock CRJ 375 Jan 25 Cost of sales DAJ 39
21 Trading stock DJ 900 31 Trading account GJ 1 236
1 275 1 275

TRADING ACCOUNT F
20.6 20.6
Jan 31 Cost of sales GJ 1 236 Jan 31 Sales GJ 1 648
Profit & Loss a/c
(gross profit) GJ 412
1 648 1 648
TASK 11.2  Calculations

Calculate the number of cases which were not sold on 31 January 20.8.
30 – 20 = 10 cases

Calculate the number of cases which were not sold on 28 February 20.8.
10 + 40 – 42 = 8 cases

11.4.1 Calculate the value of cases not sold on 31 January 20.8.
10 x 10 = R100
11.4.2 Calculate the cost of sales on 31 January 20.8.

20 x 10 = R200
11.4.3 Calculate the gross profit on 31 January 20.8.

Sales = 20 x 22 = R440
Cost price = R200
Gross profit = 440 – 200 = R240
11.4.4 Calculate the value of cases not sold on 28 February 20.8.

8 x 10 = R80
11.4.5 Calculate the cost of sales on 28 February 20.8.

Cost price = 42 x 10 = R420
11.4.6 Calculate the gross profit on 28 February 20.8.

Selling price = 42 x 22 = R924
Cost price = R420
Gross profit = 924 – 420 = R504
TASK 11.5  Calculation of Cost of sales

11.5.1
Opening stock (1 July 20.8) R23 000
Purchases 63 600
Carriage on purchases 4 600
Cost price of goods available for sale 91 200
Closing stock (30 June 20.9) [35 000]
Cost of sales 56 200
Gross profit 30 400
Sales 86 600
11.5.2 The target mark-up of this business is 60%. Calculate the mark-up achieved.
30 400 x 100 = 54%
56 200 1
11.5.3 Should the owner be satisfied with the mark-up achieved? Explain why.
No, he is achieving 6% (60% - 54%) below target.
Probable causes: too many discounts, mark-downs, stock losses due to theft, damage, etc., inaccurate
calculations.

Under the periodic stock system, theft of stock could be a reason for not achieving the mark-up percentage.
However, under the perpetual stock system, as we are crediting with the cost of sales (which would not show
goods stolen) this is not a reason. The Trading stock deficit gives you an indication of stock stolen.

TASK 11.6  Trading account
11.6.1 GENERAL LEDGER OF ATTILLA STORES
Dr TRADING ACCOUNT F1 Cr
20.8 20.8
Feb 28 Opening stock GJ 85 000 Feb 28 Closing stock GJ 62 500
Purchases[2] GJ 141 250 Sales[1] GJ 337 500
Carriage on purchases GJ 15 000
Customs duty GJ 8 000
Profit and Loss GJ 150 750
400 000 400 000
[1]
220 500 + 132 000 – 13 000 – 2 000
[2]
168 500 – 25 000 – 1 500 - 750
11.6.2 Calculate the mark-up percentage.

Cost of sales = 337 500 – 150 750 = R186 750
Gross profit = R150 750
Mark-up = 150 750 x 100 = 81%
186 750 1
11.6.3 The owner intends increasing his mark-up percentage by 10%. List three factors that
he should consider before he implements this policy.
Effect on turnover as his price will now be higher.
Prices of competitors.
Effect on net profit.
Etc.
TASK 11.7  Calculation of Cost of sales

11.7.1 Calculation of cost of sales:
Opening stock 46 000
Purchases [100 240 + 120 650 – 2 700 + 500 – 1 200 + 1 450] 218 940
Carriage on purchases [12 450 + 420 + 590] 13 460
Customs duty 1 500
Closing stock [56 700]
11.7.2 Calculate the gross profit for the year.

Sales = 250 000 + 150 000 – 2 400 = R397 600
Cost of sales = R223 200

TASK 11.8  Calculation of Cost of sales and ratios
11.8.1 Calculation of cost of sales:
Purchases [112 000 – 12 000 to suppliers] 100 000
Customs duty 4 000
Closing stock (includes customer returns) [20 000]

Carriage on sales is a ‘selling’ expense and is not considered in the calculation of cost of sales. Only expenses
incurred in purchases are considered in the calculation. Being a ‘selling’ expense, carriage on sales will be
shown in the Profit and Loss account or Income Statement as an operating expense.
11.8.2 Calculate the gross profit.

Sales = 185 100 – 5 000
= R180 100
Gross profit = 180 100 – 104 500
= R75 600
11.8.3 Calculate the mark-up achieved.

75 600 x 100 = 72%
104 500 1
11.8.4 Comment on your answer in 11.8.3 above. Should the owner be satisfied with the
mark-up percentage?
No, he is achieving 28% (100% - 72%) below the target.
11.8.5 Calculate how long (in days) Bro’s Confectioners can expect their stock to last.
[15 000 + 20 000]  2 x 365
104 500 1
17 500 x 365 = 61 days
104 500 1
11.8.6 Comment on your answer in 11.8.5 above. Make your recommendations.

61 days (about 2 months) may be a little too long for a confectioner.
However, they should not run short of stock.
Holding excess stock on hand may result in loss due to damage, theft, evaporation, products passing their
expiry date, etc.
Holding stocks for long periods may tie up working capital as stock is idle and is not being used to generate
profits.
On the other hand, some dealers believe in having extra stock to protect themselves against possible future
price increases.

TASK 11.9 Analysis of the Trading stock account
11.9.1
No. Description
[1] Balance of stock unsold at the end of the previous month.
[2] Stock purchased and paid for by cheque.
[3] Stock purchases on credit.
[4] Stock returns by debtors.
[5] Carriage on purchases paid for by cheque charged directly to trading stock.
[6] Cost price of stock sold for cash.
[7] Cost price of stock sold on credit.
[8] Stock returned to suppliers/creditors.
[9] Stock withdrawals by the owner.
[10] Donations of stock.
[11] Stock unsold at the end of the current month.
11.9.2 GENERAL LEDGER

20.4 20.4
June 1 Balance b/d 18 000 June 30 Opening stock GJ 18 000
30 Closing stock GJ 34 500

PURCHASES N
20.4 20.4
June 30 Bank CPJ 35 000 June 30 Creditors control CAJ 3 100
Creditors control CJ 68 000 Drawings GJ 4 100
Donation GJ 900
Trading account GJ 94 900
103 000 103 000
SALES N
20.4 20.4
June 30 Debtors allowances[3] DAJ 3 300 June 30 Bank[1] CRJ 67 500
Trading account GJ 122 700 Debtors control[2] DJ 58 500
126 000 126 000
[1]
45 000 x 150/100 = R67 500 [2]
39 000 x 150
/100 = R58 500
[3]
2 200 x 150/100 = R3 300

TRADING ACCOUNT F1
20.4 20.4
June 30 Opening stock GJ 18 000 June 30 Closing stock GJ 34 500
Purchases GJ 94 900 Sales GJ 122 700
Carriage GJ 3 400
Profit and loss GJ 40 900
157 200 157 200

TASK 11.10  Accounting Equation
Perpetual system
No. Account debit Account credit A= OE + L
1. Trading stock Bank +5 689 0 +5 689
2. Debtors control Sales +8 400 +8 400 0
Cost of sales Trading stock -6 000 -6 000 0
3. Trading stock Bank +1 435 0 +1 435
4. Drawings Trading stock -964 -964 0
5. SARS ( PAYE) Bank 0 0 ±8 234
6. Repairs Bank 0 -12 200 +12 200
7. Bank Bad debts recovered 0 +2 222 -2 222
Periodic system
No. Account debit Account credit A= OE + L
1. Purchases Creditors control 0 -24 334 +24 334
2. Bank Sales 0 +14 400 -14 400
3. Carriage on purchases Bank 0 -2 333 +2 333
4. Donation Purchases 0 ±720 0
5. Creditors control Purchases 0 +930 -930
6. Bank Rent income 0 +900 -900
7. Debtors allowances Debtors control -684* -684 0
*513 x 1331/3
100
TASK 11.11 Different businesses

Note: This is an open-ended question; alternate answers will apply.
Trader Main line of Annual

System Reason
business turnover
Computer Turnover is high to warrant the expenditure
Trader A equipment and ac- R1 200 000 Perpetual on scanning/barcode equipment.
cessories
Difficult to calculate cost price of products,
Trader B Bakery 240 000 Periodic
e.g. flour.
Better control over stock as this business car-
Trader C Hardware 2 000 000 Perpetual ries a large variety of stock. Screws, nails, etc.
should be pre-packed, e.g. in units of tens.
High turnover warrants the expenditure on
Trader D Supermarket 50 000 000 Perpetual
scanning and barcode equipment.
Smaller business which probably carries less
Trader E Superette 700 000 Periodic
stock.
May sometimes be unfeasible to calculate cost
Trader F Florist 80 000 Periodic
price of single items.
Smaller type of business which carries less
Trader G Restaurant 180 000 Periodic
stock.
May sometimes be difficult to calculate cost
Trader H Fruit and vegetables 1 500 000 Periodic
price of single products.
Trader I Bookstore 4 000 000 Perpetual Better control over stock is exercised.
May sometimes be difficult to calculate cost
Trader J Butcher 3 500 000 Periodic
price of individual items.

TASK 11.12 Accounting Equation
11.12.1 Describe each transaction in date order.
Date Transaction
1 Owner deposited capital into the banking account.
3 Stock purchases paid for by cheque.
9 Stock purchases on credit.
12 Stock returned to suppliers/creditors.
15 Cash sales.
19 Stock withdrawals by the owner.
21 Carriage on purchases paid for by cheque.
28 Credit sales.
30 Stock returned by debtors.
31 Value of stock on hand (unsold) at month-end.
11.12.2 Calculate the net change in owner’s equity in January.

R20 900 – 20 000 capital at the beginning = R900 increase in net worth.
11.12.3 Calculate the cost of sales.

2 000 + 8 000 – 200 – 900 + 300 – 5 600 = R3 600
11.12.4 Calculate the mark-up achieved.

Sales = 3 000 + 2 500 – 100 = R5 400
Gross profit = 5 400 – 3 600 = R1 800
Mark-up = 1 800 x 100 = 50%
3 600 1
11.12.5 Indicate why the net change in owner’s equity is not the same as the gross profit.
Refer to the transaction on the 19th.
This transaction has no effect on owner’s equity – it increases and decreases by R900, however, the trans-
action decreases purchases by R900.
An expense is being credited which implies an increase in profit.
The net effect on owner’s equity is R900 while the gross profit is R1 800.
11.12.6 Show how the closing stock figure of R5 600 was arrived at.
2 000 + 8 000 – 200 – 2 000[1] – 900 + 300 – 1 667[2] + 67[3] = R5 600
[1]
3 000 x 100/150
[2]
2 500 x 100/150
[3]
100 x 100/150

TASK 11.13 Accounting Equation
Day Transaction Amount Account debited Account credited A= OE + L
1 Capital contribution R50 000 Bank Capital +50 000 +50 000 0
4 Bought merchandise for cash 15 000 Purchases Bank -15 000 -15 000 0
9 Paid the monthly rent 1 500 Rent expense Bank -1 500 -1 500 0
15 Purchased stock on credit 18 000 Purchases Creditors control 0 -18 000 +18 000
16 Donated merchandise 400 Donation Purchases 0 ±400 0
19 Stock withdrawals by the owner 1 300 Drawings Purchases 0 ±1 300 0
24 Credit sales 15 000 Debtors control Sales +15 000 +15 000 0
26 Cash sales 9 000 Bank Sales +9 000 +9 000 0
27 Returns of stock by debtors
600 Debtors allowances Debtors control -600 -600 0
28 Paid carriage on purchases 1 200 Carriage on purchases Bank -1 200 -1 200 0
Paid sundry expenses 4 000 Sundry expenses Bank -4 000 -4 000 0
Closing stock 16 900 Trading stock Closing stock +16 900 +16 900 0
+68 600 +50 600 +18 000
Profit [50 600 – 50 000] R600
[1]
Calculation of closing stock:
15 000 + 18 000 – 400 – 1 300 – 10 000* – 6 000* + 400* + 1 200 = R16 900
*Selling price x 100/150

EXTRA TASK
This Task is not in the Learner’s Book but you can use it for extra practice or for a test.
Required:
Analyse the transactions below according to the headings supplied. The periodic system is in use, the bank
balance is favourable for all the transactions.
No. Journal Account debit Account credit A= OE + L
Transactions:
1. The owner took merchandise for his own use R430.
2. Made a donation by cheque to the local school R200.
3. Donated merchandise of R600 to the local school.
4. The owner returned some of the merchandise which he had previously taken for
his own use R80.
5. Sold stock on credit R2 000.
6. Purchased merchandise and paid for it by cheque R4 900.
7. A credit customer returned damaged goods of R110. A credit note was issued.
8. A cheque for R1 500 previously received from a debtor was returned by the bank due to insufficient funds.
A discount of R60 had been allowed to him.
9. Paid customs duty by cheque for R320 on stock imported from overseas.
10. Stock bought and paid for by cheque R2 220 was incorrectly posted to the Equipment account. The error
must be corrected.
11. Bought trading stock on credit R5 400.
12. Returned damaged merchandise to the supplier R320.
13. Stock sold for cash R800.
14. The bank charges as per the bank statement amounted to R340.
15. The stock on hand as per physical stock-take at year-end amounted to R24 000.

Solution:
No. Journal Account debit Account credit A= OE + L

1. GJ Drawings Purchases 0 ±430 0
2. CPJ Donation Bank -200 -200 0
3. GJ Donation Purchases 0 ±600 0
4. GJ Purchases Drawings 0 ±80 0
5. DJ Debtors control Sales +2 000 +2 000 0
6. CPJ Purchases Bank -4 900 -4 900 0
7. DAJ Debtors allowances Debtors control -110 -110 0
8. CPJ Debtors control Bank ±1 500 0 0
GJ Debtors control Discount allowed +60 +60 0
9. CPJ Customs duty Bank -320 -320 0
10. GJ Purchases Equipment -2 220 -2 220 0
11. CJ Purchases Creditors control 0 -5 400 +5 400
12. CAJ Creditors control Purchases +320 -320
13. CRJ Bank Sales +800 +800 0
14. B/S Bank charges Bank -340 -340 0
15. GJ Trading stock Closing stock +24 000 +24 000 0
TASK 11.14 Ledger and Trial Balance

GENERAL LEDGER OF MANACKS STORES
Dr CAPITAL B1 Cr
20.9 20.9
Jan 31 Balance c/d 520 000 Jan 1 Balance b/d 500 000
30 Bank CRJ3 20 000
520 000 520 000
DRAWINGS B2
20.9 20.9
Jan 1 Balance b/d 20 000 Jan 31 Balance c/d 21 500
21 Purchases GJ1 1 500
21 500 21 500
LAND AND BUILDINGS B3

20.9
Jan 1 Balance b/d 250 000
VEHICLES B4
20.9

Dr EQUIPMENT B5 Cr
20.9 20.9
Jan 1 Balance b/d 45 000 Jan 31 Balance c/d 46 676
12 Creditors control CJ3 1 676
46 676 46 676
DEBTORS CONTROL B6
20.9 20.9
Jan 1 Balance b/d 23 122 Jan 31 Bank CRJ3 20 485
20 Bank (r/d) CPJ3 14 345 Discount allowed CRJ3 1 028
31 Sales DJ3 13 149 Debtors allowances DAJ3 499
Sundry accounts GJ3 887 Balance c/d 29 491
51 503 51 503
BANK B7
20.9 20.9
Jan 1 Balance b/d 76 231 Jan 31 Sundry accounts CPJ3 88 490
31 Sundry accounts CRJ3 131 278 Balance c/d 119 019
207 509 207 509
CASH FLOAT B8
20.9
CREDITORS CONTROL B9
20.9 20.9
Jan 31 Bank CPJ3 23 088 Jan 1 Balance b/d 23 592
Discount received CPJ3 659 31 Sundry accounts CJ3 38 596
Sundry accounts CAJ3 1 877
Balance c/d 36 564
62 188 62 188
CREDITORS FOR SALARIES B10

20.9 20.9
Jan 25 Bank CPJ3 24 817 Jan 31 Salaries SJ3 24 817
UIF B11
20.9 20.9
Jan 25 Bank CPJ3 648 Jan 31 Salaries SJ3 324
UIF (Contribution) SJ3 324
648 648

Dr PENSION FUND B12 Cr
20.9 20.9
Jan 25 Bank CPJ3 6 498 Jan 31 Salaries SJ3 3 249
Pension contribution SJ3 3 249
6 498 6 498
SKILLS LEVY B13

20.9 20.9
Jan 25 Bank CPJ3 324 Jan 31 Salaries SJ3 324
SARS ( PAYE) B14

20.9
Jan 31 Salaries SJ3 4 100

SALES N1
20.9
Jan 1 Total b/f 177 250
31 Bank CRJ3 84 393
Debtors control DJ3 13 149
274 792
DEBTORS ALLOWANCES N2
20.9
31 Debtors control DAJ3 499
12 943
PURCHASES N3
20.9 20.9
Jan 1 Total b/f 58 923 Jan 21 Drawings GJ3 1 500
31 Bank CPJ3 11 322 31 Creditors control CAJ3 1 759
Creditors control CJ3 34 628
104 873 3 259
CARRIAGE ON PURCHASES N4
20.9
8 Bank CPJ3 1 987
6 554
SALARIES N5
20.9
31 Sundry accounts SJ3 32 490
97 470

Dr CONSUMABLES N6 Cr
20.9 20.9
Jan 1 Total b/f 2 358 Jan 31 Creditors control CAJ3 118
31 Bank CPJ3 977
5 173 118
TELEPHONE N7
20.9
27 Bank CPJ3 2 345
3 642
BANK CHARGES N8
20.9
Jan 1 Total b/f 907
28 Bank CPJ3 348
1 255
DISCOUNT ALLOWED N9
20.9 20.9
Jan 1 Total b/f 670 Jan 20 Debtors control GJ3 757
31 Debtors control CRJ3 1 028
1 698 757
DISCOUNT RECEIVED N10

20.9
31 Creditors control CPJ3 659
2 000
RENT INCOME N11

20.9
5 Bank CRJ3 2 500
25 Bank CRJ3 2 500
10 000
WATER, RATES AND LIGHTS N12

20.9
25 Bank CPJ3 1 112
2 347

Dr PENSION CONTRIBUTION N13 Cr
20.9
31 Salaries SJ3 3 249
16 245
UIF CONTRIBUTION N14

20.9
31 Salaries SJ3 324
1 624
SUNDRY EXPENSES N15

20.9
BAD DEBTS RECOVERED N16

20.9
Jan 30 Bank CRJ3 1 400
STATIONERY N17
20.9
Jan 23 Bank CPJ3 679
31 Creditors control CJ3 454
1 133
SKILLS LEVY CONTRIBUTION N18

20.9
Jan 31 Salaries SJ3 324
INTEREST INCOME N19

20.9
Jan 1 Debtors control GJ3 130
DEBTORS LEDGER
R. Rocky DL1
Date Details Fol Debit Credit Balance
20.9
Interest income GJ3 130 15 232
7 Inv 234 DJ3 5 678 20 910
8 C/N 110 DAJ3 89 20 821
15 Rec 14 CRJ3 14 345 6 476
Discount allowed CRJ3 757 5 719
20 R/d cheque CPJ3 14 345 20 064
Discount allowed GJ3 757 20 821
24 Inv 237 DJ3 2 349 23 170

S. Stony DL2
20.9
17 Inv 235 DJ3 3 124 8 535
18 C/N 112 DAJ3 346 8 189
25 Rec 15 CRJ3 5 140 3 049
G. Grassy DL3
20.9
10 Rec 13 CRJ3 1 000 1 609
19 Inv 236 DJ3 1 998 3 607
22 C/N 113 DAJ3 64 3 543
DEBTORS LIST ON 31 JANUARY 20.9

Debtor Fol Amount
R. Rocky DL1 23 170
S. Stony DL2 2 778
G. Grassy DL3 3 543
29 491
CREDITORS LEDGER
WEN CC CL1
20.9
12 Cheq 15 CPJ3 2 697 0
19 Inv 766 CJ3 4 337 4 337
D/N 032 CAJ3 189 4 148
BABCO LTD CL2

20.9
19 Cheq 16 CPJ3 10 000 5 220
Discount received CPJ3 250 4 970
25 Inv V50 CJ3 14 591 19 561
27 Cheq 26 CPJ3 5 000 14 561
28 Inv V91 CJ3 7 796 22 232
D/N 033 CAJ3 930 21 302

ALCO LTD CL3
20.9
12 Inv 120 CJ3 9 875 15 550
14 D/N 031 CAJ3 758 14 792
20 Cheq 17 CPJ3 5 391 9 401
24 Inv A21 CJ3 1 997 11 114
CREDITORS LIST ON 31 JANUARY 20.9

Creditor Fol Amount
Wen CC CL1 4 148
Babco Ltd CL2 21 302
Alco Ltd CL3 11 114
36 564
TRIAL BALANCE ON 31 JANUARY 20.9

BALANCE SHEET ACCOUNTS SECTION Fol DEBIT CREDIT
Capital B1 520 000
Drawings B2 21 500
Land and buildings B3 250 000
Vehicles B4 120 000
Equipment B5 46 676
Bank B7 119 019
Cash float B8 2 500
SARS (PAYE) B14 4 100
Sales N1 274 792
Purchases N3 101 614
Carriage on purchases N4 6 554
Salaries N5 97 470
Consumables N6 5 055
Telephone N7 3 642
Bank charges N8 1 255
Discount allowed N9 941
Rent income N11 10 000
Water, rates and lights N12 2 347
Pension contribution N13 16 245
UIF contribution N14 1 624
Bad debts recovered N16 1 400
Stationery N17 1 133
Skills levy (contribution) N18 324
Interest income N19 130
848 986 848 986

TASK 11.15  Journals, Ledger and Trial Balance
HUBERS STORES
CASH RECEIPTS JOURNAL FOR JUNE 20.9 CRJ1
Analysis Debtors control Sundry accounts
Doc.
D Details Fol of re- Bank Sales Discount
No. Receipts Amount Fol Details
ceipts allowed
CRT1 4 Sales 24 450 24 450
R19 MJ Springer 1 400 25 850 1 400 N11 Bad debts recovered
R20 5 DJ Cool DL1 14 000 14 000 14 000 400
CRT2 12 Sales 23 560 23 560
R21 DB Swerve DL3 1 440 25 000 1 440 100
CRT3 18 Sales 21 450 21 450 21 450
CRT4 24 Sales 24 440 24 440 24 440
R22 25 B. Bartoq 9 000 9 000 9 000 N7 Rent income
R23 27 DJ Cool DL1 4 000 4 000 4 000 -
B/S One-Stop Bank 400 400 N12 Interest income
CRT5 28 Sales 20 030 20 030
R24 LT Powers* DL2 7 505 27 535 7 505 395
151 675 113 930 26 945 895 10 800
B8 N1 B6 N8 B6
* 8 560 + 6 530 + 800 = 90 = 15 800
15 800 ÷ 2 = 7 900
7 900 x 5% = 395

HUBERS STORES: CASH PAYMENTS JOURNAL FOR JUNE 20.9 CPJ1
Con- Creditors control Sundry accounts
Doc. Pur- Sundry
D Details Fol Bank suma- Pay- Discount
No. chases expenses Amount Fol Details
bles ments received
008 3 Guzz Wholesalers CL1 31 317 31 317 803
010 5 A4 Paper Suppliers 430 430
011 10 DD Suppliers 5 420 4 550 690 180 N4 Carriage on purchases
012 Mr Hubers 1 330 1 330 B2 Drawings
013 14 ASBA Bank 20 000 20 000 B9 Fixed deposit
B/S 16 DB Swerve (r/d cheque) DL3 1 440 1 440 B6 Debtors control
014 18 ASBA Insurers 1 400 1 400
015 Vermaak Handelaars CL3 14 820 14 820 380
016 25 Scarpo Suppliers 3 330 2 550 780
B/S Sundry employees 31 800 31 800 B10 Creditors for salaries
017 26 DD Suppliers CL2 25 000 25 000 1 200
B/S 27 One-Stop Bank 210 210
018 28 Municipality 1 500 1 500
019 MacBikes 1 100 1 100 B4 Vehicles
020 29 TelCell 2 400 2 400
B/S 30 SARS 6 750 6 750 B11 SARS ( PAYE)
B/S Care Medical Aid 12 000 12 000 B12 Medical aid fund
B/S UIF 900 900 B13 UIF
B/S AS Pension fund 7 000 7 000 B14 Pension fund
168 147 7 100 6 200 1 210 71 137 2 383 82 500
B8 N3 N10 N6 B7 B7 N9
DEBTORS JOURNAL – JUNE 20.9 DJ1

Inv. No. D Debtor Fol Sales
14 9 DJ Cool DL1 7 640
15 12 DJ Cool DL1 2 140
16 21 LT Powers DL2 6 530
17 24 DB Swerve DL3 1 110
18 25 LT Powers DL2 800
18 220
B6 N1

HUBERS STORES
DEBTORS ALLOWANCES JOURNAL – JUNE 20.9 DAJ1
C/N Debtors al-
D Debtor Fol
No. lowances
5 10 DJ Cool DL1 640
6 25 DB Swerve DL3 40
7 25 LT Powers DL2 90
770
N2 B6
HUBERS STORES
CREDITORS JOURNAL – JUNE 20.9 CJ1
Inv Creditors Equip- Consum- Sundry accounts
D Creditor Fol Purchases
no control ment ables Amount Fol Details
V21 2 DD Suppliers CL2 10 510 7 890 2 170 450 N4 Carriage
S8 9 Vermaak Handelaars CL3 6 660 4 560 1 120 980
M2 18 DD Suppliers CL2 9 140 8 900 240 N10 Sundry expenses
99 20 Guzz Wholesalers CL1 6 040 5 550 490
Y3 24 Guzz Wholesalers CL1 3 420 3 420
35 770 30 320 3 290 1 470 690
B7 N3 B5 N6
HUBERS STORES
CREDITORS ALLOWANCES JOURNAL – JUNE 20.9 CAJ1
Inv Creditors Equip- Consum- Sundry accounts
D Creditor Fol Purchases
no control ment ables Amount Fol Details
24 10 Vermaak Handelaars CL3 100 60 40
25 20 Guzz Wholesalers CL1 170 140 30
26 DD Suppliers CL2 230 190 40 N10 Sundry expenses
500 390 70 40
B7 N3 N6

HUBERS STORES
GENERAL JOURNAL – JUNE 20.9 GJ1
01 5 DJ Cool DL1 720 720
Interest income N12 720
Interest charges on overdue
account
02 14 Drawings B2 740
Purchases N3 560
Consumables N6 180
Items taken for own use
03 16 DB Swerve DL3 100 100
Discount allowed N8 100
Discount on r/d cheque can-
celled
04 28 Sundry expenses N10 500
Purchases N3 500
Merchandise donated to char-
ity
820 - - -
B6
GENERAL LEDGER OF HUBERS STORES

Dr CAPITAL B1 Cr
20.9
DRAWINGS B2
20.9 20.9
June 1 Balance b/d 80 000 June 30 Balance c/d 82 070
10 Bank CPJ1 1 330
14 Purchases GJ1 560
Consumables GJ1 180
82 070 82 070

20.9
VEHICLES B4
20.9 20.9
28 Bank CPJ1 1 100
181 100 181 100

Dr EQUIPMENT B5 Cr
20.9 20.9
30 Creditors control CJ1 3 290
99 290 99 290
DEBTORS CONTROL B6
20.9 20.9
June 1 Balance b/d 24 500 June 30 Bank CRJ1 26 945
16 Bank (r/d) CPJ1 1 440 Discount allowed CRJ1 895
30 Sales DJ1 18 220 Debtors allowances DAJ1 770
Sundry accounts GJ1 820 Balance c/d 16 370
44 980 44 980
20.9 20.9
June 30 Bank CPJ1 71 137 June 1 Balance b/d 65 420
Discount received CPJ1 2 383 30 Sundry accounts CJ 35 770
Sundry accounts CAJ1 500
Balance c/d 27 170
101 190 101 190
BANK B8
20.9 20.9
June 1 Balance b/d 65 770 June 30 Sundry accounts CPJ1 168 147
30 Sundry accounts CRJ1 151 675 Balance c/d 49 298
217 445 217 445
FIXED DEPOSIT B9
20.9
June 14 Bank CPJ1 20 000
CREDITORS FOR SALARIES B10

20.9 20.9
June 25 Bank CPJ1 31 800 June 25 Salaries SJ1 31 800
SARS (PAYE) B11

20.9 20.9

Dr MEDICAL AID FUND B12 Cr
20.9 20.9
Medical aid contrib. SJ1 6 000
12 000 12 000
UIF B13
20.9 20.9
June 30 Bank CPJ1 900 June 25 Salaries SJ1 450
UIF Contribution SJ1 450
900 900
PENSION FUND B14

20.9 20.9

SALES N1
20.9
June 1 Total b/f 290 000
30 Bank CRJ1 113 930
Debtors control DJ1 18 220
422 150
20.9
30 Debtors control DAJ1 770
3 110
PURCHASES N3
20.9 20.9
June 1 Total b/f 89 760 June 30 Creditors control CAJ1 390
30 Bank CPJ1 7 100 Drawings GJ1 560
Creditors control CJ1 30 320 Sundry expenses GJ1 500
127 180 1 450
20.9
10 Bank CPJ1 180
19 190

Dr SALARIES N5 Cr
20.9
3 Sundry accounts SJ1 45 000
135 000
CONSUMABLES N6
20.9 20.9
30 Bank CPJ1 1 210 Drawings GJ1 180
7 900 250
RENT INCOME N7
20.9
25 Bank CRJ1 9 000
27 000
DISCOUNT ALLOWED N8
20.9 20.9
June 1 Total b/f 2 340 June 16 Debtors control GJ1 100
30 Debtors control CRJ1 895
3 235 100
DISCOUNT RECEIVED N9
20.9
30 Creditors control CPJ1 2 383
8 003
SUNDRY EXPENSES N10

20.9 20.9
28 Purchases GJ1 500
30 Bank CPJ1 6 200
21 490 40
BAD DEBTS RECOVERED N11

20.9
June 4 Bank CRJ1 1 400
INTEREST INCOME N12

20.9
June 5 Debtors control GJ1 720
27 Bank CRJ1 400
1 120

Dr MEDICAL AID CONTRIBUTION N13 Cr
20.9
June 25 Salaries SJ1 6 000
UIF CONTRIBUTION N14

20.9
June 25 Salaries SJ1 450
PENSION CONTRIBUTION N15

20.9
June 25 Salaries SJ1 7 000
DEBTORS LEDGER
DJ Cool DL1
20.9
5 Interest income GJ1 720 15 120
Rec R20 CRJ1 14 000 1 120
Discount allowed CRJ1 400 720
9 Inv 14 DJ1 7 640 8 360
10 C/N 5 DAJ1 640 7 720
12 Inv 15 DJ1 2 140 9 860
27 Rec R23 CRJ1 4 000 5 860
LT Powers DL2
20.9
21 Inv 16 DJ1 6 530 15 090
25 Inv 18 DJ1 800 15 890
C/N 7 DAJ1 90 15 800
28 Rec 24 CRJ1 7 505 8 295
DB Swerve DL3
20.9
12 Rec 21 CRJ1 1 440 100
Discount allowed CRJ1 100 0
16 R/d cheque CPJ1 1 440 1 440
Discount allowed GJ1 100 1 540
24 Inv 17 DJ1 1 110 2 650
25 C/N 5 DAJ1 40 2 610

DEBTORS LIST ON 30 JUNE 20.9
Debtor Fol Amount
DJ Cool DL1 5 860
LT Powers DL2 7 900
DB Swerve DL3 2 610
16 370
CREDITORS LEDGER
Guzz Wholesalers CL1
20.9
3 Cheq 008 CPJ1 31 317 803
Discount received CPJ1 803 0
20 Inv 99 CJ1 6 040 6 040
D/N 25 CAJ1 170 5 870
24 Inv Y3 CJ1 3 420 9 290
DD Suppliers CL2
20.9
2 Inv V21 CJ1 10 510 25 940
18 Inv M2 CJ1 9 140 35 080
20 D/N 25 CAJ1 230 34 850
26 Cheq 017 CPJ1 25 000 9 850
Discount received CPJ1 1 200 8 650
Vermaak Handelaars CL3

20.9
9 Inv S8 CJ1 6 660 24 530
10 D/N 24 CAJ1 100 24 430
18 Cheq 015 CPJ1 14 820 9 610
CREDITORS LIST ON 30 JUNE 20.9

Creditor Fol Amount
Guzz Wholesalers CL1 9 290
DD Suppliers CL2 8 650
Vermaak Handelaars CL3 9 230
27 170

TRIAL BALANCE ON 30 JUNE 20.9
BALANCE SHEET ACCOUNTS SECTION Fol DEBIT CREDIT
Capital B1 540 000
Drawings B2 82 070
Vehicles B4 181 100
Equipment B5 99 290
Bank B8 49 298
Fixed deposit B9 20 000
Sales N1 422 150
Salaries N5 135 000
Consumables N6 7 650
Discount allowed N8 3 135
Interest income N12 1 120
Medical aid contribution N13 6 000
UIF contribution N14 450
1 026 843 1 026 843
TASK 11.16 Profitability

Report on profitability.
Different views and interpretations are possible. Some suggestions are given below:
- The mark-up should be calculated and commented on. A comparison should be made between the
gross profit and mark-up.
Cost price = 144 500 – 88 320
= R56 180
Mark-up = 88 320 x 100
56 180 1
= 157%
- The loss of the rent income of R24 000 will decrease the net profit to R3 090 (27 090 – 24 000). This
future loss of income will, therefore, have a drastic effect on the profitability.
- Drawings are R45 800 while the net profit is R27 090. He is drawing out more than the net earnings
of the business resulting in a negative capital growth - capital has decreased from R90 000 to R71 290.
- Other areas that need to be looked at: expenses need to be curtailed; mark-up may have to be
increased – since the target mark-up is not known, it is not possible to comment on whether the mark-
up percentage has improved or deteriorated; etc.

TASK 11.17  Journals, Ledger and Trial Balance
11.17.1 GENERAL LEDGER OF AAREE DEALERS
Dr CAPITAL B1 Cr
20.8 20.8
Dec 31 Balance c/d 349 820 Dec 31 Balance b/d 320 000
349 820 349 820
20.9
LOAN FROM BEEBUZZ BANK B2

20.8
Dec 31 Balance b/d 80 000

20.8
VEHICLES B4
20.8

20.8 20.8
Dec 31 Balance c/d 68 000 Jan 1 Balance b/d 40 000
Dec 31 Depreciation GJ 28 000
68 000 68 000
20.9
EQUIPMENT B6
20.8

20.8 20.8
Dec 31 Balance c/d 29 500 Jan 1 Balance b/d 24 000
Dec 31 Depreciation GJ 5 500
29 500 29 500
20.9

Dr DEBTORS CONTROL B8 Cr
20.8 20.8
Dec 31 Balance b/d 25 600 Dec 31 Sundry accounts GJ 260
Balance c/d 25 340
25 600 25 600
20.9
PROVISION FOR BAD DEBTS B9

20.8 20.8
Dec 31 Prov. for b/d adjust. GJ 60 Dec 31 Balance b/d 2 560
Balance c/d 2 500
2 560 2 560
20.9
BANK B10
20.8
PETTY CASH B11

20.8
CASH FLOAT B12

20.8

20.8
SARS (PAYE) B14

20.8
PENSION FUND B15

20.8
ACCRUED EXPENSES/EXPENSES PAYABLE B16

20.8 20.8
Dec 31 Balance c/d 1 810 Dec 31 Carriage on purchase GJ 210
Interest on loan GJ 1 600
1 810 1 810
20.9

Dr TRADING STOCK B17 Cr
20.8
Dec 31 Closing stock GJ 42 000
CONSUMABLES ON HAND B18

20.8
Dec 31 Consumables GJ 90
DEFERRED INCOME/INCOME RECEIVED IN ADVANCE B19

20.8
Dec 31 Rent income GJ 6 000
PREPAID EXPENSES B20

20.8
Dec 31 Sundry operating ex- GJ 2 100
penses

OPENING STOCK N1
20.8 20.8
Dec 31 Total b/f 45 670 Dec 31 Trading account GJ 45 670
PURCHASES N2
20.8 20.8
20.8 20.8
Accrued expenses GJ 210
21 210 21 210
SALES N4
20.8 20.8
Dec 31 Debtors allowances GJ 28 000 Dec 31 Total b/f 450 110
450 110 450 110
20.8 20.8
Dec 31 Total b/f 28 000 Dec 31 Sales GJ 28 000
SALARIES AND WAGES N6

20.8 20.8
Dec 31 Total b/f 178 400 Dec 31 Profit and loss a/c GJ 178 400

Dr PENSION CONTRIBUTION N7 Cr
20.8 20.8
BANK CHARGES N8
20.8 20.8
BAD DEBTS N9
20.8 20.8
Debtors control GJ 260
1 700 1 700
RENT INCOME N10

20.8 20.8
Dec 31 Deferred income GJ 6 000 Dec 31 Total b/f 42 000
42 000 42 000
CONSUMABLE STORES N11

20.8 20.8
Dec 31 Total b/f 890 Dec 31 Consumables on hand GJ 90
Profit and loss a/c GJ 800
890 890
INTEREST ON CURRENT BANK ACCOUNT N12

20.8 20.8
Dec 31 Profit and loss a/c GJ 150 Dec 31 Total b/f 150
INTEREST ON LOAN N13

20.8 20.8
Accrued expenses GJ 1 600
8 800 8 800
SUNDRY OPERATING EXPENSES N14

20.8 20.8
Dec 31 Total b/f 45 200 Dec 31 Prepaid expenses 2 100
45 200 45 200
CLOSING STOCK N15

20.8 20.8
Dec 31 Trading account GJ 42 000 Dec 31 Trading stock GJ 42 000

Dr PROVISION FOR BAD DEBTS ADJUSTMENT N16 Cr
20.8 20.8
Dec 31 Profit and loss a/c GJ 60 Dec 31 Prov. for bad debts adj GJ 60
DEPRECIATION N17
20.8 20.8
Dec 31 Acc dep on vehicles GJ 28 000 Dec 31 Profit and loss a/c GJ 33 500
Acc dep on equipment GJ 5 500
33 500 33 500

TRADING ACCOUNT F1
20.8 20.8
Dec 31 Opening stock GJ 45 670 Dec 31 Sales GJ 422 110
Purchases GJ 120 000 Closing stock GJ 42 000
Carriage on purchases GJ 21 210
464 110 464 110

20.8 20.8
Dec 31 Salaries and wages GJ 178 400 Dec 31 Trading account GJ 277 230
Pension contribution GJ 13 720 Rent income GJ 36 000
Bank charges GJ 3 600 Interest on bank a/c GJ 150
Bad debts GJ 1 700 Prov. for b/d adjust. GJ 60
Consumable stores GJ 800
Interest on loan GJ 8 800
Capital (net profit) GJ 29 820
313 440 313 440
11.17.2 GENERAL JOURNAL – DECEMBER 20.8 GJ

01 31 Carriage on purchases N3 210
Account not yet paid
02 Trading stock B17 42 000
Closing stock N15 42 000
Stock on hand at year-end
Consumables on hand B18 90
03 Consumables N11 90
Stock on hand at year-end
04 Accrued expenses B16 1 600
Interest on loan due
05 Rent income N10 6 000
Deferred income B19 6 000
Rent received in advance

GENERAL JOURNAL – DECEMBER 20.8 (Contd)
06 Bad debts N9 260
Mr Slowpay 260 260
Bad debts written off
07 Provision for bad debts B9 60
Provision for bad debts adjust- N16 60
ment
Decrease in provision
08 Prepaid expenses B20 2 100
Sundry operating expenses N14 2 100
09 Depreciation N17 33 500
Acc dep on vehicles B5 28 000
Acc dep on equipment B7 5 500
(5 250 + 250)
Depreciation on vehicles and
equipment
- 260 - -
B8
11.17.4 GENERAL JOURNAL – DECEMBER 20.8: CLOSING ENTRIES GJ

31 Trading account F1 186 880
Opening stock N1 45 670
Closing entries
Sales N4 28 000
Closing transfer
Sales N4 422 110
Trading account 464 110
Closing entries
Profit and loss a/c F2 277 230
Gross profit transferred
Bad debts N9 1 700
Consumable stores N11 800
Closing entries
Interest on bank account N12 150
Prov. for b/debts adjustment N16 60
Closing entries

GENERAL JOURNAL – DECEMBER 20.8: CLOSING ENTRIES (Contd)
Capital B1 29 820
Net profit transferred
11.17.5 AAREE DEALERS

POST-ADJUSTMENT/POST-CLOSING TRIAL BALANCE ON 31 DECEMBER 20.8
Post-adjustment Post-closing
BALANCE SHEET ACCOUNTS SECTION Fol Debit Credit Debit Credit
Capital B1 320 000 349 820
Loan from BeeBuzz Bank B2 80 000 80 000
Land and buildings B3 310 000 310 000
Vehicles B4 180 000 180 000
Accumulated depreciation on vehicles B5 68 000 68 000
Equipment B6 40 000 40 000
Accumulated depreciation on equipment B7 29 500 29 500
Debtors control B8 25 340 25 340
Provision for bad debts B9 2 500 2 500
Bank B10 14 770 14 770
Petty cash B11 2 000 2 000
Cash float B12 1 500 1 500
Creditors control B13 76 230 76 230
SARS (PAYE) B14 2 800 2 800
Pension fund B15 1 140 1 140
Accrued expenses/Expenses payable B16 1 810 1 810
Trading stock B17 42 000 42 000
Consumables on hand B18 90 90
Income received in advance B19 6 000 6 000
Prepaid expenses B20 2 100 2 100
Sales N4 450 110
Bad debts N9 1 700
Consumable stores N11 800
Interest on current bank account N12 150
Sundry operating expenses N14 43 100
1 116 300 1 116 300 617 800 617 800

11.17.6 Identify the reversal entries required on the first day of the next financial period.
Write down the adjustment numbers only.
Numbers 1, 2, 3, 4, 5, 8
11.17.7 Explain to Mary:

• Why has Mr Aaree been putting his personal expenses through the business?
He is increasing the expenses of the businesses and thus reducing the tax that has to be paid.
• Whether this is ethical or not?

No. This is unethical.
• What could the consequences be to both Mr Aaree and Mary?

Both Mr Aaree and Mary face heavy fines and possible jail sentences for defrauding SARS.
TASK 11.18  Internal control

Allow the learners to interact with each other and ensure that they justify their advice to Mrs Jones.
TASK 11.19  Differences in the 2 stock systems

The learners must draw on their Accounting knowledge, and apply it, in order to complete this Task success-
fully. Refer to the table at the beginning of the Module for the differences between the two stock systems.
TASK 11.20 Ledger and Internal control

11.20.1
5-Star Freshever Bully’s
Superette Florists Butchery
Opening stock (1 March 20.7) 34 566 1 455 12 345
Purchases 98 543 25 602 60 000
Carriage on purchases 9 995 990 12 235
Cost of goods available for sale 143 104 28 047 84 580
Closing stock (28 February 20.8) [46 345] [999] [24 500]
Cost of sales 96 759 27 048 60 080
Gross profit 46 454 14 444 41 000
Sales 143 213 41 492 101 080
11.20.2/11.20.4 GENERAL LEDGER OF 5-STAR SUPERETTE

Dr TRADING STOCK B5 Cr
20.8 20.8
Feb 28 Closing stock GJ1 46 345 Mar 1 Opening stock GJ1 46 345

OPENING STOCK N1
20.7 20.8
Mar 1 Trading stock GJ 34 566 Feb 28 Trading account GJ1 34 566
20.8
Mar 1 Trading stock GJ1 46 345

Dr PURCHASES N2 Cr
20.8 20.8
Feb 28 Total b/f 98 543 Feb 28 Trading account GJ1 98 543
20.8 20.8
Feb 28 Total b/f 9 995 Feb 28 Trading account GJ1 9 995
CLOSING STOCK N4
20.8 20.8
Feb 28 Trading account GJ1 46 345 Feb 28 Trading stock GJ1 46 345
SALES N5
20.8 20.8
Feb 28 Trading account GJ1 143 213 Feb 28 Total b/f 143 213

TRADING ACCOUNT F1
20.8 20.8
Feb 28 Opening stock GJ1 34 566 Feb 28 Closing stock GJ1 46 345
Purchases GJ1 98 543 Sales GJ1 143 213
Carriage on purchases GJ1 9 995
Profit and Loss GJ1 46 454
189 558 189 558
11.20.3 GENERAL JOURNAL OF 5-STAR SUPERETTE: FEBRUARY 20.8 GJ1

28 Trading stock B5 46 345
Stock on hand at year-end as
per count
CLOSING ENTRIES
Purchases N2 98 543
Closing entries
Sales N5 143 213
Closing entries
Profit and Loss a/c F2 46 454
Gross profit transferred to
profit and loss account

GENERAL JOURNAL OF 5-STAR SUPERETTE: FEBRUARY 20.8 (Contd)
REVERSAL ENTRY:
01 MARCH 20.8
1 Opening stock N1 46 345
Reversal entry
11.20.5 Case studies

(a) The owner of 5-Star Superette (Ms Beazle) maintains that she has an effective
stock control policy. Do you agree with her? Make use of a suitable calculation
to substantiate your answer. Her target mark-up is 50%.
Mark-up achieved = 46 454 x 100 = 48%
96 759 1
She should be satisfied as this is only 2% below the target.
On the other hand, she may not be satisfied.
It could be that the previous year’s achieved mark-up was better.
A conclusion cannot be drawn as the previous year’s figures are not available.
Answers may, therefore, differ on account of subjectivity – what may be good for one individual may be
totally unacceptable to the other.
(b) Ms Beazle intends installing scanning and bar coding equipment in her superette.
Will it still be necessary for her to continue using the periodic system? Explain
how the change will affect her business in the future. Also mention the
advantages/disadvantages of the two types of stock systems.
Answers may differ on account of subjectivity.
The one approach is to advise her to change to the perpetual system as stock control will be improved via
barcodes and scanning.
Stock figures are updated at the point of sale – she is able to do stock analyses more effectively, e.g. she
would be in a better position to identify slow moving stock; when to place her orders; theft /leakages are
easily detected; etc.
The investment in the additional equipment may pay dividends in the future as almost all products are
barcoded by manufacturers thus facilitating internal stock control.
The other approach is to advise her to remain with the periodic system.
This system seems to be working well as her mark-up achieved is almost equal to the target mark-up.
The additional investment in sophisticated equipment may, therefore, not be warranted.
Refer to the Learner’s Book for information on the main features/advantages/disadvantages of the two
systems.
(c) Freshever Florists feel that they are paying too much for carriage on purchases.
They are deciding whether to use their own vehicle to pick up stocks from their
various suppliers. In this way, they would no longer have to pay for carriage.
What is your view on this? Write a report on this.
Some suggestions are provided:
The elimination of carriage would result in a better gross profit but net profit may be negatively affected as
vehicle expenses (fuel, depreciation, repairs) may possibly increase.
The driver (if he has one) of the vehicle may demand a higher wage as he may have to work longer hours
and subsequently do more driving.
Suppliers of flowers may be located in remote areas – this is a factor which needs to be considered, arrival
of fresh stocks may be delayed.
Etc.

(d) The target mark-up of Bully’s Butchery is 80%. The owner, Mr Bully, is very
concerned about the mark-up being achieved. What internal control measures
can be implemented to improve the situation?
Mark-up achieved = 41 000 x 100 = 68%
60 080 1
His butchery is operating at 12% (80% - 68%) below the target mark-up.
The previous year’s achieved mark-up is not supplied so it cannot be established if there has been an
improvement or not. However, a 12% deficit is an area of concern which requires attention.
Some internal control measures are suggested:
A more effective stock control need to be put into place to eliminate or reduce theft by staff and shoppers,
e.g. cameras may be installed.
Discounts and mark-downs need to be reduced.
Check on wastage and damage to products – better packaging of products may be introduced.
Etc.
CHECKLIST
Requires more
Skills Yes – proficient Completed
attention
Calculate cost of sales and mark-up using
the perpetual stock system.
Make the necessary entries in the journals
and ledger accounts using the perpetual
stock system.
Show the effect on the Accounting
equation according to both systems.
Explain perpetual inventory systems.
Explain periodic inventory systems.
Discuss the difference between the two
systems.
Make the necessary entries in the journals
and ledger accounts using the periodic
stock system.
Calculate the cost of sales according to the
periodic inventory system.
Calculate opening and closing stock
according to the periodic inventory system.
Draw up the Trading account according to
the periodic inventory system.

MODULE 12
VALUE ADDED TAX (VAT)
The principles of VAT were introduced and discussed in Grade 10. Before proceeding with this Module you
need to assess the learners’ prior knowledge to ensure that they have the basic skills and knowledge to
continue with Grade 11 work.
Therefore, the first Task is a baseline assessment and this will give you the required information as to whether
you can continue with the Grade 11 work or go back to the Grade 10 book to cover missing skills and
knowledge.
Take note that learners are not required to complete VAT entries in the journals, and the ledger accounts are
only covered in Grade 12. Grade 10 was an introduction and this year, the emphasis is on the calculations
using the invoice basis.
TASK 12.1  SARS and VAT: Baseline assessment

We suggest that you divide learners into pairs and allow them to role-play an interview in which they each
give answers to the questions listed below. Allow them to assess each other to determine the prior knowledge.
Peer Assessment Form

Each learner is to assess their partner based on the fact whether they understand the explanations given to
them.
YES – shows NO – lacks
CRITERIA
understanding knowledge
Reasons why the South African government levies taxes.
Name and briefly discuss at least 5 different forms of tax levied in
South Africa.
Understands that VAT is levied on goods and services in this country.
Understands that VAT is recorded against all sales.
Understands that VAT is recorded against most purchases.
Understands that the amount paid to SARS or refunded is a differ-
ence between VAT on sales and purchases.
Can distinguish between standard, zero-rated and exempted items.
Understands which vendors have to register as a VAT trader.
Understands that some vendors might voluntary register for VAT.
Note to Teacher:
Learners should use their own assessment form to fill in the missing details in their knowledge and / or skills–
they can be referred back to the Grade 10 book or you might have to re-teach all or some aspects, depending
on the class’s responses to the assessment Task.

1.PRODUCER
1. PRODUCER
How does VAT affect the
AAfarmer
farmerproduces
producesR100
R10 consumer?
Maize and charges
Maize charges
*…R14……. . .
R1.40 VATVAT 2. PROCESSOR
The maize is used by the
Miller who adds R30 value by
Receiver of Revenue making flour. He sells to the
Baker for R40 and charges
R5.60 VAT. He takes off the
VAT he paid the farmer:
R5.60 – R1.20 = R4.20
5.
The customer
buys the
cakes
cakes
forfor
*R798…….
R79.80 3. MANUFACTURER
(R700
(R70++ *…R98….
R9.80 4. RETAILER
4. RETAILER The Baker uses the flour to
VAT) TheRetailer
The Retaileradds
addsR100
R10 value
value Make cakes and in the process
sells all the cakes
and sells cakes toto his adds R20 value. He sells it to the
customers for
customers for aa total
totalof
ofR700.
R70. local supermarket for R60 and
HeHecharges
charges *R98……..
R9.80 VAT. VAT. charges R84 VAT. He takes off the
He
He takes
takesoffoff the
the VAT
Vat hehe VAT he paid the Miller:
paid the baker: R8.40 – R5.60 = R2.80
*R98….
R9.80––*R84..
R8.40==*R14…….
R1.40
THE GENERAL PRINCIPLES OF VALUE-ADDED TAX
Suggestion: Photostat the following examples of financial statements, enlarging them to A3 size
and pin them up on your classroom wall.
VAT CALCULATIONS:
Learners have always experienced difficulties with calculations, particularly those that involve working back-
wards. It is vital that they can calculate the amount of VAT whether the prices are quoted as exclusive or
inclusive. Extracting VAT from an inclusive amount is the same calculation that is used when calculating cost
of sales when given the sales figure.
It is important that you spend some time on these calculations and ensure that the learners are happy with
the procedure so that in Grade 12 they can focus on the ledger accounts and the VAT return.
Suggestion: You may wish to get one or all of the groups to design their own chart – using any
product (maize – flour – bread) or (cotton – mill – dye – T-shirt) to show how the VAT is determined
at each stage. You could link with the Life Orientation department to do a shared project on this
subject.
TASK 12.2  Add VAT to cost price and mark-up

Cost Exclusive: Inclusive:
No. Mark-up VAT (14%)
Price Selling Price Selling Price
12.2.1 R25 R20 R45 R6.30 R51.30
12.2.2 R110 R25 R135 R18.90 R153.90
12.2.3 R280 10% R308 R43.12 R351.12
12.2.4 R540 R108 R648 R90.72 R738.72
12.2.5 R700 25% R875 R122.50 R997.50

TASK 12.3  Calculate VAT from VAT inclusive amount
Exclusive: Inclusive:
No. VAT (14%)
Selling Price Selling Price
12.3.1 R491.23 R68.77 R560
12.3.2 R719.30 R100.70 R820
12.3.3 R52.63 R7.37 R60
12.3.4 R793.86 R111.14 R905
12.3.5 R416.67 R58.33 R475
TASK 12.4  Calculate VAT from VAT inclusive and exclusive

amount
Exclusive VAT Inclusive
No. Cost Price Mark-up
Selling Price (14%) Selling Price
12.4.1 R432 15% R496.80 R69.55 R566.35
12.4.2 R393.85 30% R512 R71.68 R583.68
12.4.3 R668.86 R401.32 R1 070.18 R149.82 R1 220
(60%)
12.4.4 R728.40 R66.60 R795 R111.30 R906.30
12.4.5 R1 103.56 R264.86 R1 368.42 R191.58 R1 560
TASK 12.5 VAT calculations and interpretation

12.5.1 List three other forms of taxes levied in South Africa.
Personal income tax (PAYE).
Company tax.
Customs and excise duty.
Estate duty.
Capital gains tax.
Any other taxes applicable in South Africa.
12.5.2 What is the current rate of VAT in South Africa?

14%
12.5.3 Which Ministry of the Government has the authority to adjust the rate of VAT?
Ministry of Finance – it is normally adjusted by the Minister of Finance during his budget speech in parliament
during February of each year.
12.5.4 Briefly explain the following concepts in respect of VAT.

• Standard rated items
These goods and services attract VAT at a rate of 14%.
It is paid by all who require these goods and services.
• Zero-rated items
These goods and services attract VAT at a rate of 0%.
These goods and services are zero-rated so that they are affordable to the poorer members of the population.
(The Minister of Finance may change zero-rated products to standard rated or vice versa).
• VAT exempted items

These are goods and services on which no VAT is charged.

12.5.5 Indicate in the table below whether the following are standard rated, zero-rated or VAT
exempted. Place an X in the relevant columns.
Standard VAT
GOODS/SERVICES Zero-rated
rated exempted
Rent paid on an outbuilding for domestic use X
Hotel accommodation X
White bread X
Rice X
Mealie rice X
School fees X
Water and electricity X
Interest on loan X
Baked beans X
Fruit X
12.5.6 Explain the following VAT related concepts:
• Input VAT
This refers to VAT that is paid by the business on goods and services purchased.
The VAT is paid to the business’s suppliers.
• Output VAT
This refers to VAT that is collected from the customers of the business for goods and/or services rendered.
12.5.7 Complete the following table. Assume that all goods and services are subject to VAT at
14%.
VALUE IN-
Value exclu-
TRANSACTION VAT amount CLUSIVE OF
sive of VAT
VAT
Credit sales 16 200 2 268 18 468
Cash sales 32 400 4 536 36 936
Cash purchases of trading stock 22 700 3 178 25 878
Credit purchases of trading stock 18 100 2 534 20 634
Goods taken by the owner for personal use 2 000 280 2 280
Goods returned to suppliers 1 800 252 2 052
Goods returned by customers 600 84 684
Account of a debtor written off 400 56 456
Discount allowed on credit sales 300 42 342
12.5.8 12.5.8.1 Is Mona’s Supermarket a VAT registered vendor? Give a reason for your an-
swer.
Yes. The supermarket has a VAT registration number.
12.5.8.2 Calculate the amounts that should be indicated at:

• A
R108.32
• B
(8.55 + 9.69 + 31.92 + 13.68) = 63.84 x 14
/114 = R7.84
12.5.8.3 Calculate the selling price of the washing powder exclusive of VAT.
R31.92 x 100
/114 = R28.00
12.5.8.4 Calculate the change that the cashier would have handed to you.
R120.00 – R108.32 = R11.68

Note to Teacher:
Ensure that learners understand the method used when paying VAT to SARS. Remember that the Invoice
basis is the norm and if no instructions are given to the contrary, this is the method to be used.
BAD DEBTS AND ETHICS

Ensure that the learners appreciate that this is not a way of committing fraud against SARS but that they will
have to give proof that the debt is genuinely a bad debt.
NOTE:
It is customary for businesses to process entries into the VAT Input and VAT Output accounts and then to
transfer the respective amounts to the VAT control account at the end of the two month period. However, it
is also possible to process all entries directly into the VAT control account
TASK 12.6  Durban Traders (1): Bad debts and ethics

12.6.1 The amount that had to be written off the account of B. Botha.
R13 680 less R9 120 = R4 560
12.6.2 The adjusted amount of VAT that Durban Traders is liable to pay SARS in respect of this
sales invoice no DB 143.
Amount of original sale was R13 680 (inclusive of VAT)
VAT payable on sale = R13 680 x 14/114 = R1 680
Amount to be written off equals R4560 (inclusive of VAT)
VAT on amount to be written off = R4 560 x 14/114 = R560
VAT liability to SARS on inv. no. DB 143 = R1 680 less R560 = R1 120
TASK 12.7  Durban Traders (2): Transaction analysis on Bad

debts and VAT
GENERAL LEDGER ACCOUNT EFFECT ON ACCOUNTING EQUATION
No. Owners
Debited Credited Assets Liabilities
Equity
12.7.1 Debtors control Sales +12 000 +12 000 0
Debtors control Output VAT +1 680 0 +1 680
12.7.2 Bank Debtors control ±9 120 0 0
12.7.3 Bad debts Debtors control -4 000 -4 000 0
Output VAT Debtors control -560 0 -560
TASK 12.8  Eshowe Wholesalers: Difference between trade

discount and discount for prompt cash payment
12.8.1 Calculate the total amount that Tulani Retailers will pay Eshowe Wholesalers if they
pay the full amount on 25 September 20.1.
The following amounts will be reflected on the invoice issued on 18 July 20.1:
• Value of goods R40 000
• LESS: Trade discount R12 000
• Net amount payable R28 000
Tulani Retailers is allowed a trade discount of 30% because of being a trader who buys in bulk in order to
resell at profit.
Since Tulani Retailers settled the account after 30 days no further discount is applicable.

12.8.2 Calculate the total amount that Tulani Retailers will pay Eshowe Wholesalers if they
pay the full amount on 15 August 20.1.
resell at profit.
Since Tulani Retailers settled the account within 30 days a further discount of 10% is applicable.
Therefore Tulani Retailers pays an amount of R25 200 in full settlement of debt of R28 000.
R25 200 = R28 000 less R2 800 (10% of R28 000).
12.8.3 Calculate the third and final amount that Tulani Retailers will pay Eshowe Wholesalers
on 18 December 20.1 if they had made two payments on the following dates:
• A first payment of R15 000 on 29 July 20.1.
• A second payment of R8 000 on 31 August 20.1.
resell at profit.
However, Tulani Retailers failed to settle their total debt within the 90 day period.
An amount of R23 000 (R15 000 + R8 000) was settled at 90 days, i.e.18 October 20.1
An amount of R5 000 (R28 000 less R23 000) was owing for two additional months.
Interest payable for 2 months amounts to R200 (R5 000 x 24% for 2/12).
Total payable on 18 December is R5 200 (R5 000 + R200).
TASK 12.9  Smit Traders: VAT and Sales returns

GENERAL LEDGER OF SMIT TRADERS
Dr DEBTORS CONTROL B Cr
20.1 20.1
Jan 1 Balance b/d 25 000 Jan 8 Debtors allowances 1 500
VAT Output 210
DEBTORS ALLOWANCES N
20.1
8 Debtors control 1 500
VAT OUTPUT B
20.1 20.1
Jan 8 Debtors control 210 Jan 1 Balance b/d 4 000
Workings:
VAT = R1 710 x 14/114 = R210
Sales returns = R1 710 - R210 = R1 500

TASK 12.10  Ixopo Traders: VAT and purchases returns
GENERAL LEDGER OF IXOPO TRADERS
Dr CREDITORS CONTROL B Cr
20.1 20.1
Aug 2 Trading stock 2 200 Aug 1 Balance b/d 38 000
VAT Input 308
TRADING STOCK N
20.1 20.1
Aug 1 Balance b/d 18 800 Aug 2 Creditors control 2 200
VAT INPUT B
20.1 20.1
Aug 1 Balance b/d 9 000 Aug 2 Creditors control 308
Workings:
VAT = R2 508 x 14/114 = R308
Purchases returns = R2 508 - R308 = R2 200
TASK 12.11  Transaction Analysis on returns and VAT

GENERAL LEDGER ACCOUNT EFFECT ON ACCOUNTING EQUATION
No. Owners
Debited Credited Assets Liabilities
Equity
12.11.1 Debtors control Sales +3 000 +3 000 0
Debtors control VAT Output +420 0 +420
12.11.2 Debtors allowances Debtors control -900 - 900 0
VAT Output Debtors control -126 0 -126
Trading stock Cost of sales +600 +600 0
12.11.3 Trading stock Creditors control +16 000 0 +16 000
VAT Input Creditors control +2 240 0 +2 240
12.11.4 Creditors control Trading stock -2 500 0 -2 500
Creditors control VAT Input -350 0 -350

TASK 12.12  Soweto Traders: Calculation of balance in VAT
control account
NOTE TO TEACHER:
Ensure that learners understand the effect of increasing liability or decreasing liability to SARS i.r.o. VAT.
For learners who are still finding it a challenge - explain the double entry and the journal. This Task makes
use of the VAT Control account instead of separate VAT Input and VAT Output accounts.
GENERAL LEDGER OF SOWETO TRADERS

Dr VAT CONTROL ACCOUNT B Cr
20.1 20.1
Mar 31 Creditors control 4 060 Mar 1 Balance b/d 3 500
(credit purchase of
goods)
Bank (cash purchase 2 940 31 Debtors control 3 920
of goods) (credit sales)
Bank (payment to 7 200 Bank (cash sales of 7 280
SARS for VAT) goods)
Debtors control (re- 504 Creditors control (re-
672
turns of goods) turns of goods )
Debtors control (bad 406 Creditors control (dis-
490
debts) count received)
Debtors control (dis- 616
count allowed)
Balance cd 136
15 862 15 862
Apr 1 Balance Bd 136
Amount Payable: R136
TASK 12.13  Bad debts and ethics

The purpose of this Task is to allow the learners an opportunity to engage in an ethical argument. Try to
focus on the fact that the accountant is a person of high repute and is of the belief that you cannot be caught.
You also are in need of extra cash at the moment.
Try to use examples that many people will say that they would not be unethical but when faced with situations
often react differently. For example, how many people do not try to cheat SARS by manipulating information,
take their families out to supper and claim it as a business expense, take stationery home that becomes a tax-
deductible expense to the business?
Allow learners time to discuss the ethical issues. If possible, use case studies or information that is relevant
in your community or at this present time.
PENALTIES FOR TAX EVASION AND FRAUD

Learners need to be aware that severe penalties exist if the VAT laws are infringed in any way. Try to keep
up-to-date with any new legislation in this regard. Visit the SARS web page for updated information.

TASK 12.14 Ethics and fraud
Allow learners time to read and discuss these articles. If possible, try to add extra articles from your local
area.
Suggested answers to the discussion:

•Why do you think people commit fraud?
- We live in a world that is rapidly changing in all aspects and, unfortunately, when people live at a fast pace
ethics are often forgotten.
- Materialism and greed are prevalent in our society. We are constantly bombarded with media reports,
peers and society in general about the value of acquiring material possessions, and the desire to acquire
these material possessions often supersedes our value systems.
- We live in a world of constant competition, peer pressure, self-centredness that again means we forget our
‘values’.
- Unfortunately, many leaders in all aspects of life are not good role models – how many business people,
politicians and celebrities get involved in unethical behaviour? Open any newspaper and you will be inun-
dated with examples.
•How do they manage to defraud (cheat) SARS?

- Incorrect recordings.
- Incorrect documents.
- Failure to disclose all information.
- False information.
- Etc.
•Discuss the following slogan as portrayed by SARS “Your tax quenches the nation’s thirst”
and the effect of fraud on the country.
Tax money is used for the country, e.g. education, police force, defence, hospitals, roads, emergency situa-
tions, etc.
If SARS is defrauded, it means they do not collect all the money and this will impact on the government’s
delivery of services.
TASK 12.15 Case study: Interpretation and tax fraud

12.15.1 Write out the full name for the following acronyms (abbreviations).
• SARS
South African Revenue Services
• VAT
Value Added Tax
• SAICA
South African Institute of Chartered Accountants
• SAIPA
South African Institute of Professional Accountants
12.15.2 Briefly explain ONE function of SAICA.

Set standards for those entering the Accounting profession and monitor whether accountants conform to the
code of conduct and work ethics of these professionals.
12.15.3 Explain who or what a VAT vendor is.

A business registered for VAT with SARS.
This business pays VAT to suppliers when it buys goods and charges its own customers VAT when selling
goods to them.
It then subtracts the VAT paid from the VAT received and remits the difference to SARS.

12.15.4 What is the minimum annual turnover for compulsory VAT registration?
R1 million
12.15.5 How much does SARS pay out monthly for VAT claims?
R20 to R30 billion per month
12.15.6 Explain briefly what you understand by the term “biometric verification”.
This is “fingerprint scanning”. A VAT vendor (the owner or manager) must have his fingerprints recorded at
SARS and they can verify the real person by physically checking the finger prints.
12.15.7 According to Gugu Smit what is South Africa’s tax system based on? State at least
THREE elements.
“South Africa's tax system is based on self-declaration and depends to a large extent on the integrity of tax
payers to make full, accurate and honest disclosure and pay all the tax that is due.''
12.15.8 According to the article how do businesses commit VAT fraud?

Small businesses giving fake details and addresses to claim VAT from SARS.
Show less sales to reduce VAT output.
Inflate purchases to claim higher VAT input.
12.15.9 How did SARS detect fraud in the case of Dr. Tulani Colin Khan?
The VAT audit conducted by SARS revealed the fraud.
This included checking the bank statements.
12.15.10 Do you agree with the punishment given? Give ONE reason for your answer.
Yes.
He committed fraud which is illegal but he is paying back R1.5 million to SARS and doing 1 000 hours of
community service at a hospital in Durban dealing with HIV.
OR
No
If you commit the crime then you should at least serve part of the sentence of 10 years – should not be wholly
suspended.
12.15.11 Do you think that newspapers should be allowed to publish details of court cases of
fraud and corruption committed by private individuals, business people and govern-
ment officials?
No. Fraud by Yes / No Reason

A Private Individual Yes It will inform many people about fraud committed by him /
her – so people will be aware.
B Business people Yes Business is there to make a profit. The customer is paying
for a service and customer must get TRUE value for his
money.
C Government officials Yes Government officials really work for the people – paid by
taxpayers’ money. The taxpayer expects these officials to
be honest. Therefore, if there is corruption then the tax-
payer must know about it.

CHECKLIST
Yes – Requires more

Skills Complete
proficient attention
Understands the need for taxes.
Understands how VAT works.
Can calculate the amount of VAT if the price
quoted is exclusive.
Can calculate the amount of VAT if the price
quoted is inclusive.
Understands the difference between invoice and
receipt base for the payment of VAT.
Appreciates the penalties attached to fraud and
evasion.
Appreciates the effect on the economy if tax
evasion takes place.

MODULE 13
REVISION
BANK RECONCILIATION
TASK 13.1 Spears Dealers: Cash journals, Bank account &

Bank Reconciliation Statement
13.1.1 SPEARS DEALERS
CASH RECEIPTS JOURNAL FOR MAY 20.8 CRJ
D Details Fol Bank
31 Totals b/f 25 300 25 300
B/S H. Xaba 278 278 Bad debts recovered
176 BN Sellers (stale cheque) 340 340 Consumables
278 Jojo Wholesalers (overstated) 60 60 Creditors control
25 978 25 978
B
CASH PAYMENTS JOURNAL FOR MAY 20.8 CPJ

D Details Fol Bank
31 Totals b/f 15 412 15 412
B/S V. Shakie (r/d cheque) 450 450 Debtors control
B/S FirstPlus Bank 221 98 Bank charges
123 Interest on o/d
B/S Assure Insurance Co. 412 412 Insurance
265 BN Sellers 340 340 Consumables
268 BooHoo Suppliers (understated) 18 18 Trading stock
B/S P. Waylaid (r/d cheque) 723 723 Debtors control
286 Hootie Suppliers 1 440 1 440 Trading stock
19 016 19 016
B
13.1.2 GENERAL LEDGER OF SPEARS DEALERS

Dr BANK B Cr
20.8 20.8
May 31 Sundry accounts CRJ 25 978 May 1 Balance[1] b/d 1 840
31 Sundry accounts CPJ 19 016
Balance c/d 5 122
25 978 25 978
[1]
1 545 + 340 + 515 + 2 101 + 258 – 469 – 2 450

13.1.3 BANK RECONCILIATION STATEMENT AT 31 MAY 20.8
Debit Credit
No. 257 3 480
No. 263 2 460
No. 264 297
No. 265 340
No. 286 1 440
Balance as per bank statement* 12 780
15 240 15 240
*Balancing figure.
TASK 13.2 Yougo Traders: Calculations, Bank Reconciliation

Statement
13.2.1
CASH JOURNAL
No.
CRJ CPJ
Totals 6 420 5 170
1 (a) 900
1 (b) 140 140
1 (c) 90
1 (d) 699
2 (b) 360
2 (d) 2 000
2 (f) 300
2 (g) 200
2 (h) 900
8 449 8 870
13.2.2 Calculation of bank account balance:
Opening balance R4 931

(4 200 + 3 100 – 900 – 140 - 430 – 200 – 699)
CRJ total: 8 449
13 380
CPJ total: (8 870)
Favourable bank balance (Dr) R4 510
13.2.3 BANK RECONCILIATION STATEMENT OF YOUGO TRADERS AT 31 MAY 20.9

Debit Credit
Outstanding cheques: No. 94 200
No. 98 140
No. 109 700
No. 112 2 000
7 550 7 550

TASK 13.3 Orpheus Stores: Cash journals, Bank account,
Bank Reconciliation Statement
13.3.1 ORPHEUS STORES
CASH RECEIPTS JOURNAL FOR AUGUST 20.7 CRJ
D Details Fol Bank
31 Totals b/f 41 630 41 630
341 Mukstar Shop Suppliers (stop payment) 2 500 2 500 Equipment
364 Steyn Motors (overstated) 180 180 Drawings
B/S Mamoo & Co. 2 200 2 200 Rent income
359 Pinewood Seniors (lost cheque) 300 300 Donation
46 810 46 810
B
CASH PAYMENTS JOURNAL FOR AUGUST 20.7 CPJ

D Details Fol Bank
31 Totals b/f 49 920 49 920
367 Printpak (understated) 200 200 Stationery
B/S V. Badboy (r/d cheque) 700 700 Debtors control
B/S Great Bank 637 245 Interest on o/d
392 Bank charges
B/S City Council 326 326 Municipal rates
B/S Luton Brokers 110 110 Insurance
387 Pinewood Seniors 300 300 Donation
391 PS Wholesalers 1 200 1 200 Creditors control
53 393 53 393
B
13.3.2 GENERAL LEDGER OF ORPHEUS STORES

Dr BANK B Cr
20.7 20.8
Aug 31 Sundry accounts CRJ 46 810 Aug 1 Balance[1] b/d 10 812
Balance c/d 17 395 31 Sundry accounts CPJ 53 393
64 205 64 205
Sept 1 Balance b/d 17 395
[1]
3 675 + 7 070 – 2 500 – 4 860 – 8 620 – 5 577
13.3.3 BANK RECONCILIATION STATEMENT AT 31 AUGUST 20.7

Debit Credit
No. 384 854
No. 386 3 840
No. 387 300
No. 391 1 200
26 160 26 160

TASK 13.4 Completion of table
Bank
Cash Journal
NO. DETAILS Reconciliation No Entry
CRJ CPJ DR CR
1. Cheques not yet presented for payment. X
2. Dishonoured cheques as indicated on the B/S. X
3. Discounts on dishonoured cheques (see No. 2). X
4. Bank charges as per B/S. X
5. Deposit not yet credited by the bank. X
6. Electronic payments made by the business. X
7. Electronic transfers made in favour of the X
business.
8. Cash deposit fees as per B/S. X
9. Post-dated cheques received from customers. X
10. Post-dated cheques issued to suppliers. No entry X X
has been made.
11. Bank statement balance on the 1st day of the X
month (favourable).
12. Bank statement balance on the last day of the X
month (unfavourable).
13. Bank account balance on the 1st day of the month X
(favourable).
14. Bank account balance on the last day of the X
month (unfavourable).
15. Interest on overdraft as per B/S. X
16. Interest earned on current banking account as X
per the bank statement.
17. Stop orders as per B/S. X
18. Debit orders as per B/S. X
19. Service fees as per B/S. X
20. Loan instalment paid by debit order as per B/S. X
EXTRA BANK RECONCILIATION STATEMENT TASKS
The following Tasks do not appear in the Learner’s textbook but can be used for extra Tasks or tests.
EXTRA TASK 1
Information:
During February 20.9, a trader had issued and recorded the following cheques in her books. The bank balance
was overdrawn by R5 400 (before any adjustments) on 28 February 20.9. The following have not yet been
considered:
(a) R500 to FiveUp Dealers for merchandise, dated 3 March 20.9.

(b) R830 to VIP Builders for the erection of a retaining wall around the car park, dated 5 March 20.9.
(c) R460 to GB Finance towards a loan repayment, dated 12 February 20.9.
(d) R555 to Plump Wholesalers in settlement of a debt of R580, dated 1 March 20.9.
(e) R95 from Alberto in settlement of his debt of R100. The cheque was dated 3 March 20.9.
(f) R1 500 from tenant, Ms Cutie’s Salon. The cheque was dated 28 February 20.9.
(g) Bank charges as per bank statement R314.
(h) Interest on overdraft as per bank statement R982.

Required:
1. Under the headings below, show how the above will be dealt with on 28 February 20.9, the end of the
financial year. If no entry is required place an ‘X’ in the ‘NO ENTRY’ column. Indicate an increase with
a ‘+’, a decrease with ‘-‘ and no effect with ‘0’.
Name of account in General

No. No
Ledger A= OE + L Reason
entry
Account debit Account credit
2. Calculate the new bank balance after taking into account the adjustments. Indicate whether the bank
balance is favourable or unfavourable.
1.
Name of account in General
No. Ledger No
A= OE + L Reason
Account debit Account entry
credit
Trading stock is an asset which
increases on the Dr side; Bank
(a) Trading stock Bank +500 +500
is a liability which increases on
the Cr side.
Land & buildings is an asset
which increases on the Dr side;
(b) Land & buildings Bank +830 +830
Bank is a liability which
increases on the Cr side.
Loan is a liability which
decreases on the Dr side; Bank
(c) Loan: GB Finance Bank ±460
is a liability which increases on
the Cr side.
Creditors control is a liability
which decreases on the Dr
(d) Creditors control Bank ±555
side; Bank is a liability which
Creditors control is a liability
which decreases on the Dr
Discount
Creditors control +25 -25 side; Discount received is an
received
income which increases on the
Cr side (OE+).
Post-dated cheques are only
(e) X
recorded on the due date.
Bank is a liability which
decreases on the Dr side; Rent
(f) Bank Rent income +1 500 -1 500 income is an income which
increases on the Cr side
(OE+).
Bank charges is an expense
which increases on the Dr side
(g) Bank charges Bank -314 +314
(OE-); Bank is a liability which
Interest on o/d is an expense
which increases on the Dr side
(h) Interest on o/d Bank -982 +982
(OE-); Bank is a liability which

2. New bank balance
Debits Credits
1 500 5 400
500
830
460
555
314
982
1 500 9 041
Unfavourable bank balance = R9 041 – 1 500 = R7 541
EXTRA TASK 2
Required:
1. Complete the Cash Journals of Sipilo Stores.
2. Post to the Bank account only.
3. Prepare the Bank Reconciliation Statement on 30 April 20.9.
Note:
Sipilo Stores has a current account with Sharper Bank.
Information:
Bank Reconciliation Statement on 31 March 20.9
Favourable balance as per bank statement R315
Outstanding cheques:
No. 0155 2 444
No. 0178 6 498
No. 0189 992
No. 0198 500
No. 0204 530
Balance as per bank account ?
Notes on March Bank Reconciliation Statement:

• The outstanding deposit that consisted of cash sales duly appeared on the April bank statement.
• On investigation, it was established that cheque no. 0155 had been mislaid. It had been paid to a supplier,
Morteck Suppliers. Sipilo Stores have an account with them. Cheque no. 0234 was hand-delivered to them
on 27 April 20.9. Morteck Suppliers have not yet deposited the cheque.
• Cheque no. 0178 was issued to DK Dealers for trading stock bought. This cheque does not appear on the
April bank statement. DK Dealers claim that they never received the cheque and requested a new cheque.
They refused to grant the cash discount of 5%, which had been originally received from them. Cheque
no. 0239 was issued on 29 April 20.9. The cheque was dated 1 May 20.9.
• Cheque no. 0189 had been issued to Omar’s Shop for wrapping materials appeared on the April bank
statement but the amount shown was R929. On investigation, it was found that the bank statement was
correct.
• Cheque no. 0198 had been presented to the bank on 21 April 20.9. It had been issued to Stein’s Auctioneers
for antique furniture bought for the beach cottage of Mr Sipilo (the owner).
• Cheque no. 0204 did not appear on the April bank statement. It was issued on 30 March 20.9 to GeeBee
Ltd for trading stock and dated 3 May 20.9.
Additional information:
1. Provisional totals in the Cash Journals:
Cash Receipts Journal R18 760
Cash Payments Journal R13 647
2. The bank statement showed a direct deposit of R3 560 received from Fulham Stores for commission
earned. This did not appear in the Cash Journal.

3. The following stop/debit orders appeared on the bank statement only:
(a) R890: paid to SurePlus Insurance Brokers for shop insurance;
(b) R620: paid to SurePlus Insurance Brokers for Mr Sipilo’s car insurance (the car belongs to the
business);
(c) R400: paid to Mobile Phones Ltd for Mrs Sipilo’s personal cell phone.
(d) R210: paid to Rep Booksellers for financial magazine subscriptions (Mr Sipilo encourages the reading
of these magazines by the management staff).
(e) The following appear on the bank statement:
Service fee R244
Interest on credit balance 45
Cash deposit fee 79
Interest on overdraft 198
Credit card levies 120
4. A debtor, P. Noble, for R250 whose account had previously been written off in February 20.9 re-appeared.
He transferred the amount owing electronically into the bank account of Sipilo Stores on 15 April 20.9.
5. Cheque no. 0243 for R2 108 received from credit customer, M. Alfonso, was dishonoured because of
insufficient funds.
6. A cheque (no. 0260) was shown on the bank statement as R117 whilst the Cash Journal reflected the
same cheque as R71. The bank statement figure is correct. The cheque had been issued to Dewars for
trading merchandise bought.
7. A deposit for R13 120 being the sales takings appeared in the Cash Receipts Journal only.
8. The following cheques appeared in the Cash Payments Journal only:
(a) Cheque no. 0267 for R310 issued to Mantro for merchandise dated 29 April 20.9.
(b) Cheque no. 0271 for R3 222 issued to Didco Ltd, a creditor, dated 25 April 20.9.
(c) Cheque no. 0275 for R2 500 issued to M. Mortar for extensions to the buildings dated 30 June
20.9.
9. A cheque for R55 dated 15 May 20.9 had been received from a client, M. Guffy, on 10 April 20.9. The
cheque does not appear in the Cash Journal or the bank statement.
10. The bank statement showed a balance of R? on 30 April 20.9.
1. SIPILO STORES
CASH RECEIPTS JOURNAL FOR APRIL 20.9 CRJ
D Details Fol Bank
30 Totals b/f 18 760 18 760
0155 Morteck Suppliers (mislaid cheq.) 2 444 2 444 Creditors control
0178 DK Dealers (cheque cancelled) 6 498 6 498 Trading stock
0189 Omar’s Shop (overstated) 63 63 Consumable stores
B/S Fulham Stores 3 560 3 560 Commission income
B/S Sharper Bank 45 45 Interest income
B/S P. Noble 250 250 Bad debts recovered
31 620 31 620
B

CASH PAYMENTS JOURNAL FOR APRIL 20.9 CPJ
D Details Fol Bank
30 Totals b/f 13 647 13 647
0234 Morteck Suppliers 2 444 2 444 Creditors control
0239 DK Dealers 6 840* 6 840 Trading stock
B/S SurePlus 1 510 1 510 Insurance
B/S Mobile Phones Ltd 400 400 Drawings
B/S Rep Booksellers 210 210 Stationery
B/S Sharper Bank 641 443 Bank charges
198 Interest on o/d
B/S M. Alfonso (bad cheque) 2 108 2 108 Debtors control
0260 Dewars (understated) 46 46 Trading stock
27 846 27 846
B
*6 498 x 100
/95
2. GENERAL LEDGER OF SIPILO STORES

Dr BANK B Cr
20.9 20.8
April 1 Balance[1] b/d 1 951 Aug 31 Sundry accounts CPJ 27 846
33 571 33 571
May 1 Balance b/d 5 725
[1]
315 + 12 600 – 2 444 – 6 498 – 992 – 500 - 530
3. BANK RECONCILIATION STATEMENT AT 30 APRIL 20.9

Debit Credit
No. 0239 6 840
No. 0204 530
No. 0267 310
No. 0271 3 222
No. 0275 2 500
21 571 21 571
EXTRA TASK 3
The information below relates to the books of Silvano Dealers.
Required:
Use the relevant information to prepare the following:
1. The Bank account in the General Ledger, properly balanced on 30 June 20.8.
2. The Bank Reconciliation Statement as at 30 June 20.8.

Information:
Favourable balance of bank account on 1 June 20.8 R6 700
Unfavourable bank statement balance 1 June 20.8 1 300
Favourable bank statement balance 30 June 20.8 9 090
Cheques drawn but not yet presented for payment after comparison with June 20.8 bank
statement:
No. A1235 in favour of Velima CC 890
No. A1245 in favour of OnTop Wholesalers 1 430
No. A1251 in favour of Sanpehle Co. Ltd. 2 220
Deposits not yet credited by the bank after comparison with June 20.8 bank statement:
Deposit on 27 June 20.8 2 310
Deposit on 28 June 20.8 1 990
Total of bank column of the CRJ before updating with June 20.8 bank statement 24 560
Total of bank column of the CRJ after updating with June 20.8 bank statement 27 150
Total of bank column of the CPJ before updating with June 20.8 bank statement 13 640
Total of bank column of the CPJ after updating with June 20.8 bank statement 25 000
1. GENERAL LEDGER OF SILVANO DEALERS

Dr BANK B Cr
20.8 20.8
June 1 Balance b/d 6 700 June 30 Sundry accounts CPJ 25 000
33 850 33 850
2. BANK RECONCILIATION STATEMENT AT 30 JUNE 20.8

Debit Credit
Outstanding deposit [2 310 + 1 990] 4 300
Outstanding cheques: No. A1235 890
No. A1245 1 430
No. A1251 2 220
13 390 13 390
EXTRA TASK 4
The inexperienced bookkeeper of Money Penny Stores closed off the cash journals for March 20.8 before
comparing the bank statement.
Required:
Enter all the necessary transactions to update the records directly into the Bank account and prepare a Bank
Reconciliation Statement on 31 March 20.8.
Note:
The contra accounts (contra references) for the individual entries must be clearly indicated when preparing
the Bank account.
Information:
1. The Bank account is given below:

Dr BANK B5 Cr
20.8 20.8
Mar 31 Total receipts CRJ 64 321 Mar 1 Balance b/d 9 671
31 Total payments CPJ 78 442
2. The following items appeared on the bank statement for March 20.8 and were not ticked off:
• Service fees R245; cash deposit fee R68; interest on debit balance R255.
• Unpaid cheque:
- A cheque received from G. Buntie for R540 in settlement of his account was dishonoured due to
insufficient funds.
• Deposits:
- An electronic payment made by the tenant R3 000.
- An electronic payment made by a debtor, U. Opius, R350. His account had been previously written
off.
• Cheque no. 0961 for R2 690 for merchandise. This had been entered into the Cash Payments Journal
as R1 690. The bank statement is correct.
• Debit orders:
- In favour of BeeQue Brokers for insurance R1 245.
- In favour of the local municipality to pay the monthly utility bill in respect of lights, water and rates
R1 988.
- In favour of TMN to pay the monthly cellphone charges of the business R1 774.
- In favour of TMN to pay the monthly cellphone charges of the owner’s daughter R1 991.
3. The following items appeared in the cash journals but not on the bank statement:
- Outstanding deposit R1 445.
- Cheques:
No. 0061: R1 200 (15 September 20.7)
No. 0081: 245 (6 January 20.8)
No. 0861: 2 555 (8 February 20.8)
No. 1141: 987 (15 March 20.8)
No. 1175: 432 (15 April 20.8)
Note:
▪ Cheque no. 0061 was issued to Tavco Wholesalers for goods which had been delivered in
September. The cheque is stale.
▪ Cheque no. 0081 had been lost in transit. It was issued to Dino’s for repairs. The cheque will be
replaced during April 20.8.
1. GENERAL LEDGER OF MONEY PENNY STORES

Dr BANK B Cr
20.8 20.8
Mar 31 Total receipts CRJ 64 321 Mar 1 Balance b/d 9 671
Rent income 3 000 31 Total payments CPJ 78 442
Bad debts recovered 350 Bank charges 313
Trading stock 1 200 Interest on o/d 255
Repairs 245 Debtors control 540
Balance c/d 28 103 Trading stock 1 000
Insurance 1 245
Utility bill 1 988
Cell phone charges 1 774
Drawings 1 991
97 219 97 219
April 1 Balance b/d 28 103

BANK RECONCILIATION STATEMENT AT 31 MARCH 20.8
Debit Credit
No. 1141 987
No. 1175 432
29 548 29 548
CREDITORS RECONCILIATION STATEMENT
TASK 13.5 Celeb Stores: Creditors Reconciliation Statement

13.5.1 Calculate the correct balance of Coprox Wholesalers in the Creditors Ledger.
16 330 + 900 = R17 230
Explanation:
The bookkeeper (Rihanna) overstated the discount by R900. It is, therefore, necessary to add back R900 to
the creditor’s balance.
13.5.2 Creditors Reconciliation Statement on 30 June 20.8

Debit Credit
Balance as per Statement of account 30 314
Correction of error on 20th – Inv. 5780 9 880
Invoice 6011 not reflected on statement 6 771
Payment not reflected on statement 9 500
Discount not reflected on statement 475
Balance as per Creditors Ledger 17 230
37 085 37 085
Alternate format:
Correction of error on 20th – Inv. 5780 (9 880)
Invoice 6011 not reflected on statement 6 771
Payment not reflected on statement (9 500)
Discount not reflected on statement (475)
Explanation:
• The Statement of account balance is entered on the debit side. From the point of view of Coprox Whole-
salers this amount (R30 314) is owing to them. It should be noted, that you can start with the balance in
the Creditors Ledger and then end with the Statement of account balance.
• Error on the 20th: this is shown as a credit as Celeb Stores were erroneously debited with a purchase
made by another business.
• Invoice 6011: this purchase has not been recorded by Coprox Wholesalers as this transaction took place
after the 25th. The Statement of account reflects transactions up to and including 25 June 20.8.
• Payment and the discount: these do not appear on the Statement as the transaction took place after the
25th.

TASK 13.6 Tuscon CC: Creditors Reconciliation Statement
13.6.1 CREDITORS LEDGER OF ADLIB OUTFITTERS
Tuscon CC CL
20.8
Aug 1 Account rendered/Balance b/d 1 499
4 Cheque 115 CPJ 1 000* 499
Discount CPJ 25* 474
10 Invoice X321 CJ 899 1 373*
12 D/N 118 CAJ 99 1 274*
19 Invoice X391 CJ 275* 1 549
28 Cheque 131 CPJ 400 1 149*
29 Invoice X432 CJ 196* 1 345
31 Correction of error on invoice X391 GJ 99 1 444
13.6.2 Creditors Reconciliation Statement on 31 August 20.8

Payment not reflected on statement (400)
Invoice not reflected on statement 196
13.6.3 The owner of this business needs to know how soon suppliers (creditors) are being
paid. Use the relevant information below to calculate the creditors’ payment period
in days.
Average creditors x 365
Credit purchases
½(50 000 + 64 000) x 365
416 100
57 000 x 365 = 50 days
416 100
13.6.4 The debtors collection period on 28 February 20.8 is 90 days. State your observations
on the debtors collection and creditors payment periods. Suggest ways in which the
situation can be improved.
Creditors are been paid in 50 days which is 40 days before the debtors are paying their accounts (90 days).
Besides this the business has to also sell the stock and only then collect the money from the debtors some
90 days later.
The business thus has to pay out money before it has been collected. This will mean the business needs
more working capital.
The ideal situation is to sell the stock, collect the money from the debtors and only then pay the creditors.

TASK 13.7 Billyboo Traders: Analysis of the Creditors’
Reconciliation Statement
13.7.1 Mention two advantages of preparing a Creditors Reconciliation Statement.
• Update your creditors account.
• Check for errors and outstanding amounts on the creditor’s statement.
• Internal control to ensure that your books and those of the creditor agree.
13.7.2 Apart from showing the amount owing to the supplier what are the other purposes of
a statement of account?
Shows purchases for the month, payments made, discounts that may have been received, returns, etc.
13.7.3 Provide a reason for the stock returns not appearing on the statement.
• The business has not received the stock yet.
• The business has not accepted the returns.
13.7.4 Calculate the balance as per Creditors Ledger.

4 320 – 240 + 1 800 – 3 120 – 180 = R2 580
13.7.5 Refer to the 2nd item in the Creditors Reconciliation Statement. Why has this amount
been subtracted?
The supplier may have overstated an invoice by R240.
Other possible answers, e.g. incorrect addition, a return may have been understated by R240, creditor may
have charged for goods that this business did not purchase, etc.
The incorrect plus will have to be cancelled by subtracting the amount.
13.7.6 Calculate the balance of the creditors account.

Correction of incorrect debit 40
Correction of incorrect payment (720)
Correction of invoice not recorded 920
Balance as per reconciliation statement R2 580
TASK 13.8 Mila Stores: Creditors Reconciliation Statement

13.8.1 Refer to Additional information number 3. Give a possible reason for this payment not
being reflected on the statement.
Zinkwa Wholesalers closed off their accounts before the 30th.
13.8.2 Creditors Reconciliation Statement on 30 June 20.8

Correction of error on invoice 1011 (R800 x 2) (1 600)
Correction of overcharge on invoice 1032 (222)
Payment not reflected on statement (3 500)
Correction of overcharge on invoice 987 (180)

FIXED ASSETS
TASK 13.9 Ishmail & Sons: Recording of depreciation

13.9.1 GENERAL JOURNAL OF ISHMAIL & SONS – JUNE 20.7 GJ
Debtors con- Creditors
No D Details F Debit Credit trol control
01 30 Depreciation N19 117 010
Acc. depreciation on vehicles[1] B8 54 210
Acc. depreciation on equipment[2] B9 37 000
Acc. depreciation on computers[3] B10 25 800
Depreciation on vehicles at 25%
p.a. on carrying value, equipment
at 20% p.a. on cost, computers at
30% p.a. on cost
Calculations:
[1]
Vehicles 510 000 – 60 000 – 258 160 x 25% = R47 960
60 000 x 25% x 5 months (5/12) = R6 250
R47 960 + 6 250 = R54 210
[2
Equipment 171 500 x 20% = R34 300
40 500 x 20% x 4/12 months = R2 700
R34 300 + R2 700 = R37 000
[3]
Computers R85 000 x 30% = R25 500
1 500 x 30% x 8/12 months = R300
R25 500 + 300 = R25 800
13.9.2 GENERAL LEDGER OF ISHMAIL & SONS

Dr VEHICLES B5 Cr
20.6 20.7
July 1 Balance b/d 450 000 June 30 Balance c/d 510 000
20.7
Feb 1 Bank/Creditors control 60 000
510 000 510 000
20.7
EQUIPMENT B6
20.6 20.7
20.7
Feb 28 Bank/Creditors control 40 500
212 000 212 000
20.7

Dr COMPUTER B7 Cr
20.6 20.7
Nov 30 Bank/Creditors control 1 500
86 500 86 500
20.7

20.7 20.6
June 30 Balance c/d 312 370 July 1 Balance b/d 258 160
20.7
June 30 Depreciation GJ 54 210
312 370 312 370
20.7

20.7 20.6
20.7
132 120 132 120
20.7
ACCUMULATED DEPRECIATION ON COMPUTERS B10

20.7 20.6
20.7
80 000 80 000
20.7

DEPRECIATION N19
20.7
June 30 Accumulated dep. on
vehicles[1] GJ1 54 210
Accumulated dep. on
equipment[2] GJ1 37 000
Accumulated dep. on GJ1
computers[3] 25 800
[1]
[510 000 – 60 000 – 258 610 x 25% = 47 960] + [60 000 x 25% x 5/12 = 6 250] = 54 210
[2]
[171 500 – 40 500 x 20% = 34 300] + [40 500 x 20% x 4/12 = 2 700] = 37 000
[3]
[85 000 x 30% = 25 500] + [1 500 x 30% x 8/12 = 300] = 25 800

(a) Why do you think this business maintains a separate account for computers?
Different rate of depreciation.
Concept of materiality – they want to keep separate records.
Any other feasible answer.
(b) What concept of GAAP is applicable to the depreciation of Fixed/Tangible assets?

Prudence concept – being realistic, assets lose value over time.
(c) What effect does depreciation have on Owner’s Equity?

Decrease; depreciation is an expense.
TASK 13.10 J. Lavine: Recording of depreciation, Asset dis-

posal
13.10.1 GENERAL JOURNAL OF J. LAVINE GJ1
Debtors Creditors
Date Details Fol Debit Credit control control
20.4
Aug 31 Depreciation [1] 540
Accum. dep. on equipment B6 540
Depreciation on equipment sold at
10% p.a. on cost
Asset disposal N17 5 400
Equipment B5 5 400
Cost price of equipment transferred
Accum. dep. on equipment [2] B6 3 780
Accumulated depreciation trans-
ferred to asset disposal
K. Alex DL1 1 800 1 800
Asset disposal N17 180
Profit on sale of asset N18 180
Profit on disposal of asset
20.5
Feb 28 Depreciation [3] 24 680
Accum. dep. on equipment B6 24 680
Depreciation at 10% p.a. on cost
1 800 - - -
[1]
R5 400 x 20% x 6/12 = R540
[2]
1 March 20.1 – 31 Aug 20.4 = 42 months / 3½ years
5 400 x 20% x 42/12 = R3 780
[3]
128 800 – 5 400 x 20% = R24 680

13.10.2 GENERAL LEDGER OF J. LAVINE
Dr EQUIPMENT B5 Cr
20.4 20.4
Mar 1 Balance b/d 128 800 Aug 31 Asset disposal GJ1 5 400
20.5
128 800 128 800
20.5

20.4 20.4
Aug 31 Asset disposal GJ1 3 780 Mar 1 Balance b/d 20 160
20.5 Aug 31 Depreciation GJ1 540
Feb 28 Depreciation GJ1 24 680
45 380 45 380

ASSET DISPOSAL N17
20.4 20.4
Aug 31 Equipment GJ1 5 400 Aug 31 Acc dep on equip GJ1 3 780
Profit on sale of asset GJ1 180 Debtors control GJ1 1 800
5 580 5 580
PROFIT ON SALE OF ASSET N18

20.4
Aug 31 Asset disposal GJ1 180
13.10.3 FIXED ASSETS REGISTER

ITEM Office desk DATE PURCHASED 1 March 20.1
DEPRECIATION 10% p.a. on cost
Accum.
Cost Book
Date Details Amount depre- Remarks
price value
ciation
20.8
March 1 Balance b/d 5 400 3 240 2 160
Aug 31 Depreciation at
20%p.a. for 6 540 3 780 1 620
months
Sold to K. Alex 1 800 R180 profit on sale

TASK 13.11 Oakley: Asset disposal account, Fixed Assets note
13.11.1 GENERAL LEDGER OF OAKLEY
20.3 20.3
Dec 31 Equipment GJ 40 000 Dec 31 Acc dep on equip* GJ 15 000
Bank CRJ 25 000
40 000 40 000
* 30 June 20.1 – 31 Dec 20.3 = 30 months/2½ years

40 000 x 155 x 30/12 = 15 000
NOTE TO THE FINANCIAL STATEMENTS
13.11.2 Fixed/Tangible Assets

Land and
Equipment
Buildings
Carrying value at beginning of year 4 139 000 165 000
Cost 4 139 000 300 000
Accumulated depreciation 0 (135 000)
Movements (1 375 000) 83 000
Additions at cost 0 160 000
Disposals at carrying value[1] (1 375 000) (25 000)
Depreciation[2] 0 (52 000)
Carrying value at end of year 2 764 000 248 000
Cost 2 764 000 420 000
Accumulated depreciation 0 (172 000)
[1]
40 000 – 15 000 = 25 000
[2]
Sold: 40 000 x 15% x 6/12 = 3 000
Remaining: 300 000 – 40 000 x 15% = 39 000
New: 160 000 x 15% x 5/12 = 10 000
13.11.3 Discuss 4 measures that the owner could introduce to ensure that the new equipment
brings in a profit when it is sold in the future.
• Ensure that the equipment is serviced whenever necessary to maximise the life span.
• Buy equipment of good quality so that it lasts and has a higher re-sale value.
• Should consider selling the equipment earlier before it loses too much value.
• Control personal use of the equipment.

TASK 13.12 Flowers: Asset disposal account, Fixed Assets
note
FLOWERS:
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MAY 20.9
13.12.1 Fixed/Tangible Assets

Land &
Vehicles Equipment
buildings
Carrying value at beginning 1 260 000 235 000 150 000
Cost 1 260 000 360 000 240 000
Accumulated depreciation 0 (125 000) (90 000)
Movements 190 000 90 400 78 000
Additions at cost 190 000 204 000 [2]
120 000
Disposals at carrying value 0 (34 000) 0
Depreciation 0 (79 600) [1]
(42 000)
Carrying value at end 1 450 000 325 400 228 000
Cost 1 450 000 474 000 360 000
Accumulated depreciation 0 (148 600) (132 000)
[1]
132 000 – 90 000 = 42 000 [2]
12 000 x 100
/10 = 120 000
CALCULATION OF DEPRECIATION:
On vehicles:
Sold: 90 000 x 20% x 8/12 = R12 000
Remaining: 360 000 – 90 000 x 20% = R54 000
204 000 x 20% x 4/12 = R13 600
Total: 12 000 + 54 000 + 13 600 = R79 600
On equipment:
150 000 x 20% = R30 000
120 000 x 20% x 6/12 = R12 000
Total: 30 000 + 12 000 = R42 000
13.12.2 GENERAL LEDGER OF FLOWERS

20.9 20.9
Jan 31 Vehicle GJ *90 000 Jan 31 Acc dep on vehicle GJ 56 000
Creditors control GJ 25 000
Loss on sale of asset GJ 9 000
90 000 90 000
*360 000 + 204 000 – 474 000 = 90 000

TASK 13.13 Recording of Asset disposal account, Fixed Assets
note
REMINGTON
13.13.1 NOTE TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 20.8
FIXED ASSETS
Land &
Vehicles Equipment Computers
buildings
Cost 450 000 800 000 510 000 88 000
Movements 0 84 500 37 000 (4 750)
Additions at cost 44 000 210 000 140 000 18 000
Disposals at carrying value 44 000 0 (22 000) 0
Depreciation 0 (129 000) (81 000) (9 749)
Cost 494 000 1 010 000 570 000 106 000
Accumulated depreciation 0 (389 000) (293 000) (88 749)
13.13.2 GENERAL LEDGER OF REMINGTON

Dr EQUIPMENT B Cr
20.7 20.7
Mar 1 Balance b/d 510 000 Sept 1 Asset disposal GJ 80 000
Sept 1 Creditors control CJ 140 000 20.8
650 000 650 000
20.8
ACCUMULATED DEPRECIATION ON EQUIPMENT B

20.7 20.7
Sept 1 Asset disposal GJ 58 000 Mar 1 Balance b/d 270 000
20.8 Sept 1 Depreciation GJ 6 000
Feb 28 Balance c/d 293 000 20.8
351 000 351 000

ASSET DISPOSAL N
20.7 20.7
Sept 1 Equipment GJ 80 000 Sept 1 Acc dep on equipment GJ 58 000
Creditors control GJ *19 000
Loss on sale of asset GJ 3 000
80 000 80 000
*140 000 – 121 000 = 19 000

CALCULATIONS:
VEHICLES
540 000 x 20% = 108 000
210 000 x 20% x 6/12 = 21 000
Total: 108 000 + 21 000 = R129 000
EQUIPMENT
Sold: 80 000 x 15% x 6/12 = 6 000
Remaining: 510 000 – 80 000 x 15% = 64 500
New: 140 000 x 15% x 6/12 = 10 500
Total: 6 000 + 64 500 + 10 500 = R81 000
COMPUTERS
88 000 x 25% = 8 999 (the book value is only R9 000)
18 000 x 25% x 2/12 = 750
Total: 8 999 + 750 = R9 749
PARTNERSHIPS
TASK 13.14 T&Y General Stores: Capital & Current accounts

13.14.1 Notes to the financial statements on 28 February 20.6
Capital T. Thando Y. Yenzo TOTAL
Balance at beginning of the year 160 000 180 000 340 000
Contributions during the financial year 20 000 - 20 000
Withdrawals during the financial year - (20 000) (20 000)
Balance at end of the year 180 000 160 000 340 000
Current accounts
Salary[1] 122 000 97 600 219 600
Bonus 20 000 - 20 000
Drawings (129 000) (125 280) (254 280)
Retained income at beginning of year 2 000 (2 500) (500)
Retained income at end of the year 44 700 520 45 220
[1]
Calculation of Salary:
Thando: (10 000 x 10) + (11 000 x 2) = 100 000 + 22 000 = 122 000
Yenzo: (8 000 x 10) + (8 800 x 2) = 80 000 + 17 600 = 97 600
[2]
Calculation of Interest on capital:
Thando: (160 000 x 15% x 6/12) + (180 000 x 15% x 6/12) = 12 000 + 13 500 = 25 500
Yenzo: (180 000 x 15% x 10/12) + (160 000 x 15% x 2/12) = 22 500 + 4 000 = 26 500

(a) Explain two major shortcomings (disadvantages) of a partnership business.
Partners need to be able to trust each other in the mutual running of the business (they each need to pull
their weight; this is not always the case and this leads to disagreements).
Partners might want to raise more capital than the amount they can jointly provide.
Partners are jointly and severally liable for the debts of the business (if one partner cannot assist in settling
debts when necessary, the other partner’s will have to assume a greater responsibility.
If one partner dies or retires, the partnership agreement has to be renegotiated and the business might
have to close down in its present form.
(b) Refer to the notes prepared above. Should the partners be happy with their business?
Supply two reasons.
Returns on average equity are as follows:
Business: 300 000/362 360 x 100 = 82.8%
Thando: 171 700/193 350 x 100 = 88.8%
Yenzo: 178 300
/169 010 x 100 = 75.9%
Yes, the partners should be very happy.
The business as a whole and the partners individually are earning exceptional returns (see above).
The profit earned in one year is almost equal to the capital they have invested.
They are withdrawing approximately 85% of the profit earned (254 280/300 000 x 100) so they are not reinvest-
ing very much of the profits they earned, which is a negative point.
(c) State whether the following statements are TRUE or FALSE:
(i) False
(ii) True
(iii) True
(iv) True
(v) False
(vi) True
(vii) False
(viii) False
(ix) True
(x) False

TASK 13.15 Zululand Carpets: Year-end procedures, Ledger
accounts, Financial statements
13.15.1 GENERAL JOURNAL OF ZULULAND CARPETS – 28 FEBRUARY 20.2 GJ8
Debtors Creditors con-
Doc D Details Fol Debit Credit control trol
01 28 Donation 2 310
Carpet donated to SPCA
02 Loss due to theft 8 640
Items missing at year-end
03 Consumable stores on hand 5 850
Packing materials 1 950
Items on hand at year-end
04 Debtors allowances 2 625
Fee income 690
D. Davids 3 315 3 315
Credit note issued
Accum. depreciation on vehicles 28 050
Depreciation on vehicle sold
Vehicles 153 000
Cost of vehicle transferred
Accum. depreciation on vehicle 103 650
Accum. depreciation on asset sold
E. Egan 48 000 48 000
Vehicle sold on credit
Loss on disposal of asset 1 350
Vehicle sold at a loss
Accum. dep. on vehicles 30 600
Accum. dep. on equipment 9 600
Depreciation on fixed assets
08 B. Luyt 156 156
Interest on overdue account 156
Interest charged on debtor
09 Income receivable 960
Interest on fixed deposit 960
Amount owing at year-end
10 Rent expense 2 400
Adjustment i.r.o. repairs done
11 Interest on loan 9 550
Interest owing at year-end

GENERAL JOURNAL OF ZULULAND CARPETS (Continued)
Debtors Creditors
Doc D Details Fol Debit Credit control control
12 Prepaid expenses 1 320
Insurance 1 320
Premium paid in advance
13 G. Gewers 1 920 1 920
G. Gewers 1 920 1 920
Transfer to debtors ledger
14 Prov. for bad debts adjustment 3 750
Prov. for bad debts 3 750
Increase in provision
15 Salary: Andile 216 000
Salary: Bryan 144 000
Current a/c: Andile B3 216 000
Current a/c: Bryan B4 144 000
Salary allowance to partners
Bonus: Bryan 20 000
Bonus due to Bryan
Interest on capital 39 750
Interest on capital at 10%
Appropriation F3 84 749
Share in remaining loss
48 156 4 235 1 920 -
WORKING:
Rent:
(6 600 x 11) = 72 600; Repairs = 76 800 – 72 600 = 4 200; Feb rent to pay = R6 600 – 4 200 = R2 400
Interest on loan:
(280 000 x 13% x 6/12) + (250 000 x 13% x 6/12) = 18 200 + 16 250 = R34 450
Interest on capital: Andile

(240 000 x 10% x 9/12) + (270 000 x 10% x 3/12) = 18 000 + 6 750 = R24 750
Interest on capital: Bryan

150 000 x 10% = R15 000

13.15.2 ZULULAND CARPETS: TRIAL BALANCE ON 28 FEBRUARY 20.2
POST-ADJUSTMENT POST-CLOSING
Balance Sheet account section Debit Credit Debit Credit
Capital: Andile 270 000 270 000
Capital: Bryan 150 000 150 000
Current a/c: Andile [15 900 + 216 000 + 24 750] 256 650 34 875
Current a/c: Bryan
[16 800 + 144 000 + 20 000 + 15 000] 195 800 55 026
Drawings: Andile 192 000 -
Drawings: Bryan 111 000 -
Loan from SBDC (18% p.a.) 250 000 250 000
Delivery vehicles [306 000 – 153 000] 153 000 153 000
Acc. dep. on vehicles [151 200 + 28 050 – 103 650 + 30 600] 106 200 106 200
Equipment 96 000 96 000
Accum dep. on equipment [28 800 + 9 600] 38 400 38 400
Trading stock [481 000 – 2 310 – 8 640] 470 050 470 050
Debtors control [55 500 – 2 625 - 690 + 48 000 + 156 – 1 920] 98 421 98 421
Provision for bad debts [2 250 + 3 750] 6 000 6 000
Creditors control [56 700 – 1 920] 54 780 54 780
Fixed deposit 124 000 124 000
Savings account 18 000 18 000
Bank 15 630 15 630
Petty cash 900 900
SARS – PAYE 6 900 6 900
Consumable stores on hand [3 900 + 1 950] 5 850 5 850
Income receivable 960 960
Expenses payable [2 400 + 9 550] 11 950 11 950
Prepaid expenses 1 320 1 320
984 131 984 131
Sales 1 762 800
Debtors allowances [60 000 + 2 625] 62 625
Fee income [274 900 – 690] 274 210
Rent expense [76 800 + 2 400] 79 200
Interest on loan [24 900 + 9 550] 34 450
Advertising 13 500
Insurance [5 640 – 1 320] 4 320
Interest on fixed deposit [3 540 + 960] 4 500
Interest on savings a/c 1 980
Donation 2 310
Loss due to theft 8 640
Depreciation [28 050 + 30 600 + 9 600] 68 250
Loss on disposal of asset [153 000 – 103 650 – 48 000] 1 350
Interest on overdue account 156
Salary: Andile 216 000
Salary: Bryan 144 000
Bonus: Bryan 20 000
3 390 326 3 390 326

13.15.3 GENERAL LEDGER OF ZULULAND CARPETS
Dr CURRENT ACCOUNT: ANDILE B3 Cr
20.2 20.1
Feb 28 Drawings: Andile 192 000 Mar 1 Balance b/d 15 900
Appropriation GJ8 29 775 20.2
Balance c/d 34 875 Feb 28 Salary: Andile GJ8 216 000
256 650 256 650
CURRENT ACCOUNT: BRYAN B4

20.2 20.1
Feb 28 Drawings: Bryan 111 000 Mar 1 Balance b/d 16 800
Appropriation GJ8 29 774 20.2
Balance c/d 55 026 Feb 28 Salary: Bryan GJ8 144 000
Bonus: Bryan GJ8 20 000
195 800 195 800

ASSET DISPOSAL N15
20.2 20.2
Jan 31 Vehicle GJ8 153 000 Jan 31 Acc dep on vehicles GJ8 103 650
Debtors control GJ8 48 000
set GJ8 1 350
153 000 153 000

TRADING ACCOUNT F1
20.2 20.2
Feb 28 Cost of sales 924 000 Feb 28 Sales 1 700 175
Profit and loss account 776 175 [1 762 800 – 62 625]
1 700 175 1 700 175

Dr PROFIT AND LOSS ACCOUNT F2 Cr
20.2 20.2
Feb 28 Rent expense 79 200 Feb 28 Trading account 776 175
Interest on loan 34 450 Fee income 274 210
Advertising 13 500 Int. on fixed deposit 4 500
Packing materials 7 950 Interest on savings a/c 1 980
Consumable stores 72 900 Interest on overdue a/c 156
Insurance 4 320
Donation 2 310
Depreciation 68 250
set 1 350
Prov. for bad debts adj. 3 750
Appropriation account 360 201
1 057 021 1 057 021
APPROPRIATION F3
20.2 20.2
Feb 28 Salary: Andile 216 000 Feb 28 Profit & loss account 360 201
Salary: Bryan 144 000 Current a/c: Andile 29 775
Bonus: Bryan 20 000 Current a/c: Bryan 29 774
419 750 419 750

Note
Sales [1 762 800 – 62 625] 1 700 175
Fee income 274 210
Gross operating income 1 050 385
Rent expense [76 800 + 2 400] 79 200
Advertising 13 500
Insurance [5 640 – 1 320] 4 320
Donation 2 310
Depreciation [28 050 + 30 600 + 9 600] 68 250
Loss on disposal of fixed asset [153 000 – 103 650 – 48 000] 1 350

ZULULAND CARPETS
ASSETS Note
Tangible / fixed assets 3 104 400

Capital 7 420 000
Loan from Business Partners Ltd 250 000
1. INTEREST INCOME
On fixed deposit [3 540 + 960] 4 500
On savings account 1 980
On overdue debtors’ account 156
6 636
2. INTEREST EXPENSE
on loan [24 900 + 9 550] 34 450
34 450
3. FIXED ASSETS Vehicles Equipment Total

Cost 306 000 96 000 402 000
Accumulated depreciation [151 200] [28 800] [180 000]
Movements [108 000] [9 600] [117 600]
Disposals at carrying value [49 350] - [49 350]
Depreciation [28 050 + 30 600] [58 650] [9 600] [68 250]
Cost 153 000 96 000 249 000
Accumulated depreciation [106 200] [38 400] [144 600]
4. INVENTORIES
Trading stock [481 000 – 2 310 – 8 640] 470 050
Consumable stores on hand [3 900 + 1 950] 5 850
475 900

Trade debtors [55 500 – 3 315 + 48 000 + 156 – 1 920] 98 421
Provision for bad debts [2 250 + 3 750] [6 000]
Income receivable / Accrued income 960
94 701
Bank 15 630
Petty cash 900
34 530
7. CAPITAL Andile Bryan Total

Contribution of capital during the year 30 000 - 30 000
8. CURRENT ACCOUNTS Andile Bryan Total

Bonus: Bryan 0 15 000 15 000

SARS (PAYE) 6 900
Accrued expenses / Expenses payable [2 400 + 9 550] 11 950
73 630

TASK 13.16 Secunda School Uniforms: Appropriation, Capital
& Current accounts
13.16.1 Calculate the correct net profit for the year.
Net profit calculated by the accountant R648 530
(a) Bad debt written off (9 000 x 65c) (5 850)
(b) Rates prepaid (8 600)
(c) Correction of depreciation (60 000 – 88 000) (28 000)
(d) Correction of stock deficit (2 x R6 000) (12 000)
(e) Decrease in provision for bad debts 1 180
(f) Interest on loan (84 700)
(g) Rent income owing by tenant* 19 440
Correct net profit for the year R530 000
* Calculation of rent owing:
91 530 – (810 x 3) = 91 530 – 2 430 = 89 100
89 100 ÷ 10 = 8 910
(8 910 + 810) x 2 = 19 440
13.16.2 GENERAL LEDGER OF SECUNDA SCHOOL UNIFORMS

Dr APPROPRIATION F3 Cr
20.4 20.4
Feb 28 Salary: Mary 115 200 Feb 28 Profit & loss 530 000
Salary: Sarah[1] 96 000
Bonus: Sarah 21 200
Interest on capital [2]
111 250
Current account: Mary 124 233
Current account: Sarah 62 117
530 000 530 000
[1]
Calculation of Sarah’s salary: 115 200 x 100/120
[2]
Calculation of interest on capital:
Mary: (5% x 1 300 000 x 6/12) + (5% x 1 500 000 x 6/12) = 32 500 + 37 500 = R70 000
Sarah: (5% x 900 000 x 6/12) + (5% x 750 000 x 6/12) = 22 500 + 18 750 = R41 250
13.16.3 Notes to the financial statements on 28 February 20.4

Capital Mary Mxoli Sarah Naidoo TOTAL
Balance at beginning of the year 1 300 000 900 000 2 200 000
Contributions during the financial year 200 000 200 000
Withdrawals during the financial year (150 000) (150 000)
Balance at end of the year 1 500 000 750 000 2 250 000
Current accounts
Salary 115 200 96 000 211 200
Bonus 0 21 200 21 200
Drawings (360 000) (160 000) (520 000)
Retained income for the year (50 567) 60 657 10 000
Balance at beginning of the year 11 000 (40 000) (29 000)
Balance at end of the year (39 567) 20 567 (19 000)

If the learners require more revision Tasks they are to refer to Module 6 as there were a large number of
financial statements Tasks included in this Module.
TASK 13.17 Financial indicators

13.17.1 MN Stores:
(a) Calculate the percentage Gross profit on sales (turnover) for each year.
20.6 20.5
112 000 x 100 = 28% 96 000 x 100 = 21.8%
400 000 1 440 000 1
(b) Calculate the percentage Gross profit on cost of sales for each year.
20.6 20.5
112 000 x 100 = 38.9% 96 000 x 100 = 27.9%
288 000 1 344 000 1
(c) Calculate the Operating expenses as a percentage of sales (turnover) for each year.
20.6 20.5
84 000 x 100 = 21% 76 000 x 100 = 17.3%
400 000 1 440 000 1
(d) Calculate the Operating profit as a percentage of sales (turnover) for each year.
20.6 20.5
Operating profit: Operating profit:
400 000 – 288 000 + 20 000 – 84 000 = 48 000 440 000 – 344 000 + 20 000 – 76 000 = 40 000
48 000 x 100 = 12% 40 000 x 100 = 9.1%
400 000 1 440 000 1
(e) Calculate the Net profit as a percentage of sales (turnover) for each year.
20.6 20.5
Net profit = 48 000 + 10 000 – 11 000 = 47 000 Net profit = 40 000 + 9 000 – 8 000 = 41 000
47 000 x 100 = 11.8% 41 000 x 100 = 9.3%
400 000 1 440 000 1
(f) Comment on the Profitability of the business for 20.6.

The effective mark-up percentage has increased in 20.6 from 27.9% to 38.9% probably due to fewer trade
discounts being granted.
This has effectively led to a decrease in sales by R40 000, but gross profit has in fact increased by R16 000,
so the change – discount policy has been beneficial.
The business is still not reaching its intended mark-up percentage of 40% (some discounts are still being
given).
The business’ profitability has improved from 20.5 to 20.6.
Out of each R1.00 of sales they are now earning 11.8c compared to the 9.3c in 20.5.
This is mainly due to the pricing policy, because operating expenses are costing relatively more, i.e. 21c in
each R1.00 of sales compared to 17.3c last year.
The financing achieved have had little effect on the final profit as operating profit and net profit are very
similar in both years.
13.17.2 OP Stores:
Calculate(a)
Net profit as a percentage of Average owners’ equity for each year.
20.6 20.5
168 000 x 100 = 26.9% 232 000 x 100 = 43%
624 000 1 540 000 1

Use the financial
(b) indicator you have calculated in order to comment on the return
earned in this business in 20.6. Should the owners be satisfied with this return? Ex-
plain briefly.
The owners should not be completely satisfied. Although the return of 26.9% exceeds that which can be
earned on alternative investments (e.g. fixed deposit or shares on stock exchange), it is lower than that of
the preceding year.
The reason for the decline needs to be investigated, e.g. gearing effect, control of expenses, decline in
sales, etc.
13.17.3 QR Stores:
Calculate(a)
Net assets for each year.
20.6 20.5
Total assets – Total liabilities
(560 000 + 40 000 + 180 000) – (100 000 + 320 (568 000 + 40 000 + 152 000) – (80 000 + 520
000) 000)
780 000 – 420 000 = R360 000 760 000 – 600 000 = R160 000
Calculate(b)the Solvency ratio (i.e. total assets: total liabilities) for each year.
20.6 20.5
Total assets : total liabilities
780 000 : 420 000 = 1.9 : 1 760 000 : 600 000 = 1.3 : 1
Use the financial

(c) indicators you have calculated in order to comment on the solvency
situation of the business for 20.6. Should the owners be satisfied? Explain.
The solvency situation has improved possibly due to extra capital provided by the owners, or extra profit
retained in the business.
The business should have no problem in paying off all its debts.
13.17.4 ST Stores:
Calculate
(a) net Current assets for each year.
20.6 20.5
Current assets – Current liabilities
240 000 – 52 000 = R188 000 160 000 – 28 000 = R132 000
Calculate
(b) the Current ratio (i.e. Current assets : Current liabilities) for each year.
20.6 20.5
Current assets : Current liabilities
240 000 : 52 000 = 4.6 : 1 160 000 : 28 000 = 5.7 : 1
Calculate
(c) Liquid assets (i.e. Current assets without Inventories) for each year.
20.6 20.5
Current assets – Inventories
240 000 – 140 000 = R100 000 160 000 – 80 000 = R80 000
Calculate
(d) the Acid-test ratio (i.e. Liquid assets : Current liabilities) for each year.
20.6 20.5
Liquid assets : Current liabilities
100 000 : 52 000 = 1.9 : 1 80 000 : 28 000 = 2.9 : 1

(e)the financial indicators you have calculated in order to comment on the liquidity situa-
Use
The business is in a very liquid situation as the current assets significantly outweigh the current liabilities.
The liquidity ratios appear to be too high, although they have dropped from the previous year.
The current ratio improved from 5.7 : 1 to 4.6 : 1 while the acid-test ratio improved from 2.9 : 1 to 1.9 : 1.
However it appears that there is too much invested in liquid assets which will not yield a return.
Rather convert some current assets (e.g. stock, debtors or cash) into financial assets that are earning a return.
13.17.5 UV Stores:
(a) Calculate the average stock for each year.
20.6 20.5
(165 000 + 195 000) ÷ 2 = R180 000 (135 000 + 165 000) ÷ 2 = R150 000
(b) Estimate how long it will take the business to sell its closing stock at the end of each year.
20.6 20.5
Average daily cost of sales:
900 000 ÷ 365 = R2 466 600 000 ÷ 365 = R1 644
Stock period:
195 000 ÷ 2 466 = 79 days 165 000 ÷ 1 644 = 100 days
(c) Calculate how many times the business had to re-order stock during each year, i.e. the turn-
over rate of stock (use average stock in your calculation).
20.6 20.5
900 000 ÷ 180 000 = 5 times 600 000 ÷ 150 000 = 4 times
(d) You are told that this business sells clothing. In your opinion, are the financial indicators
calculated above satisfactory? Explain.
Yes, the indications are satisfactory.
The business is now replacing its stock at a faster rate (5 times instead of 4 times) which could indicate greater
volume of customers, which would lead to bigger profits.
In the clothing business fashion changes frequently (±3 months), so 79 days should be appropriate.
This has improved from the 100 days of stock in 20.5.
(e) If this business sells groceries, would your answer in (d) be different? Explain.
Yes.
A grocery store stocks perishable items.
A grocery store should aim to have a very high stock turnover rate and a lower closing stock.
13.17.6 WX Stores:
(a) Calculate the debtors average collection period for 20.6 and 20.5.
20.6 20.5
Average debtors: Average debtors:
(60 000 + 100 000) ÷ 2 = 80 000 (100 000 + 80 000) ÷ 2 = 90 000
80 000 x 365 = 38.9 days 90 000 x 365 = 29.2 days
750 000 1 1 126 000 1
(b) Calculate the creditors average payment period for 20.6 and 20.5.
20.6 20.5
Average creditors: Average creditors:
(200 000 + 140 000) ÷ 2 = 170 000 (140 000 + 160 000) ÷ 2 = 150 000
160 000 x 365 = 74.9 days 150 000 x 365 = 49.8 days
780 000 1 1 100 000 1

(c) Comment on the financial indicators calculated above. Note that normal credit terms are
30 days and that WX Stores receive 60-day credit terms from their suppliers.
The debtors are now taking longer to pay (39 days compared to 29 days.
This is not a good sign as it can lead to cash flow problems.
The debtors should be paying in 30 days.
Slow debtors should be chased up.
Also, the creditors are being paid too slowly (79.6 days compared to 49.8 days).
This will give WX stores a poor reputation with suppliers as the credit terms are 60 days.
TASK 13.18 Ramsamy & Sons: Debt-equity ratio

In your opinion should the business consider taking out more loans? Explain.
No.
Loans will then be R400 000 + R300 000 = R700 000.
Interest on the loan will be 17% of R700 000 (R119 000).
This will exceed the profit earned as the final return on equity is 12%, lower than the interest rate.
The business will be placed under strain because they will be required to repay loans and interest each
month.
This will be ill-advised if the profits are lower than the interest.
TASK 13.19 AM Traders: Returns & financial gearing

13.19.1 GENERAL LEDGER OF AM TRADERS
Dr APPROPRIATION F3 Cr
20.8 20.8
Feb 28 Salary: Aboobaker GJ 72 000 Feb 28 Profit & loss account GJ 195 000
Salary: Marx GJ 108 000 Current a/c: Aboobaker GJ 45 000
Interest on capital GJ 75 000 Current a/c: Marx GJ 15 000
255 000 255 000
13.19.2 What is the total primary distribution?

R255 000
13.19.3 What is the partnership profit for the year?

R195 000
13.19.4 How would you know that the partners were expecting to make a bigger profit than
the one they earned this year?
The primary distribution according to the partnership agreement is greater the net profit earned.
They would have expected a remaining profit.
13.19.5 What percentage of the current year’s profits was retained in the business? What
reason would the partners have had in making this decision?
75 000 x 100 = 38.5%
195 000 1
The partners wish to retain a portion of the profits so that the business can grow and earn bigger profits in
the future.
13.19.6 What is the profit-sharing ratio as stipulated in the partnership agreement?

Aboobaker : Marx = 45 000 : 15 000 = 3 : 1

13.19.7 Identify the amount earned by each partner, and calculate the proportion of the busi-
ness profit attributed to each partner.
Aboobaker earned R79 500 which is 41% of the total profit.
Marx earned R115 500 which is 59% of the total profit.
13.19.8 Calculate the percentage return earned by the business.

Average equity: (600 000 + 900 000 + 21 000 + 96 000) ÷ 2 = 808 500
195 000 x 100 = 24.1%
808 500 1
13.19.9 Calculate the percentage return earned by each partner.

Aboobaker:
Average equity: 450 000 + 600 000 + 8 500 + 48 000) ÷ 2 = 553 250
79 000 x 100 = 14.4%
553 250 1
Marx:
Average equity: 150 000 + 300 000 + 12 500 + 48 000) ÷ 2 = 255 250
115 500 x 100 = 45.2%
225 250 1
13.19.10 If the debt : equity ratio is 0.25 : 1, calculate the amount of the non-current loans.
Non-current loans : 0.25 x 996 000 = R249 000
13.19.11 Comment on the returns and the debt : equity ratio for 20.8. The comparative figures
for the previous year were:
- Return earned by the business: 21%
The percentage return earned by the business increased from 21% to 24.1%.
- Return earned by Aboobaker: 11%

Aboobaker’s return increased from 11% to 14.4%
- Return earned by Marx: 38%

Marx’s return increased from 38% to 45.2%.
- Debt: equity ratio: 0.4 : 1

The debt : equity ratio has improved from 0.4 : 1 to 0.25 : 1.
This is due to more capital by the owners or could also indicate a reduction in the loan amount.
13.19.12 Aboobaker is not happy with his returns. In your opinion, does he have a valid con-
cern? What advice would you offer him?
Yes – Consider the following:
• Aboobaker has more capital than Marx.
• The return earned by Aboobaker is less than that of the business and Marx.
• He should renegotiate the partnership agreement.

TASK 13.20 Parys Fashions: Financial indicators
13.20.1 Piet and Zilda decided to increase the prices marked on the clothing from 70% in 20.4
to 90% in 20.5. In your opinion, has this been a good strategy? Explain, quoting
figures or a financial indicator (actual ratio or percentage) for both years to support
your answer.
Yes.
Despite the increase in the mark-up % the sales increased by R500 000 and their gross profit has increased
from R945 000 (39.4% of R2.4m) to R1 287 600 (44.4% of R2.9m).
This indicates that the customers are still supporting the shop.
Maybe there is no other fashion shop in Parys and Piet and Zilda might have a monopoly over this form of
business in Parys which enables them to charge high prices.
Piet and Zilda are still granting trade discounts to some of their customers as they are achieving an 80% mark-
up compared to the 90% intended mark-up (65% compared to 70% in 20.4), so this might encourage cus-
tomers to support Parys Fashions even if a competitor opens up in a nearby town.
13.20.2 Has the business appeared to control its operating expenses well in 20.5? Quote two
financial indicators (actual figures or percentages) for both years to support your an-
swer.
Yes.
Operating expenses as a percentage of sales have improved from 42.5% in 20.4 to 35.1% in 20.5.
Consequently Operating profit as a percentage of sales increased from 16.6% to 20.2%.
This is partly due to the good control of operating expenses, and also to the successful strategy relating to the
mark-up percentage.
13.20.3 Comment on the solvency of the business. Should the partners be satisfied? Explain.
Quote a financial indicator (actual figures or percentages) for both years to support
your answer.
Yes.
In both years the solvency ratio is more than 3 : 1 .
The total assets exceed the total liabilities by more than three times, so the business should not have any
problem in paying off all its debts.
13.20.4 Zilda says she does not agree with the low value of land & buildings in the Balance
Sheet as it is valued at the cost price from 10 years ago. She says the solvency ratio
will be even better if the land & buildings are valued at current values. Do you agree
with her? Explain.
Yes and No.
She is correct that the solvency ratio will be higher as total assets will be much higher based on the current
value of land and buildings.
However, it is generally accepted practice to value land and buildings at historical cost (GAAP).
This also complies with the rule of prudence (i.e. being conservative) as they cannot be certain of the current
value until the land and buildings are sold.
13.20.5 Comment on the control over stock, debtors and creditors. Quote financial indicators
(actual figures) for both years to support your answer.
Stock:
The business is keeping too much stock.
Fashions change almost every 3 months/90 days), but they are keeping 150 days of stock (worsened from 120
days).
Debtors:
The control over debtors has improved.
They are now paying much quicker, in 27 days rather than the 45 days of the previous year.

Creditors:
The business is complying with normal credit terms of 30 days.
This will keep the suppliers happy and will help the business in negotiating better cost prices with their suppli-
ers.
13.20.6 Comment on the current ratio and the acid-test ratio. Quote the financial indicators
(actual figures or percentages) for both years to support your answer.
Current ratio: Has increased from 2.4 : 1 to 3.3 : 1
Acid-test ratio: Has increased from 1.3 : 1 to 1.5 : 1.
Although the business will have no problem in settling its current debts, both these ratios are too high and
represent too much invested in working capital.
Even without relying on the sale of stock, the business will not have a problem paying off its current debts.
Current asset items do not earn a return and it would be advisable to convert some of these assets into
investments.
13.20.7 Comment on the debt / equity ratio. Quote a financial indicator (actual figures or
percentages) for both years to support your answer.
The debt/equity ratio has been maintained at 0.2 : 1 for both years which indicates that the business relies
significantly more on capital provided by the owners rather than on borrowed capital.
Partner’ capital is 5 times higher than the loans.
This means that the business is in a low-risk situation.
If profits drop in future, the business will not have to pay high interest on loans and loan repayments will be
relatively low.
13.20.8 Comment on the percentage return earned by the business, by Piet and by Zilda.
Quote financial indicators (actual figures or percentages) for both years to support
your answer.
Percentage return of the business:
This has improved from 22.2% to 26.3% which greatly exceeds the return on alternative forms of investment.
The partners should be very satisfied.
But this return could be even higher if they sort out the over-investment in current assets (see 13.20.5 and
13.20.6 above).
Percentage return of Piet:
His return is good and it has increased from 18% to 21.6%.
Percentage return of Zilda:
His return is very satisfactory; it has increased from 24.9% to 30.0%.
However, Piet should be concerned that his percentage return is consistently lower than that of Zilda, and that
of the business.
He might have contributed considerable capital and he might not be earning what he feels he might be entitled
to earn.
He should inspect the partnership agreement to see that he is happy with the provisions.
13.20.9 Comment on the Drawings taken by the partners. Is this good business practice? Ex-
plain, quoting a financial indicator (ratio or percentage) for both years to support your
answer.
In both years the partners are drawing 50% of the profit earned by the business.
This is good business practice as it means the partners are personally benefiting from the business each year
by taking a good percentage of the profit in the form of drawings, while they are also retaining 50% of the
profit in the business which will enable it to grow and earn even bigger profits in the future.
Also the business will be worth more, which will enable the partners to sell the business at a higher value
should they choose to retire at some stage.

13.20.10 Piet feels that they should open up a separate department which sells cheaper fash-
ions. Zilda feels this will be a bad idea as it will give the business a poor reputation
by selling poor quality clothes. This is causing disagreement between the partners.
What would you say to them to influence a ‘ win-win’ situation for Piet and Zilda?
Both Piet and Zilda are probably correct.
Piet might well be correct to diversify into low-cost clothing because it would open up a new market for
the business.
Zilda might well be correct because lower quality clothing will negatively influence perceptions about the
business and might chase customers away if they feel a certain status in shopping at an exclusive shop.
The compromise might be for them not to open up another department in the same shop, but to open up a
new shop in Parys with a different trading name, e.g. Parys Bargains.
Piet could run this shop or they could employ a manager to run it for them.
However, they must not allow their focus to drift off Parys Fashions as this business is earning a good profit
for them.
CLUBS (NON-PROFIT ORGANISATIONS)
TASK 13.21 Membership Fees account and Financial State-

ments
13.21.1 GENERAL LEDGER OF PRESTIGE SPORTS CLUB
20.2 20.2
Jan 1 Income receivable 90 Jan 1 Deferred income 225
Dec 31 Deferred income 450 Dec 31 Bank 10 965
Income & Expenditure* 10 875 M/fees written off 90
Income receivable 135
11 415 11 415
*[200 – 2 x 45] + [40 x 11 x 3.75] + [21 x 3.75 x 4]

= 8 910 + 1 650 + 315 = 10 875

13.21.2 PRESTIGE SPORTS CLUB
INCOME AND EXPENDITURE STATEMENT FOR YEAR ENDED 31 DECEMBER 20.2
INCOME Notes
Other income: 4 379
Entrance fees [4 575 x 2/3] 3 050
Refreshment profit: 823
Refreshment sales [1 875 – 160] 1 715
Refreshment purchases [939 + 378 – 325 - 100] [892]
Dance profit: 250
Dance proceeds 625
Dance expenses [375]
Donations 256
Gross income 15 254
EXPENDITURE [12 156]
Wages [4 875 – 1 470] 3 405
Stationery 155
Water and electricity [1 350 – 100] 1 250
Honorarium to treasurer 300
Sports expenses [1 388 + 30 – 150] 1 268
Donation 100
Depreciation [2 250[1] + 338[2]] 5 588
Interest expense/financing cost 2 [2 875]
[1]
15 000 X 15% = 2 250 [2]
3 000 x 15% x 9/12 = 338
13.21.3 PRESTIGE SPORTS CLUB

ASSETS Notes
Financial assets:
Investment at AB Bank [12 500 + 1 250 – 6 250] 7 500
Inventory 4 325
Receivables 5 1 755
Loan from EBC Bank [16 250 – 3 750 – 3 750] 8 750
Payables 8 5 500

Notes to the financial statements for the year ended 31 December 20.2
1. INTEREST INCOME
from investments [3 000 – 750 + 48] 2 298
2 298
2. INTEREST EXPENSE
on loan [1 625[1] + 1 250[2]] 2 875
2 875
[1]
16 250 x 20% x 6/12 = 1 625 [2]
16 250 – 3 750 x 20% x 6/12 = 1 250
3. FIXED/TANGIBLE ASSETS Land &

Equipment Total
Buildings
Cost 131 250 35 000 166 250
Movements (2 588) (2 588)
Additions at cost - 3 000 3 000
Cost 131 250 38 000 169 250
4. INVENTORIES
Refreshments [939 – 939 + 325] 325
325
5. RECEIVABLES
Prepaid expenses [30 – 30 + 1 470] 1 470
Income receivable/Accrued income
[1 000 – 90 – 750 –160 + 135] 135
Deposit for hall 150
1 755
Fixed deposit 6 250
Savings account 456
Bank [75 + 21 344 – 19 321] 2 098
8 804
7. ACCUMULATED FUND
Entrance fees capitalized [4 575 x 1/3] 1 525
8. PAYABLES
Creditors [925 – 875] 50
Expenses payable [100 – 100 + 1 250] 1 250
Deferred income [225 – 225 + 450] 450
Short term loan 3 750
5 500

TASK 13.22 Membership Fees account – Interpretation
GENERAL LEDGER OF WEMBLEY BOWLING CLUB
20.3 20.3
Jan 1 Accrued income[1] 1 800 Jan 1 Deferred income 300
Dec 31 Deferred income 1 500 Dec 31 Bank: 20.2[2] 1 200
Income & Expend.[5] 31 500 20.3[6] 28 800
20.4 1 500
Membership fees writ-
ten off[3] 600
Accrued income[4] 2 400
34 800 34 800
[1]
6 x 300 = 1 800
[2]
4 x 300 = 1 200
[3]
2 x 300 = 600 OR 1 800 – 1 200 = 600
[4]
8 x 300 = 2 400
[5]
100 + 6 – 1 x 300 = 31 500
[6]
Balancing figure OR
100 – 1 (membership terminated) – 1 (paid in 2002 for 2003) – 8 (arrears in 2003) + 6 (new members)
= 96 x 300 = R28 800
TASK 13.23 Ledger accounts and Financial Statements

13.23.1 GENERAL LEDGER OF STAY TRIM SPORTS CLUB
20.3 20.3
Jan 1 Income accrued 5 600 Jan 1 Deferred income 6 400
Dec 31 Deferred income 8 800 Dec 31 Bank: 20.2 2 400
Income & Expenditure 414 400 20.3 394 400
[510 + 12 – 4 x 800] 20.4 8 000
Membership fees writ-
ten off 3 200
Energy drinks 1 600
428 800 428 800
13.23.2 COST OF SALES

Opening stock 3 000
Cash purchases 21 100
Credit purchases 14 500
Stock received from member 1 600
Stock returned to creditor [600]
Donation [500]
39 100
Less closing stock [2 200]
COST OF SALES 36 900

13.23.3 STAY TRIM SPORTS CLUB
INCOME AND EXPENDITURE STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20.3
INCOME Note
Entrance fees 3 000
Fun run profit [8 000 – 2 600] 5 400
Energy drinks profit [45 625 – 36 900] 8 725
Profit on sale of asset [3 600 + 1 155 + 8 000 – 12 000] 755
EXPENDITURE [167 999]
Membership fees written off 3 200
Salary of caretaker [68 175 + (2 x 600)] 69 375
Unemployment Insurance contribution [682 + 12] 694
Water and electricity 8 140
Honorarium: Treasurer 8 000
Rent [5 000 + 62 000 – 5 500[3]] 61 500
Donation 500
Depreciation [1 155[4] + 19 140[5] + 910[6]] 21 205
Interest income[1] [980 + 468 + 150] 1 598
Interest expense/financing cost[2] [10 440]
[1]
[28 000 x 5%] + [2 400 x 8% x 3/12] = 1 400 + 48 = R1 448
[2]
[120 000 x 9% x 8/12] + [120 000 – 12 000 x 9% x 4/12]
= 7 200 + 3 240 = R10 440
[3]
62 000 + 5 000 – [4 x 500] = 65 000 for 13 months
Old rent amount = 65 000  13
= R5 000 per month
Prepaid amount = 5 000 + 500
= R5 500
[4]
8 400 x 15% x 11/12 = 1 155
[5]
[260 000 – 12 000] – [124 000 – 3 600]
= 248 000 – 120 400 = 127 600
127 600 x 15% = R19 140
[6]
18 200 x 15% x 4/12 = R910
13.23.4 Notes to the financial statements for the year ended 31 December 20.3
FIXED/TANGIBLE ASSETS Equipment

Carrying value at beginning 136 000
Cost 260 000
Movements [10 250]
Additions at cost 18 200
Disposals at carrying value [7 245]
Depreciation [21 205]
Carrying value at end 125 750
Cost 266 200

CASH AND CASH EQUIVALENTS
Fixed deposit: Standard Bank 28 000
Bank [11 400 + 249 765] 261 165
Petty cash 500
292 815
ACCUMULATED FUND
PAYABLES
Creditors [19 600 – 18 025 - 600] 975
Deferred income/Income received in advance 8 800
Expenses payable/Accrued expenses 10 440
UIF [12 + 12] 24
SARS – PAYE 264
Creditors for salaries [1 200 – 12 – 264] 924
33 427
TASK 13.24 Problem solving

GENERAL LEDGER OF STELLA INDOOR HOCKEY CLUB
13.24.1 Dr MEMBERSHIP FEES N Cr
20.6 20.6
Jan 1 Accrued income 15 600 Jan 1 Deferred income 8 400
Dec 31 Deferred income 9 600 Dec 31 Bank: 20.5 4 800
Bank (refund) 2 400 20.6 109 200
Income & Expend.* 135 600 20.7 9 600
M/ship fees written off 10 800
163 200 163 200
*110 – 2 [2 400 ÷ 1 200] – 9 [10 800 ÷ 1 200] + 14 [2 800 ÷ 200] x 1 200 = 113 x 1 200 = R135 600
13.24.2 Do you think the committee should be happy with the collection of fees? Why?
Give TWO reasons for your answer.
No.
13 members (15 600 ÷ 1 200) did not pay their previous year’s fees.
This amounts to 12% (13/110 x 100).
17 members (20 400 ÷ 1 200) did not pay their current year’s fees.
This amounts to 15% (17/113 x 100). Arrear fees have increased by 3%.
The fees of 9 members had to be written off – 8% (9/110 x 100) of the total membership.

13.24.3
This Task affords learners the opportunity to deal with conflict situations.
Various options are possible – class discussions, report backs from group leaders or written presentations
will encourage healthy discussion.
The class may also be split into two groups – one group representing management and the other the
‘dissatisfied’ group.
Some points to consider are listed below:
− A detailed breakdown of expenses and income should be compiled.
− The surplus of R86 000 need to be justified. What was it in the previous years? What will it be in the
next financial period? Does a high surplus indicate that club management is highly efficient in the
control of expenses? Does a high surplus indicate that management is skimping on service benefits for
members?
− A Cash Budget and Projected Income Statement may be compiled.
− The fixed deposit investment: Is it too high? Should it be cashed in and the funds used to upgrade
facilities? Should the funds be used to pay for the running expenses? This may make it possible to
decrease membership fees.
− Fixed/tangible asset values are at historical value – these could be worth much more at market value.
Members need to know this.
− Etc.
COST ACCOUNTING
TASK 13.25 Ledger accounts

13.25.1 GENERAL LEDGER OF EAST COAST MANUFACTURERS
Dr RAW MATERIALS STOCK ACCOUNT B Cr
20.8 20.9
20.9 Work-in-progress stock GJ 545 000
Feb 28 Bank CPJ 300 000 Balance c/d 45 000
Bank CPJ 30 000
610 000 610 000
WORK-IN-PROGRESS STOCK ACCOUNT B

20.8 20.9
Mar 1 Balance b/d 40 000 Feb 28 Finished goods stock GJ 1 432 200
20.9 Balance c/d 48 000
Direct labour cost GJ
(480 000 + 24 000) 504 000
1 480 200 1 480 200

Dr FINISHED GOODS STOCK ACCOUNT B Cr
20.8 20.9
Mar 1 Balance b/d 120 000 Feb 28 Cost of sales GJ 1 462 200
20.9 Balance c/d 90 000
Feb 28 Work-in-progress GJ 1 432 200
stock
1 552 200 1 552 200

FACTORY OVERHEAD COST ACCOUNT C
20.9 20.9
Feb 28 Indirect labour GJ 126 000 Feb 28 Work-in-progress stock GJ 391 200
(120 000 + 6 000)
Consumable stores GJ 27 200
(10 000 + 24 000 x 80%)
Rent (80 000 x 80%) GJ 64 000
(130 000 x 80%)
(42 000 x 2/3)
(640 000 – 36 000 x 15%)
391 200 391 200
13.25.2 Calculate the unit cost if 1 500 satellite dishes were manufactured.
R1 432 200 ÷ 1 500 units = R954.80
TASK 13.26 Calculation of break-even point

Break-even
Selling price Variable cost Contribution Fixed costs
point (no. of
per unit per unit per unit (in total)
units)
R20 R16 R4 R120 30
R40 R24 R16 R500 31.25 / 32
R180 R144 R36 R670 18.6 / 19
R700 R550 R150 R8 200 54.6 / 55
R1 200 R880 R320 R7 200 22.5 / 23
TASK 13.27 Ledger accounts and problem solving

13.27.1 GENERAL LEDGER OF KZN MANUFACTURERS
(a) Dr RAW MATERIALS STOCK B Cr
20.6 20.7
Sept 1 Balance b/d 28 300 Aug 31 Direct materials cost GJ 176 190
20.7 Balance c/d 25 500
Aug 31 Bank CRJ 78 600
Bank (carriage) CRJ 4 700
201 690 201 690

(b) Dr WORK-IN-PROCESS STOCK B Cr
20.6 20.7
Sept 1 Balance b/d 12 100 Aug 31 Finished goods stock GJ 436 000
20.7 Balance c/d 10 720
Aug 31 Direct materials cost GJ 176 190
446 720 446 720

(c) FACTORY OVERHEAD COST C
20.7 20.7
Aug 31 Indirect materials Aug 31 Work-in-process stock GJ 138 390
(540 + 6 210 - 420) GJ 6 330
Indirect labour GJ 38 300
Rent GJ 28 800
Water and electricity GJ 15 680
Insurance GJ 6 560
Salaries GJ 28 000
Maintenance GJ 11 720
138 390 138 390
(d) SELLING AND DISTRIBUTION COST C

20.7 20.7
Aug 31 Rent GJ 3 600 Aug 31 Profit & loss account GJ 80 980
Water and electricity GJ 1 960
Insurance GJ 820
Advertising GJ 12 400
Salaries GJ 52 800
Packing materials GJ 9 400
80 980 80 980
13.27.2 Calculate the unit cost of production of a cap if 109 000 caps were manufactured
during the year.
436 000 ÷ 109 000 = R4
13.27.3 PROBLEM SOLVING

(a) Explain how the importing of the sanitary ware from China will affect the profits of the
business.
Profits – increase because cost of sales will be 50% lower than when they were manufactured.
Profits – increase because selling price can be lowered - capture a large share of local market.
Any other acceptable answer.

(b) Discuss two ethical issues that John Smith should consider when importing goods from
China.
Retrench workers – increase unemployment in South Africa.
Exploitation of labour in China – long hours, low wage, child labour.
Not encouraging the development of manufacturing sector in South Africa to create employment.
Not considering the social responsibility to the workers.
Any other acceptable answer.
(c) Do you recommend that the sanitary ware be imported from China? Discuss two rea-
sons for your answer.
No.
Quality of products.
Distance between countries – lead to problems regarding queries, returns, placing of orders.
Time taken between placing of orders and delivery of goods.
Risk with shipping – damages.
Yes.
Profits increase.
Remove risks associated with manufacturing, e.g. strike action by workers, etc.
TASK 13.28 Ledger accounts, unit cost and break-even calcu-

lations
13.28.1 GENERAL LEDGER OF TASH MANUFACTURERS
(a) Dr RAW MATERIALS STOCK B Cr
20.7 20.8
Sept 1 Balance b/d 60 000 Aug 31 Creditors control 12 600
20.8 Direct materials cost 680 880
Aug 31 Bank 467 800 Balance c/d 54 620
Creditors control 204 400
Bank (carriage) 15 900
748 100 748 100
(b) WORK-IN-PROGESS STOCK B

20.7 20.8
Sept 1 Balance b/d 18 400 Aug 31 Finished goods stock 1 219 580
20.8 Balance c/d 19 260
Aug 31 Direct materials cost 680 880
Direct labour cost 328 000
Factory o/head cost 211 560
1 238 840 1 238 840

(c) Dr FINISHED GOODS STOCK B Cr
20.7 20.8
Sept 1 Balance 44 300 Aug 31 Cost of sales 1 211 390
20.8 Balance c/d 52 490
Aug 31 Work-in-progress
1 219 580
stock
1 263 880 1 263 880
COST/FINAL ACCOUNTS SECTION

(d) FACTORY OVERHEAD COST C
20.8 20.8
Aug 31 Cleaning materials[1] 13 940 Aug 31 Work–in–progress stock 211 560
Water and electricity[2] 17 920
Rent expenses[3] 24 000
Insurance[4 7 840
Salaries[5] 89 400
Depreciation 26 000
211 560 211 560
[1]
5 200 + 15 540 - 6 800 [2]
22 400 x 4/5
[3]
36 000 x 800/1 200 [4]
9 800 x 4/5
[5]
72 000 + 5 400 + 12 000
(e) TRADING ACCOUNT F

20.8 20.8
Aug 31 Cost of sales 1 211 390 Aug 31 Sales 1 938 224
Profit and loss 726 834 (1 211 390 + 60%)
1 938 224 1 938 224
13.28.2
(a) Calculate the following:
• Direct material cost per unit
390 600 ÷ 28 000 = R13.95
• Direct labour cost per unit

241 360 ÷ 28 000 = R8.62
• Factory overhead cost per unit

123 760 ÷ 28 000 = R4.42
•The break-even point

210 000
50 – (737 800 ÷ 28 000)
210 000
50 – 26.35
210 000 = 8 879.49 / 8 880 clocks
23.65
(b) Give a reason for the calculation of the break-even point.

Manufacturer will know the minimum number of clocks to manufacture and sell so that no profit or loss is
made.

BUDGETS
TASK 13.29 Debtors Collection Schedule and Interpretation

13.29.1 What is the main line of business of a draper?
Curtaining.
13.29.2 In your opinion what did Kamino do to improve credit terms? Give two examples.
No deposit; lower deposit; no credit checks, etc.
13.29.3 Calculate the expected cash and credit sales for the period 01 April 20.8 – 30 June
20.8. (Round off answers to the Rand when necessary).
April May June

Cash [40% x 90 000 + 5%] 37 800 39 690 41 675
Credit [60% x 90 000 + 20%] 64 800 77 760 93 312
Total turnover 102 600 117 450 134 987
13.29.4 DEBTORS COLLECTION SCHEDULE: 01 APRIL 20.8 – 30 JUNE 20.8

CREDIT COLLECTIONS
MONTH
SALES April May June
February: 8% 51 000 4 080
March: 70%; 8% 54 000 37 800 4 320
April: 20% (-3%); 70%; 8% 64 800 12 571 45 360 5 184
May: 20% (-3%); 70% 77 760 15 085 54 432
June: 20% (-3%) 93 312 18 103
DEBTORS’ COLLECTIONS 54 451 64 765 77 719
TASK 13.30 Cash Budget and interpretation

13.30.1 MO’S CORNER STORE
CASH BUDGET FOR THE PERIOD 01 FEBRUARY 20.8 – 30 APRIL 20.8
RECEIPTS February March April Total
Cash sales 68 800 64 000 68 000 200 800
Collection from debtors[1] 18 000 17 200 16 000 51 200
Commission 800 800 800 2 400
Rental 6 000 6 000 6 000 18 000
Total receipts [A] 93 600 88 000 90 800 272 400
PAYMENTS
Cash purchases of stock[2] 25 800 24 000 25 500 75 300
Payments to creditors[3] 16 000 24 000 18 000 58 000
Operating expenses 30 600 31 212 31 836 93 648
Drawings 10 000 10 000 10 000 30 000
Deposit on vehicle 20 000 - 20 000
Instalment on vehicle 1 200 1 200
Total payments [B] 82 400 109 212 86 536 278 148
Cash surplus (shortfall) [A – B] 11 200 [21 212] 4 264 [5 748]


[1]
Feb: 90 000 x 20%
Mar: 86 000 x 20%
Apr: 80 000 x 20%
[2]
86 000 x 100/200 x 60%; 80 000 x 100/200 x 60%; 85 000 x 100/200 x 60%
[3]
Cost of sales: Nov: 80 000 x 100/200 = 40 000 x 40% = 16 000
Dec: 120 000 x 100/200 = 60 000 x 40% = 24 000
Jan: 90 000 x 100/200 = 45 000 x 40% = 18 000
13.30.2 PROJECTED NET PROFIT FOR FEBRUARY 20.8

Sales 86 000
Gross profit 43 000
Other income: 6 800
Commission 800
Rental 6 000
NET PROFIT 19 200

(a) What other supporting documents would the bank manager require to support
the loan application?
Balance Sheet, current and previous bank statements.
(b) Refer to the Cash Budget. Is Mo likely to get the loan?

The bank manager will need to look at his Balance Sheet before he decides to grant the loan.
The Cash Budget is based on expectations while the Balance Sheet indicates real values on a particular
date.
TASK 13.31 Cash Budget and interpretation

13.31.1 ACBON TRADERS
CASH BUDGET FOR THE PERIOD JANUARY - MARCH 20.8
January February March Total
CASH RECEIPTS
Sales 180 000 162 000 186 300 528 300
Rent income - - 10 000 10 000
Loan: ZipBank - - 60 000 60 000
Sale of vehicle - 21 000 - 21 000
Total receipts [A] 180 000 183 000 256 300 619 300
CASH PAYMENTS
Stock purchases[1] 12 000 10 800 12 420 35 220
Payments to creditors[2] 151 200 108 000 97 200 356 400
Loan instalment 2 550 2 550 2 550 7 650
Salaries 60 000 60 000 60 000 180 000
Drawings 5 000 5 000 5 000 15 000
Sundry operating expenses 49 850 50 000 50 150 150 000
Total payments [B] 280 600 236 350 227 320 744 270
Cash surplus/shortfall [A - B] [100 600] [53 350] 28 980 [124 970]

Opening bank balance 186 450 85 850 32 500 186 450
CLOSING BANK BALANCE 85 850 32 500 61 480 61 480

13.31.2 Refer to the additional information and the budget to calculate the mark-up percent-
age on cost.
Total purchases in January = R12 000 + R108 000 = R120 000
Total sales in January = R180 000
Mark-up % = 180 000 – 120 000 x 100
120 000 1
= 50%
13.31.3 Answer the questions below:

(a) Does this business sell on credit? Give a reason for your answer.
No. There are no collections from debtors.
(b) The carrying value of the vehicle sold in February is R18 000. Calculate the
profit or loss on the vehicle sold.
Selling price (R21 000) is higher than the carrying value (R18 000). A profit of R3 000 was made.
(c)Calculate the expected amount for “other operating expenses” for April 20.8
Explain how you arrived at this figure
R50 300 - There is a monthly increase of R150 from January to March.
(d) Study the Cash Budget and state six observations that you have made about
this budget.
• In January the large deficit arose mainly from the large amount paid to creditors in respect of December
purchases.
• The sale of the vehicle brought in more cash but there is still a deficit.
• The additional loan in March and the rent income resulted in a positive balance.
• A healthy balance of R186 450 has decreased to R61 480 over a 3-month period.
• The proprietor should be concerned about this decrease in cash.
• Sales revenue need to be boosted – consider a change in mark-up, advertising campaigns, etc.
• Better control over expenses is necessary.
INVENTORY SYSTEMS
TASK 13.32 Ledger accounts, Calculations, Internal control

13.32.1 LEDGER OF NKOSI SPAZA SHOP
Dr Trading Account F1 Cr
20.9 20.9
Feb 28 Opening stock 55 000 Feb 28 Sales[3] 858 080
Purchases[1] 516 400 Closing stock 48 000
Customs duty 18 000
Carriage on purchases[2] 17 100
Profit & loss (gross profit) 299 580
906 080 906 080
[1]
Purchases: 520 000 + 3 400 – 5 800 – 1 200 [2]
Carriage on purchases: 14 600 + 2 500
[3]
Sales: 882 000 – 22 000 – 1 920

13.32.2 Calculate the following:
• Cost of sales
Sales – Gross profit
= 858 080 – 299 580 = R558 500
OR
Opening stock + Purchases + Customs duty + Carriage on purchases – Closing stock
= 55 000 + 516 400 + 18 000 + 17 100 – 48 000 = R558 500
• Mark-up percentage achieved for the year

299 580 x 100 = 53.6%
558 500 1
13.32.3 Calculate the amount that appears to be missing.

Expected sales = 558 500 x 1.60 = R893 600
Actual sales = R858 080
Shortfall = R35 520
13.32.4 Jack Nkosi is considering changing to the perpetual inventory system next year. What
main point should he consider before doing this?
Cost of implementation in comparison to the benefit.
Any other valid explanation.
TASK 13.33 Analysis of the Purchases account

13.33.1 What stock system does this business use? Supply a reason for your answer.
Periodic system.
Purchases account applies only to this system.
Trading stock account applies to the perpetual system.
13.33.2 In which section of General Ledger would this account appear?

Nominal section – Purchases is an expense account.
13.33.3 On which side does this account decrease?

Credit.
13.33.4 Identify the journals for [1] – [5].

[1]: CPJ
[2]: CJ
[3]: GJ
[4]: CAJ
[5]: GJ
13.33.5 Describe the transactions for [1] – [5].

[1]: Cash purchases of merchandise.
[2]: Credit purchases of merchandise.
[3]: Merchandise taken by owner for personal use.
[4]: Merchandise returned to suppliers/allowances granted by suppliers.
[5]: Donated merchandise.
13.33.6 At month-end the amount that will be transferred to the Trial Balance is R92 376. Cal-
culate the missing amount on the debit side marked ‘*’.
92 376 + 1 232 + 1 987 + 1 209 – 24 320 – 31 250 = R41 234

13.33.7 The balance of this account indicates the value of stock on hand. Is this statement true
or false? Provide a reason for your answer.
False.
A stock take will reveal the amount of stock on hand. The balance on the purchases account represents the
net purchases for the month.
TASK 13.34 Giga’s Stores: Ledger accounts, Post-Adjustment

Trial Balance, Calculations, Balance Sheet
13.34.1 GENERAL LEDGER OF GIGA’S STORES
20.7 20.8
Dec 31 Closing stock GJ 92 000 Jan 1 Opening stock GJ 92 000

OPENING STOCK N
20.7 20.7
20.8
Jan 1 Trading stock GJ 92 000
PURCHASES N
20.7 20.7
Dec 31 Total b/f 356 710 Dec 31 Drawings GJ 1 860
356 710 356 710

13.34.2 GIGA’S STORES
POST-ADJUSTMENT TRIAL BALANCE ON 31 DECEMBER 20.7
Capital [600 000 + 50 000] B1 650 000
Drawings [120 000 + 2 500 + 1 860] B2 124 360
Vehicles [320 000 – 80 000] B4 240 000
Accum. depreciation on vehicles
[200 740 + 5 500 – 61 500 + 23 815] B5 168 555
Equipment [116 000 + 32 000] B6 148 000
Accumulated depreciation on equipment [98 000 + 17 400 + 1 600] B7 117 000
Debtors control [54 600 – 870 – 720 + 1 390] B8 54 400
Provision for bad debts [5 000 + 440] B9 5 440
Bank [25 420 – 1 310 – 2 500 + 1 500 + 21 000] B10 44 110
Petty cash B11 2 000
Cash float B12 4 500
Creditors control [89 030 + 1 500] B13 90 530
Pension fund [2 500 – 90 + 1 080] B14 3 490
UIF [210 – 1 080 + 90] B15 780
Loan from Icic Bank [120 000 + 18 000] B16 138 000
Income received in advance B17 5 600
Prepaid expenses [6 000 ÷ 12 x 11] B21 5 500
Purchases [356 710 – 1 860] N2 354 850
Carriage on purchases [39 840 + 670] N3 40 510
Customs duty [12 480 + 1 310] N4 13 790
Sales N5 997 860
Debtors allowances [8 770 + 870] N6 9 640
Salaries and wages [258 000 – 90 – 1 080 + 1 080 + 90] N7 258 000
Unemployment insurance contribution N9 2 580
Telephone N11 15 440
Rent income [33 000 – 5 600]
[1]
N12 27 400
Bad debts [6 600 + 720] N13 7 320
Consumable stores [8 730 – 500] N14 8 230
Sundry operating expenses [42 100 – 5 500] N15 36 600
Depreciation [(5 500[2] + 23 815[3]) + (17 400[4] + 1 600[5])] N20 48 315
Asset disposal [80 000 + 2 500 – (56 000 + 5 500) - 21 000] N22 -
Profit on sale of asset N23 2 500
2 300 435 2 300 435
[1]
Rent amount before the R500 increase = 33 000 – [4 x 500]
= 33 000 - 2 000 = R31 000
01 Jan 20.7 – 30 April 20.7: 4 x 100% = 400%
01 May 20.7 – 28 Feb 20.8: 10 x 115% = 1 150%
Total = 1 550%

31 000 x 115/1 550 = R 2 300
Amount received in advance = 2 300 + 500 x 2 months
= R5 600
[2]
80 000 – 56 000 x 25% x 11/12 = R5 500
[3]
[320 000 – 80 000] – [200 740 – 56 000] x 25%
= 240 000 – 144 740 x 25% = R23 815
[4]
148 000 - 32 000 x 15% = 17 400
[5]
32 000 x 15% x 4/12 = 1 600
13.34.3 Gross profit

Net sales = 997 860 – 9 640 = R988 220
Cost of sales:
Purchases 354 850
Customs duty 13 790
505 810
LESS Closing stock 92 000
Cost of sales R413 810
Gross profit = 988 220 – 413 810 = R574 410
13.34.4 Net profit

Gross income:
574 410 + 27 400 + 1 390 + 2 500 = R605 700
Expenses:
258 000 + 38 700 + 2 580 + 5 210 + 15 440 + 7 320 + 8 230 + 36 600 + 18 000 + 440 + 48 315
= R438 835
Net profit = 605 700 – 438 835 = R166 865
13.34.5 GIGA’S STORES

ASSETS Note
Non-current assets

Capital and reserves / Owners’ equity
Capital 5 692 505
Non-current liabilities
Loan from Icic Bank 138 000
Current liabilities

Notes to the financial statements on 31 December 20.7
buildings
Cost 630 000 320 000 116 000 1 066 000
Movements - [47 815] 13 000 [34 815]
Additions at cost - - 32 000 32 000
Disposals at carrying value - [18 500] - [18 500]
Depreciation - [29 315] [19 000] [48 315]
Cost 630 000 240 000 148 000 1 018 000
2. INVENTORIES
92 500
54 460
Bank 44 110
Petty cash 2 000
Cash float 4 500
50 610
5. OWNER’S EQUITY
Balance on 01.01.20.7 600 000
Net profit for the year 166 865
Additional capital introduced 50 000
Drawings [124 360]
Balance on 31.12.20.7 692 505
Pension fund (2 500 – 90 + 1 080) 3 490
UIF (210 – 1 080 + 90)* (780)
Income received in advance/Deferred income 5 600
Accrued expenses/Expenses payable 670
99 510
*Can be shown under Trade and other receivables.

TASK 13.35 Katlov Retailers: Ledger accounts
GENERAL LEDGER OF KATLOV RETAILERS
13.35.1 Dr DEBTORS CONTROL B Cr
20.8 20.8
June 1 Balance b/d 41 211 June 30 Bank CRJ 24 316
30 Bank (r/d) CPJ 2 468 Discount allowed CRJ 896
Sales DJ 44 569 Debtors allowances DAJ 4 222
Sundry accounts GJ 225 Sundry accounts GJ 139
Balance c/d 58 900
88 473 88 473
13.35.2 BANK B
20.8 20.8
June 1 Balance b/d 12 569 June 30 Sundry accounts CPJ 89 256
128 224 128 224
13.35.3 CREDITORS CONTROL B

20.8 20.8
June 30 Bank CPJ 14 982 June 1 Balance b/d 33 324
Discount received CPJ 350 30 Sundry accounts CJ 22 419
Total allowances CAJ 3 080 Sundry accounts GJ 98
Sundry accounts GJ 542
Balance c/d 36 887
55 841 55 841

13.35.4 SALES N
20.8
30 Bank CRJ 56 782
Debtors control DJ 44 569
203 698
13.35.5 PURCHASES N
20.8 20.8
June 1 Total b/f 99 550 June 30 Creditors control CAJ 2 167
30 Bank CPJ 36 298
Petty cash PCJ 449
152 664 2 167

13.35.6 Dr CONSUMABLES N Cr
20.8 20.8
June 1 Total b/f 24 563 June 30 Creditors control CAJ 51
30 Bank CPJ 6 743
Creditors control CJ 784
Petty cash PCJ 140
32 230 51
TASK 13.36 Analysis of transactions, Accounting equation

13.36.1 Perpetual (Continuous) method:
(a) Trading stock Bank R4 425
(b) Debtors control Sales R3 500
Cost of sales Trading stock R2 500
(c) Trading stock Bank R535
(d) Drawings Trading stock R650
(e) SARS – PAYE Bank R15 000
(f) Repairs Bank R2 500
(g) Bank Bad debts recovered R1 450
Periodic method:
(a) Purchases Creditors control R3 942
(b) Bank Sales R3 400
(c) Carriage on purchases Bank R475
(d) Donation Purchases R720
(e) Creditors control Purchases R930
(f) Bank Rent income R2 900
(g) Debtors allowances Debtors control R513
13.36.2 Briefly explain 2 advantages of the perpetual inventory system over the periodic in-
ventory system.
Stock movements are recorded immediately.
Stock shortages are easily detected.
More sophisticated – bar coding, inventory control computer software.
13.36.3 Briefly explain 2 advantages of the periodic inventory system over the perpetual in-
ventory system.
Cheaper – no need for expensive outlay in computer/scanners, etc.
Ideal for smaller businesses where cost price cannot be easily determined.
VAT
TASK 13.37 Matching columns

1. D 6. E
2. G 7. H
3. A 8. F
4. I 9. C
5. B

TASK 13.38 VAT calculations
Exclusive Inclusive
Cost price Mark-up selling VAT (14%) selling
price price
R220 R80 R300 R42 R342
R320 25% R400 R56 R456
R480 R72 (15%) R552 R77.28 R629.28
R440 50% R660 R92.40 R752.40
R593.79 30% R771.93 R108.07 R880
TASK 13.39 VAT calculations
How does VAT affect the

1. PRODUCER consumer?
A farmer produces R100
Maize and charges
2. PROCESSOR
R14 VAT. The maize is used by the
Miller who adds R300 value by
Receiver of Revenue/SARS making flour. He sells to the
Baker for R400 and charges
R56 VAT. He takes off the
VAT he paid the farmer:
R56 – R14 = R42
5.
The customer
buys the
cakes
for R798 3. MANUFACTURER
(R700 + R98 4. RETAILER
4. RETAILER The Baker uses the flour to
VAT) The Retailer
The Retailer adds R100
R100 value
value make cakes and in the process
sells all the cakes
and sells cakes to
to his adds R200 value. He sells it to the
customers
customers for
for a total of
of R700.
R700. local supermarket for R600 and
He charges
He charges *R98……..
R98 VAT.VAT. charges R84 VAT. He takes off the
He
He takes
takes off
off the Vat he VAT he paid the Miller:
paid the baker: R84 – R56 = R28
*R98….R98– *R84..
– R84 = = *R14…….
R14

ADDITIONAL TASKS
TASK 13.40 Kangaroo Traders: Working backwards from indi-

cators
KANGAROO TRADERS:
Income Statement for the year ended 28 February 20.7
Sales 997 500
Operating expenses 198 250
Interest on fixed deposit 20 250
319 500
Interest on loan 43 200
Net profit 276 300
Balance Sheet on 28 February 20.7

Fixed / tangible assets 1 052 500
Investment (Fixed deposit, 9% p.a.) 300 000
Inventories (all Trading stock) 190 000
Trade & other receivables (all Debtors) 375 000
Cash & cash equivalents 35 000
TOTAL ASSETS 1 952 500
Partners' equity 1 200 000

Capital 1 300 000
Current accounts (100 000)
Loan from Basix Lenders (16% p.a.) 240 000
Trade & other payables (all Creditors) 512 500
TOTAL EQUITY & LIABILITIES 1 952 500

TASK 13.41 Majmey Clothing: Working backwards from indi-
cators
MAJMEY CLOTHING
Income Statement for the year ended 28 February 20.9
20.9 20.8
Sales 7 644 000 6 825 000
Cost of sales 4 368 000 3 900 000
Gross profit 3 276 000 2 925 000
Other operating income 364 900 952 500
Operating expenses 2 293 200 2 548 000
Operating profit 1 347 700 1 329 500
Interest on fixed deposit 32 300 24 000
1 380 000 1 353 500
Interest on loan 331 200 398 000
Net profit 1 048 800 955 500
MAJMEY CLOTHING
Balance Sheet on 28 February 20.9
20.9 20.8
Non-current assets 6 320 800 5 266 500
Fixed / tangible assets 5 864 500 4 942 500
Investment (Fixed deposit at A1 Bank) 456 300 324 000
Current assets 1 459 200 2 430 000

Inventories (all Trading stock) 447 200 1 300 000
Trade & other receivables (all Debtors) 762 000 710 000
Cash & cash equivalents 250 000 420 000
TOTAL ASSETS 7 780 000 7 696 500
Partners' equity 4 900 000 4 220 000

Capital 4 800 000 4 200 000
Current accounts 100 000 20 000
Non-current liabilities 1 960 000 2 464 000

Loan from Lanka Lenders 1 960 000 2 464 000
Current liabilities 920 000 1 012 500

Trade & other payables (all Creditors) 920 000 1 012 500
TOTAL EQUITY & LIABILITIES 7 780 000 7 696 500
Note 1: CAPITAL
MAJOLA MEYER TOTAL
Balance on 1 March 20.8 3 000 000 1 200 000 4 200 000
Capital contributed on 31 August 20.8 0 600 000 600 000
Balance on 28 February 20.9 3 000 000 1 800 000 4 800 000

Note 2: CURRENT ACCOUNTS
MAJOLA MEYER TOTAL
Profit per Income Statement 690 000 358 800 1 048 800
Partners' salaries 300 000 100 000 400 000
Partners' bonus 0 39 800 39 800
Primary distribution 450 000 214 800 664 800
Share of remaining profit 240 000 144 000 384 000
Drawings (690 000) (278 800) (968 800)
Retained income for the year 0 80 000 80 000
Balance on 1 March 20.8 0 20 000 20 000
Balance on 28 February 20.9 0 100 000 100 000
TASK 13.42 Umala Deliveries: Problem-solving

Some of the expected responses are provided below. Note that additional valid responses might well be
provided by learners. These must be assessed from the figures provided to assess their validity.
Problem/s identified Positive point/s identified
There appears to be R60 000 cash missing. Anand appears to have taken 10 days’ sick
Anand should have paid in 1 600 x R300 = leave which is reasonable.
R480 000.
Anand The vehicle is very expensive (R820 000)
(Vehicle 1) which causes cash flow problems for the
business, and results in very high deprecia-
tion (R164 000 per year) which reduces the
profit.
Brian might be using the vehicle for per- The running costs of the vehicle are low
sonal activities as his average per trip is (R1.30). This might be because the vehicle
200 km whereas the other drivers travel on is fairly new and still under a maintenance
average about 80 km per trip. plan, or that Brian has been a careful
Brian is not working hard enough. He driver.
Brian worked on 180 days for 300 deliveries,
(Vehicle 2) which is less than one trip per day, whereas
the other drivers did between 7 to 11 trips
per day. Consequently he is incurring a
loss for the business as the revenue he has
earned (R90 000) is much less than his ex-
penses (R150 000).
The running costs of the vehicle are very Zama has been working very diligently. He
high at R2.38 per km whereas the other ve- has worked all 225 days that the business
hicles are running at R1.58 per km or less. was operational. On average he did 11
This vehicle is very old as it has been fully trips per day.
Zama depreciated (book value R1.00). This vehi-
(Vehicle 3) cle has done the most kilometres (200 000
km) in comparison to the others. The wis-
dom of this should be queried as it is the
oldest vehicle (8 years old) and costs the
most to run (R2.38 per km).
Any other valid points can be accepted as long as they are qualified, e.g. Salaries, number of days
worked, etc.

POINTS OF ADVICE OFFERED TO UMESH TO IMPROVE THE BUSINESS:
1. He must review his policy of allowing drivers to collect the cash from customers as this is open to abuse
(refer to the R60 000 shortfall in Anand’s case).
2. He must review his policy of not allowing credit transactions. If he can ensure that no bad debts occur,
he might benefit from increased customers if he allows them to open up accounts.
3. He must review his policy to work only 225 days in the year. If there are 52 weeks in the year, and the
business is open 5 days per week, the total weekdays in the year are 260 days. Allowing for normal
holidays of three weeks per year, each driver should work 245 days, not 225.
4. He could possibly consider working on Saturdays, charge a higher rate for Saturdays and rotate duties of
drivers so that one of them works on a Saturday.
5. He should have a plan to replace vehicles after 5 years, otherwise they end up costing too much in terms
of running costs. When replacing each vehicle after five years, ensure that the new vehicle comes with
a maintenance plan.
6. Instead of paying the drivers a fixed salary of R72 000 each, rather put them on a commission basis to
motivate drivers like Brian to do more trips.
7. He must assess the work done by each driver. Zama has made 2 500 deliveries which is 900 more than
Anand and 2 200 more than Brian. Brian appears to be unproductive. Umesh must implement an ap-
praisal system, he must give a warning to Brian as he is not working up to the required standard, and if
Brian does not respond, he should put procedures in place to discipline him and possibly replace him.
TASK 13.43 Muscle Powa Gymnasiums: Problem-solving

Some of the expected responses are provided below. Note that additional valid responses might well be
provided by learners. These must be assessed from the figures provided to assess their validity.
Knysna Benoni Polokwane
Muscle-Powa Gym Muscle-Powa Gym Muscle-Powa Gym
Manager: Cynthia Manager: Sambuko Manager: Sambuko
The gym is open throughout Operating costs (R42 000) ap- Telephone costs (R3 000)
the year (360 days) except pear to be well controlled. have been well controlled
for certain public holidays. These work out to R14 per compared to the other two
This has probably led to the member which is considerably gyms. They have 75% of the
high number of clients lower than the other gyms number of clients of the
(6 000) compared to other (but might also be due to the Knysna gym, yet the tele-
gyms. fact that they are not open phone bill is 50% of that of
every day of each week). the Knysna gym.
Promotion of the gym to gain Per client, this gym makes the Repairs to equipment appear
clients is good. Spent highest profit (R167). The po- to be well controlled
Good
R50 000 on advertising which tential exists to make the (R54 000, which is on aver-
points
is double that of the Polo- highest profit of the three age R12 per client). This
relating
kwane gym, but the Knysna gyms if they can double the could be seen as a negative if
to each
gym has 1 500 more mem- membership. clients are dissatisfied with
gym
bers. the condition of the equip-
ment.
Spent R90 000 on agents

which is double than that of
the Polokwane gym. Alt-
hough they did not gain dou-
ble the members, effectively
the extra 1 500 clients brings
in extra fees of R450 000.

The Knysna gym seems to be There is low membership Control over collection of cash
spending too much on in- compared to the other gyms is poor, R250 000 is missing
structors (R180 000) which is (3 000 members). (expected collection = 300 x
4 times more than the other R4 500 = R1 350 000). If this
Points of gyms. They do not have 4 cash is located, their profits
concern times the clients. will be R250 000 higher.
relating
to each Each instructor might also be The gym is open only 5 days Advertising has not been ef-
gym paid too much. This works per week (260 / 52 weeks). fective. Spent R60 000 which
out to R7 500 per instructor This might discourage clients is more than the Knysna gym,
(the other gyms are paying from joining. but has 1 500 fewer clients.
R5 625).
Knysna Benoni Polokwane

Muscle-Powa Gym Muscle-Powa Gym Muscle-Powa Gym
Manager: Cynthia Manager: Sambuko Manager: Sambuko
Other operating expenses Gym not well promoted as Administration costs are the
seem to be high (R300 000 or there is no commission paid highest of the 3 gyms
R50 per client) in comparison to agents to secure clients, (R290 000) yet they do not
to the other branches of R14 and advertising is very low have the highest number of
and R23. (R10 000). members and they are not
open on the most days.
These costs are generally
fixed costs (e.g. rent) so they
should be similar for all three
Points of gyms.
concern
relating Telephone costs (R9 000) are
to each relatively high, 3 times higher
gym than that of the Polokwane
gym yet fewer members.
Repair costs are relatively

high (R87 000 for only 3 000
members = R29 per mem-
ber). This is proportionately
higher than the other gyms,
especially as this gym is not
open every day.

SUGGESTIONS TO STEVE STRONG TO IMPROVE THE BUSINESS OVERALL:
1. All three gyms should open 360 days of the year as this will increase the number of clients. People want
to train on their non-working days.
2. Better control is needed over the collection of fees. A new system needs to be put in place, especially
for the Polokwane gym. Encourage clients to pay by debit order even though bank charges could in-
crease. This would also reduce the security risk of carrying cash on the premises.
3. The promotion of the gyms should probably be done as a concerted effort from Steve’s head office. It
is clear that the managers of the different gyms are using different policies which are not always suc-
cessful.
4. The role of instructors needs to be determined. These people are obviously good for each gym. Maybe
it is necessary to employ more of them and pay them more or employ them for more hours (such as
occurs with the Knysna gym) as the clients might feel they are getting better service.
5. Certain costs in certain gyms need to be investigated to assess whether controls are good or not, e.g.
telephone costs in the Knysna and Benoni gyms; administration salaries in the Polokwane gym; other
operating costs in the Knysna gym.
6. The condition of the equipment in all three gyms must be inspected. Although the Knysna and Polkwane
gyms are relatively not spending much, they must not allow the condition of the equipment to deteriorate
as this will lead to loss of clients. On the other hand, maybe the relatively higher expenditure on repairs
by the Benoni gym is due to clients or employees abusing the equipment, so better physical control
might be necessary.

MODULE 14
EXAMINATION PAPERS
EXAMINATION PAPER 1
QUESTION 1: Bank Reconciliation (45 marks; 25 minutes)
1.1 Calculate the correct bank balance on 30 September 20.9. (24)
Cash Receipts Cash Payments

Journal Journal
TOTALS b/f 56 000 49 800
2.3 ✓✓845
2.4 ✓✓300
2.5 ✓✓✓1 450
2.7 ✓182
✓420
✓560
✓✓✓2 400
2.8 ✓✓2 400
2.9 ✓✓850
2.10 ✓✓1 500
TOTALS 60 745 55 962
Calculation of bank account balance:

(7 615✓✓) + 60 745 – 55 962 = (2 832)
1.2 Bank Reconciliation Statement on 30 September 20.9 (11)

Balance as per the bank statement (7 922) ✓
Outstanding deposit✓ 5 200 ✓
Correction of overpayment of stop order✓ 2 400 ✓✓
Outstanding cheques: No. 201 (850) ✓✓
No. 195 (920) ✓
No. 198 (740) ✓
Balance as per bank account (2 832) 
Alternate format:
Bank Reconciliation Statement on 30 September 20.9
Debit Credit
Balance as per the bank statement 7 922 ✓
Outstanding deposit✓ 5 200 ✓
Correction of overpayment of stop order 2 400 ✓✓
Outstanding cheques:✓ No. 201 850 ✓✓
No. 195 920 ✓
No. 198 740 ✓
10 432 10 432 
Negative marking: -1 for R1 200; -1 for R1 250

1.3 Which GAAP principle dictates the entry to be made for No. 2.5? Why? Explain (4)
briefly.
Prudence ✓
You need to be realistic. ✓
The cheque has been written against the business bank account so they will have to make the necessary
entry and then can follow up to get the money back from the individual.✓✓
1.4 The owner has asked for your assistance on how to prevent situations like 2.5 (6)
above occurring again in the future. Briefly discuss 3 measures that he can intro-
duce.
• 2 signatures on each cheque.✓✓
• Authorisation must be obtained before a cheque is written out.✓✓
• Division of duties. ✓✓
Any other feasible reason.
QUESTION 2: Fixed assets and Asset Disposal (45 marks; 30 minutes)
2.1 GENERAL LEDGER OF SANI TRADERS

20. 20.9
June 30 Vehicles✓ GJ ✓260 000 June 30 Acc dep on vehicles GJ 110 500
[78 000✓ + 32 500]✓✓
Creditors control GJ ✓130 000
Loss on disposal of as- GJ
set ✓19 500
260 000 260 000
(12)
2.2 Tangible assets / Fixed assets (21 marks)

Land &
Vehicles Equipment
buildings
Cost 920 000 560 000 420 000
Accumulated depreciation 0 (220 000) 340 000
Movements 230 000 85 000 107 200
Additions at cost ✓✓230 000 ✓✓320 000 132 000
Disposals at carrying value  (149 500) 0
Depreciation 0  (85 500)  (24 800)
Carrying value at end of year 1 150 000 425 000 187 200
Cost 1 150 000 ✓620 000 ✓552 000
Accumulated depreciation 0  (195 000) (364 800)
CALCULATION OF DEPRECIATION
VEHICLE SOLD: 260 000 x 15% x 10/12 = R32 500
Balance of vehicles:
560 000 – 260 000 = 300 000 x 15% = R45 000✓✓
320 000 x 15% x 2/12 = R8 000✓✓
EQUIPMENT:
80 000 x 20% = 16 000✓✓
132 000 x 20% x 4/12 = 8 800✓✓

2.3.1 The owner is very unhappy about the price that the Outlander was sold for. Sug- (6)
gest 3 possible reasons why the business could not sell the vehicle for a higher
price.
• Bad condition.✓✓
• High mileage.✓✓
• Economic climate – people are not buying expensive cars.✓✓
2.3.2 Briefly discuss 3 measures that the business could introduce to try to avoid such (6)
losses in the future.
• Control private mileage.✓✓
• Keep up the services and maintenance.✓✓
• Trade in earlier before losses are incurred.✓✓
• Any other feasible reason.
QUESTION 3: Partnerships (90 marks; 50 minutes)
NAME OF BUSINESS: S AND M SPORT SHOP

INCOME STATEMENT FOR YEAR ENDED 31 OCTOBER 20.9 (38 marks)
Note
Sales 4 000 000 ✓✓
Cost of sales 2 500 000 ✓✓
Gross profit 1 500 000 
Other operating income 110 830 
Rent income [65 800 – 9 400]✓✓ 56 400 
Bad debts recovered 2 300 ✓✓
Fee income [52 000 – 450]✓✓ 51 550 
Discount received [470 – 90]✓ 380 
Provision for bad debts adjustment [1 400 – 1 200] 200 ✓✓
Gross operating income 1 610 830 
Operating expenses 1 017 630 
Salaries and wages [360 000 + 8 000]✓ 368 000 ✓
Salary contributions [36 000 + 80]✓ 36 080 ✓
Insurance [17 280 – 1 500]✓ 15 780 
Bad debts 4 560
Consumable stores [8 200 – 600] 7 600 ✓
Sundry expenses *103 110 
Water and electricity [12 400 + 1 300]✓ 13 700 ✓
Trading stock deficit 2 000 
Depreciation 45 000
Rent 420 000
Operating profit / loss 593 200 
Interest income [1 900 + 500]✓✓ 2 400 
Profit / loss before interest expense/financing cost 595 600 
Interest expense/financing cost (75 600) ✓✓
Net profit / loss for the year 520 000
*Balancing figure

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 OCTOBER 20.9
3.2.1 INVENTORIES
Trading stock [84 000 - 800✓ - 2 000]✓ ✓81 200
Consumable stores on hand [8 200 – 7 600] ✓600
3.2.2 TRADE AND OTHER RECEIVABLES

Net trade debtors 29 100
Trade debtors [28 000 + 2 300]✓✓ 30 300
Provision for bad debts [1 400 – 200] ✓(1 200)
Income receivable / accrued ✓500
Expenses prepaid ✓ 1 500
(11)
3.2.3 CAPITAL ACCOUNTS Stuart Mark Total
Balance at the beginning of the year 480 000 600 000 1 080 000
Contribution of capital during the year 80 000
Withdrawal of capital during the year
Balance at the end of the year 560 000 600 000 1 160 000
3.2.4 CURRENT ACCOUNTS Stuart Mark Total

Profit per Income Statement 314 800 205 200 ✓520 000
Partners’ salaries 216 000 ✓108 000
Interest on capital[1] 40 000 ✓48 000
Bonus - ✓10 000
Primary distribution of profits 256 000 166 000 422 000
Final distribution of profits 58 800 39 200 98 000
Drawings during the year[2] ✓✓(25 800) (154 344)
Retained income for the year 289 000 50 856
Retained income at end of year 311 000 34 856 345 856
[1]
Stuart: 28 800 + 11 200✓ [2]
25 000 + 800 (18)
3.2.5 TRADE AND OTHER PAYABLES

Trade creditors [54 000 + 4 890]✓ 58 890
Deferred income/Income received in advance [9 400 + 450]✓ 9 850
Expenses payable/Accrued expenses ✓1 300
UIF [230 + 80✓ + 80]✓ ✓390
SARS (PAYE) [2 400 + 1 680]✓ 4 080
Creditors for salaries ✓6 240
Current portion of loan ✓92 000
(14)

3.3 Answer the following questions:
3.3.1 Calculate the return earned on the average owners’ equity of the partnership. (5)
Average equity = (1 080 000 + 1 160 000 + 6 000 + 345 856) ÷ 2 = 1 295 928
520 000 ✓ x 100
1 295 928 1
40%
3.3.2 Stuart and Mark are not happy with this return as they budgeted to make a return
of 50% this year. Explain to them why in view of the economic climate they
should be happy with this return. (5)
Recession and poor economic conditions may have resulted in the decrease. Also it should be noted that the
sporting industry is not an essential item. ✓✓✓
The return of 40% is a lot higher than they would receive on an alternative investment. ✓✓
QUESTION 4: Ratio and Analysis (45 marks; 30 minutes)
4.1 Calculate the current ratio for 20.9 (3)

169 000✓ : 65 000✓
2.6 : 1✓
4.2 The acid test ratio for 20.9 is 1.4 : 1. Calculate the missing cash and cash equivalent and in-
ventory figures. (6)
65 000 x 1.4 = R91 000✓✓
CASH AND CASH EQUIVALENTS: 91 000 – 72 000✓ = R19 000
INVENTORY: 169 000 – 91 000 = R78 000✓
4.3 Calculate the average stock holding period for 20.9. (4)
(78 000 + 110 000) ÷ 2 x 12
423 000
94 000 ✓ x 12
423 000✓
2.7 months / 81 days✓
4.4 Calculate the average debtors’ collection period for 20.9. (4)
(72 000 + 60 000) ÷ 2 x 12
761 400 x 70%
66 000✓ x 12
532 980✓✓
1.5 months / 45 days
4.5 Calculate the average creditors’ payment period for 20.9. (4)
(65 000 + 52 000) x 12
423 000 x 90%
58 500✓ x 12
380 700✓✓
1.8 months / 56 days
4.6 The owner is very happy as he believes the liquidity position of the business has
improved as the current ratio has decreased from last year. You do not totally agree
with him. Explain why you feel this way, by quoting at least 2 figures to support your
answer. (6)
The stock holding period has increased from 1.9 months to 2.7 months.✓✓
The creditors are been paid quicker than last year (1.8 months as against 2.1 months).✓✓
The debtors are taking longer to pay, i.e. 1.5 months as against 1.2 months.✓✓
Therefore, creditors are been paid before the stock has been sold and the debtors have all paid.

4.7 Calculate the owner’s equity for 20.9. (5)
1 200 000 + 240 000 + 169 000✓✓ – 500 000 – 65 000✓✓ = R1 044 000✓
4.8 Is the business solvent? Quote figures to explain. (2)

Yes – the owner’s equity is positive OR
Assets exceed liabilities ✓✓
4.9 Calculate the debt : equity ratio for 20.9. (3)

500 000✓ : 1 044 000
0.5 : 1
4.10 Explain to the owner whether the taking out of the loan was the best option or not.
Quote figures to explain your answer. (8)
The risk has increased from 0.2 : 1 to 0.5 : 1 although there is still low risk.✓✓
The return on total capital employed has decreased from 19% to 17%. ✓✓
While there is still positive gearing, the reason for the decrease needs to be assessed – is it going to increase
in the future?✓✓
Overall opinion – partner or loan ✓✓
QUESTION 5: Manufacturing (30 marks; 15 minutes)
GENERAL LEDGER OF RAINBOW TOYS

20.8 20.9
Nov 1 Balance b/d 23 000 Oct 31 Creditors control✓ ✓880
20.9 Work-in-progress✓ 137 592
Oct 31 Creditors control
/ purchases✓ ✓✓105 600 Balance b/d 6 800
Carriage✓ ✓6 200
Import duties✓ ✓✓10 472
145 272 145 272
Nov 1 Balance 6 800
(12)

20.8 20.9
Nov 1 Balance b/d 56 000 Oct 31 Cost of sales✓ ✓✓450 000
20.9 Balance c/d 24 000
Oct 31 Work-in-progress
stock✓ 418 000
474 000 474 000
Nov 1 Balance b/d 24 000
(5)

Dr WORK-IN-PROGRESS STOCK B Cr
20.8 20.9
Nov 1 Balance b/d 6 000 Oct 31 Finished goods ✓ 418 000
20.9 Balance c/d 16 392
Oct 31 Direct materials
cost✓ 137 592
Direct labour cost ✓100 800
Factory overhead
cost 190 000
434 392 434 392
Nov 1 Balance b/d 16 392
(7)
5.2 Point out at least 3 reasons why it would be better to buy the raw materials from
Limpopo. (6)
• Buying locally means more employment for locals which could lead to an improvement in the living condi-
tions of our own people.
• Due to fluctuating exchange rates the imported products are not stable.
• Goods brought from China are subject to import duties and higher carriage.
• Ethical reasons around child labour in China.
QUESTION 6: Budgets (45 marks; 30 minutes)
CASH BUDGET OF JOYCE STORES FOR THE 3 MONTHS ENDED 31 DECEMBER 20.9
6.1.1 DEBTORS COLLECTION SCHEDULE

MONTH CREDIT SALES OCTOBER NOVEMBER DECEMBER
August 180 000 54 000 27 000
September 210 000 99 750 63 000 31 500
October ✓330 000 156 750 99 000
November ✓420 000 199 500
153 750 246 750 330 000
(5)

6.1.2 CASH BUDGET OF JOYCE STORES FOR THE 3 MONTHS ENDED 31 DECEMBER 20.9
RECEIPTS OCTOBER NOVEMBER DECEMBER
Cash sales ✓✓220 000 ✓280 000 ✓360 000
Cash from debtors 153 750 246 750 330 000
Loan 420 000
TOTAL RECEIPTS 373 750 946 750 690 000
PAYMENTS
Cash purchases ✓✓55 000 ✓✓70 000 ✓✓90 000
Payments to creditors 140 000 160 000 ✓✓220 000
Interest on the loan 3 600 7 800 7 800
Salaries for the shop assistants 50 000 50 000 54 000
Manager’s salary 20 000 20 000 23 000
Rent 5 200 ✓✓5 590 5 590
Telephone 4 000 4 000 4 000
Sundry expenses 11 000 11 000 11 000
TOTAL PAYMENTS 288 800 328 390 415 390
Surplus (Deficit) 84 950 618 360
Opening bank balance (120 000) (35 050)
Closing bank balance (35 050) 583 310
(28)
6.2 Problem solving (12 marks)
PROBLEM POSSIBLE SOLUTION
BRANCH
2 mark for identification 2 marks for possible solution
Keurboom • 18 bikes have gone missing. • Need to introduce better control mech-
• Sales have not met the budget. anisms to prevent theft of bikes.
• Need to advertise more.
Hot Springs • Bought 20 more bikes than what was • Need to control buying so that it is line
budgeted for. with the budget.
• Sales are too low. • Need to advertise more or reduce the
• Holding too much stock. selling price in order to increase the
stock.
• Need to buy stock only when it is
needed.
Valley Rise • Budget is too low. • Need to review the budgeting.

• No stocks on hand. • Need to ensure that there is stock
• Over-spent on advertising. available.
• Advertising has resulted in all the stock
been sold. Assess whether all this ad-
vertising is necessary or increase
stocks and sales.

Grade 11 Examination Paper 1: Analysis Grid
QUES. 1 QUES. 2 QUES. 3 QUES. 4 QUES. 5 QUES. 6
Bank
Recon Fixed Ass IS & Notes Interp Manuf Budgets TOTAL
PER
FINANCIAL ACCOUNTING TOPIC TOTAL TARGET
Concepts - partnerships 1 1
Concepts - GAAP 0
Selected ledger entries & documents - partnerships 0
Accounting equation - partnerships 0
Prepare bank reconciliations 35 35
Prepare creditors reconciliations 0
150 to
Final accounts - partnerships 0 178 180
Financial statements - IS - partnerships 38 38
Financial statements - BS - partnerships 0
Financial statements - Notes - partnerships 21 42 63
Financial statements - Differences Partnerships vs Non-Profit Orgs 0
Analysis and interpretation of FS - partnerships 10 31 41
Calculate VAT 0
QUESTION QUESTION QUESTION QUESTION QUESTION QUESTION
MANAGERIAL ACCOUNTING 1 2 3 4 5 7 TOPIC TOT TOTAL TARGET
Ledger accounts of a manufacturing business 24 24
60 to
Cost calculations 0 66 75
Prepare cash budgets 42 42
MANAGING RESOURCES 1 2 3 4 5 7 TOPIC TOT TOTAL TARGET
Recording acquisition & disposal of fixed assets 12 12
Periodic inventory system - record transactions 0 60 to
Identify & analyse ethical behaviour using different scenarios 6 6 56 75
Internal control, internal audit, division of duties, docs, phys con-
trols 9 12 14 3 38
TOTAL PER QUESTION 45 45 90 45 30 45 300 300
Should be 300

COGNITIVE AND CHALLENGE
Problem-
Blooms Taxonomy Challenge Solving
Q Remem- Under- Ap- Ap- Ana- Ana- Evalu- Cre- Sur-
NO. TOPIC ber stand ply 1 ply 2 lyse 1 lyse 2 ate ate Easy Medium High face Deeo
1.1 Bank balance 3 21 14 6 4
1.2 Recon 5 6 6 2 3
1.3 Theory 4 6 1 3 6
Asset dis-
2.1 posal 4 3 5 5 7
2.2 Fixed asset 3 18 9 10 2
2.3.1 Reasons 6 4 2
2.3.2 Measures 6 2 4 6
Income
3.1 Statement 17 21 14 12 12
3.2 Notes 26 16 26 12 4
3.3 Questions 5 5 5 5
4.1 Current ratio 3 3
4.2 Acid test 6 3 3
4.3 Stock holding 4 2 2
4.4 Debtors 4 2 2
4.5 Creditors 4 2 2
4.6 Liquidity 6 2 4
Owners eq-
4.7 uity 5 5
4.8 Solvent 2 2
4.9 Debt : equity 3 3
4.10 Loan 8 8 8
5.1 Ledger 12 12 8 12 4
5.2 Ethics 6 6 6
Debtors col-
6.1 lection 2 6 4 4
6.2 Budget 14 16 2 20 8
6.3.1 Interest rate 4 4
6.3.2 Comment 3 3
4 6 85 126 6 33 22 18 300 98 120 82 300 6 14

1% 2% 28% 42% 2% 11% 7% 6% 33% 40% 27% 2.0% 4.7%
TAR- TAR- TAR-
TARGET = 30% TARGET = 40% TARGET = 30% GET=30% GET=40% GET=30%

EXAMINATION PAPER 2
QUESTION 1: Ledger entries & Accounting equation (30 marks; 18 minutes)
Account debited Account credited Amount A O L

e.g. Equipment Creditors control R20 000 + 0 +
Bank  R120 000
1.1 Capital: Ben  + + 0
Vehicle  R150 000
Capital: Ben  R200 000
1.2 Loan from Ben  0 – +
Current acc: Ben  R100 000
1.3 Drawings: Ben  Trading stock  R11 200  – – 0
Salary: Dudu  R480 000  +
1.4 Current a/c: Dudu 0 0
Bonus: Dudu  R50 000 –
Current a/c: Ben R240 000 
1.5 Appropriation  0 ±✓ 0
Current a/c: Dudu R80 000 
(8) (7) (5) (10)
QUESTION 2: Creditors Reconciliation & Internal Control (35 marks; 21 minutes)
2.1 Explain the following:

• What is meant by ‘internal control’ and ‘division of duties’ in an Accounting de- (4)
partment of a business?
‘Internal control’
The systems put in place to safeguard the resources and assets of a business. ✓✓
‘Division of duties’
The careful allocation of Tasks to people in the Accounting Department so that the work of one person serves
as a check on another.✓✓
• Three points you would mention to Miss Nevva Wright concerning the comments (6)
she has made (see above).
Any three valid points   
• Creditors’ reconciliations are an important part of internal control.
• They are not a waste of time but are essential to ensure that creditors are paid the correct amounts.
• This process is part of her job description as a bookkeeper. Her existing salary covers this.
• Statements received from creditors are documents received from other organisations.
2.2 Make a list of the changes to BB Wholesalers’ account in the Creditors Ledger which (12)
Miss Nevva Wright should process to correct her errors or omissions. Show the
changes to the balance of BB Wholesalers in the Amount column.
Description of correction Amount

Discount received reversed +680
Interest expense to be entered +658
Correction of DN 102 -114
Correction of JV 82 -4 000
Correction of adding error on 23 Oct -18 000
Entry of discount on 23 Oct -1 000
Workings:
New balance on BB Wholesalers’ account: 57 000 – 21 776 = 35 224

2.3 Prepare a Creditor’s Reconciliation Statement in respect of BB Wholesalers for Oc- (13)
tober 20.8
Balance per statement received from BB Wholesalers 9 842

Reduction of interest charged -500
Correction of C/N 1009 +3 000
Correction of Inv 5943 -198
Transfer of balance JV82 -2 000
Invoice 6021 omitted +25 080
Correct balance 35 224
QUESTION 3: Balance Sheet & Fixed assets (80 marks; 48 minutes)
VUZAN TRADERS
BALANCE SHEET / STATEMENT OF FINANCIAL POSITION ON 28 FEBRUARY 20.8 (33 marks)
ASSETS Note R
Non-current assets 3 205 200
Fixed assets 1 2 985 200
Investment: Fixed deposits [300 000 – 80 000] 220 000
Current assets 793 000
Inventories [565 200 – 12 000 – 7 000 + 8 000] 554 200
Trade & other receivables
93 800
[103 000 – 13 000 – 7 200 + 11 000]
Cash & cash equivalents [60 000 + 5 000 + 80 000] 145 000
TOTAL ASSETS  3 998 200
Partners’ equity  3 309 000
Capital [1 500 000 + 900 000] 2 400 000
Current accounts 2  909 000
Loan from Prime Lenders [344 000 + 62 500 – 96 000] 310 500
Current liabilities 378 700
Trade & other payables 3 356 900
Bank overdraft [35 000 + 800 – 14 000] 21 800
TOTAL EQUITY & LIABILITIES 3 998 200
Note 1: FIXED ASSETS (16 marks)

Land &
Equipment Total
buildings
Cost  2 520 000 900 000 3 420 000
Accumulated depreciation (360 000) (360 000)
Movements 75 000 [149 800] [74 800]
Additions at cost  75 000  36 000 111 000
Disposals at carrying value  (5 500) (5 500)
Depreciation*  (180 300) (180 300)
Carrying value at end 2 595 000  390 200 2 985 200
Cost  2 595 000  909 000 3 504 000
Accumulated depreciation  (518 800) (518 800)
*[27 000 x 20% x 10/12] + [900 000 – 27 000 x 20%] + [36 000 x 20% x 2/12]

Note 2: CURRENT ACCOUNTS (13 marks)
8. CURRENT ACCOUNTS Vuzi Andrew Total
Profit per Income Statement 620 000  680 000 1 300 000
Partners’ salaries 360 000 ✓✓360 000 720 000
Interest on capital [60 000 + 5 000] 150 000  65 000 215 000
Bonus  200 000 200 000
Primary distribution 510 000  625 000 1 135 000
Share of remaining profit 110 000  55 000 165 000
Drawings [220 000 + 12 000] (240 000)  (232 000) (472 000)
Retained income for the year 380 000  448 000 828 000
Balance at beginning of year (44 000)  125 000 81 000
Balance at end of year 336 000  573 000 909 000
Note 3: TRADE & OTHER PAYABLES (18 marks)

Trade creditors [181 000 + 14 000 + 36 000 – 5 500] 225 500
Deferred income (received in advance) 9 200
SARS (PAYE) [9 130 + 1 970] 11 100
Golden Age Pension Fund [7 080 + 630 + 990] 8 700
Creditors for salaries 6 400
Current portion of loan 96 000
356 900
QUESTION 4: Interpretation of financial information (50 marks; 30 minutes)
4.1 Comment on the solvency of the business. Should the partners be satisfied? Ex- (4)
plain. Quote a financial indicator (actual figures or percentages) for both years to
support your answer.
Opinion: Yes
Comment:
The business should have no problem in settling all its debts.
Total assets are 4 times higher than total liabilities (increased from 3 times in the previous year). 
4.2 Should the partners be satisfied with the stock turnover rate? Explain, quoting (4)
the financial indicator (actual figures) for both years to support your answer.
Opinion: Yes
Comment:
The business is selling its stock more quickly in 20.8. 
The stock turnover rate has improved from 5 times to 7 times in 20.8. 
4.3 Comment on the liquidity of the business. Quote two financial indicators (actual (6)
figures or percentages, other than those used above) for both years to support
your answer.
Both the current ratio and the acid-test ratio have remained constant at 1.8 : 1 and 0.8 : 1 respec-
tively.
Liquid assets are approximately equal to current liabilities, so the business should be able to settle its current
debts, especially as these ratios have existed for the past two years without any apparent problems.
The ratios are not too high indicating that the working capital is being used efficiently. 
4.4 In your opinion, has the business appeared to control its operating expenses well (3)
in 20.8? Quote two financial indicators (actual figures or percentages) for both
years to support your answer.
Opinion: No 
Comment:
Operating expenses on sales increased from 33.5% to 40.1% 

4.5 Explain what accounts for the difference between the percentage operating ex- (2)
penses on sales and the % net profit on sales.
In both years the interest expense exceeded the interest income. 
4.6 The percentage return earned by the business on average equity is 23.0%. Pro- (5)
vide a calculation to prove that this calculation is in fact correct.
885 000  x 100 = 23.0%
3 845 000 1
4.7 The percentage return earned by Ted on his average equity is 19.0%. Provide a (5)
calculation to prove that this calculation is in fact correct.
345 000  x 100 = 19.0%
1 815 000 1
4.8 Comment on the percentage return earned by the business. Quote a financial in- (4)
dicator (actual figures or percentages) for both years to support your answer.
The partners should be satisfied as the return of 23.0% in 20.8 exceeds that which can be earned on
alternative investments. 
However, this has decreased from 27.3% in 20.7 so the partners should develop strategies or implement
controls to get the return back to previous levels.
4.9 Comment on the percentage return earned by Ted. Quote a financial indicator (4)
(actual figures or percentages) for both years to support your answer.
Ted should not be completely satisfied as his return (19.0%) has decreased (from 24.9%) and is lower
than that of the business (23.0%)and Bess (27.6%).
He should look at possibly renegotiating with Bess for a fairer distribution of profit. 
4.10 Comment on the debt / equity ratio. Quote a financial indicator (actual figures or (4)
percentages) for both years to support your answer.
The debt/equity ratio has increased from 0.5 : 1 to 0.6 : 1 
This indicates that the business is making relatively more use of loans and is in a more risky situation should
profits drop in future. 
4.11 What percentage of the net income are the partners withdrawing from the busi- (4)
ness? Is this good business practice? Explain, quoting figures to support your
opinion.
Percentage withdrawn:
295 000 x 100 = 33.3%
885 000 1
Comment:
This is good business practice as the partners are now retaining a lot more in the business thereby enabling
it to grow and earn bigger profits in the future.
4.12 You are told that R200 000 has been spent in the past year for the controlled de- (5)
stroying stock of detergents, cleaning materials and chemicals that have reached
their sell-by date. Partner Bess thinks this has been a waste of money, while Ted
disagrees. Which opinion do you share? Explain.
Share Ted’s opinion.
This is a responsible business practice.
The business must display respect for the environment.
Disposing of these materials in unsafe ways will lead to consequences for the environment and the local
community.
Others will have to bear a cost of rectifying the problem which is unfair.
The business must display good corporate governance in this regard as their products are dangerous and
due care should be taken. 

QUESTION 5: Manufacturing (35 marks; 21 minutes)
5.1 Calculate the following for the year:

• Direct materials cost (3)
3 090 x 3 = 9 270✓ x R130✓ = R1 205 100✓
• Direct labour cost (5)

Normal time: 30 x R35 x 240 days x 9 hours = R2 268 000 
Overtime: 4 000 hours x R52 = R 208 000 
= R2 476 000 
5.2 Dr WORK-IN-PROCESS STOCK ACCOUNT B Cr

20.7 20.8
Mar 1 Balance b/d 510 000 Feb 28 Finished goods stock 5 531 100
20.8 (3 090 x R1 790)
Feb 28 Direct materials
cost 1 205 100 Balance c/d 320 000
Direct labour
cost 2 476 000
Factory overhead
cost* 1 660 000
5 851 100  5 851 100
20.8
Mar 1 Balance b/d 320 000 (13)
*Balancing figure.
5.3 Calculate the net profit for the year. (6)
Sales (3 060 jackets at R2 600 each) ✓R7 956 000

Cost of sales (75 000 + 5 531 100 - 143 200) ✓✓(5 462 900)
Gross profit 2 493 100
Administration cost ✓(780 000)
Selling & distribution cost ✓(822 000)
Net profit ✓891 100
5.4 Jackie is concerned about the increase in the cost of producing the jackets as this is (8)
negatively affecting the net profit he is earning. He is considering an alternative
fabric costing R110 per metre which looks the same as the fabric currently used, but
is not as long-lasting. Explain four points that you would mention to Jackie, quoting
evidence or figures from the question to support your answer.
Any four valid points.    
Award part-marks for less complete answers.
• It would be foolish to focus on the fabric as the cause of the problem as the price has remained constant
at R130 per metre for the past two years.
• The unit cost of production increased from R1 500 to R1 790 per jacket due to the other costs of production,
i.e. labour or overheads. Rather focus on those for cost savings, e.g. reduce the amount of overtime, or
do a study of the efficiency of the workers.
• The increase in unit cost is significantly affected by the number of units produced. The number of units
produced dropped from 4 000 to 3 090. Fixed costs remain constant (i.e. administration cost and factory
overheads), which means that fixed costs per unit have increased. Rather try to increase production over
4 000 units again, and market the jackets and price the jackets correctly.
• Ethically, it would be wrong to mislead the customers about the quality of the fabric. They will notice this
sooner or later and this will affect the sales that they make, as well as the goodwill that they have built up
with their client base.

QUESTION 6: Budgeting (30 marks; 18 minutes)
6.1 Consider the budget for staff training and advertising:

• Calculate the percentage increase in staff training from January to February
20.9. (2)
6 000 x 100 = 15%
40 000
• Explain how Simon budgets for advertising (calculate the actual percentage
used in his method). (2)
10 800 x 100 = 3%
360 000
OR 6 000
/200 000 x 100 OR 3600
/120 000 x 100
• Do you agree with Simon’s budgeting for both these items? Explain. (4)
- It is good that he is investing a significant amount (R40 000 and R46 000) in training as this will benefit
the business in terms of its professional dealing with customers. 
- His sales appear to be very seasonal, e.g. lower sales in January (R200 000) and even lower sales in
February (R120 000). Applying a small percentage such as 3% might not be advisable. In the months
with low sales he should consider advertising a lot more to try to keep his sales constant in order to
cover monthly overheads.
6.2 Calculate the missing figures in the Cash Budget designated by A to F. (16)
Calculation of A (Cash sales for February 20.9):
25% x R120 000 = R30 000 
Calculation of B (Collection from debtors for February 20.9):

(90 000 x 30% x 94%) + (150 000 x 55%) + (10% x 270 000)
= 25 380  + 82 500  + 27 000 
= R134 880 
Calculation of C (Rent income for January 20.9):

14 112
/112 x 100 = R12 600 
Calculation of D (Cash purchases of trading stock for January 20.9):

40% x 160 000 = R64 000 
Calculation of E (Salary of manager for January 20.9):

9 000 x 109/100 = R9 810 
Calculation of F (Wages of shop assistants for January 20.9):

20 400 x 3/4 x 105/100 = R16 065 
6.3 The shop assistants are not satisfied with their increase. Explain what advice you (6)
would give to Simon. Provide two points. Quote evidence or figures from the
question to support your answer.
Any two valid points, quoting evidence from the question.   
• The manager got an increase of 9% which is above the inflation rate.
• The shop assistants got an increase of 5% which is much lower and is calculated off a lower base. The
shop assistants will not see this as fair.
• One of the shop assistants has not been replaced. This means that the other assistants will be doing
more work. However, sales are decreasing by R60 000 in January and a further R80 000 in February,
so maybe keeping four assistants is not viable. So maybe keeping four assistants is not viable.

QUESTION 7: Periodic inventory system (40 marks; 24 minutes)
7.1.1 Calculate the value of closing stock on hand on 28 February 20.8 (refer to Infor- (6)
mation 2 (c) below).
Taps: R4 000 + R10 500 + (30 x R100): R17 500
Other stock: R102 000
TOTAL R119 500
7.1.2 Dr Trading account B Cr

20.8 20.8
Feb 28 Opening stock 94 000 Feb 28 Sales 1 565 800
Purchases (1 630 000 – 62 000–
(870 000+ 66 400) 936 400 2 200)
Customs duty
(28 000 + 9 960) 37 960 Closing stock 119 500
Carriage (45 000+
7 000) 52 000
Profit & loss 564 940
1 685 300 1 685 300
(19)
7.1.3 Calculate the following:

• Cost of sales (3)
1 565 800✓– 564 940 = R1 000 860
OR
(94 000 + 936 400 + 37 960 + 52 000)✓ – 119 500 = R1 000 860
• Mark-up % achieved on cost (3)

564 940  x 100 = 56.4%
1 000 860  1
QUESTION 7.2
COMMENT, IDENTIFY PROBLEM &
PROVIDE ADVICE
QUOTE FIGURE/S
Mark allocation on each shop:
3 marks x 3 shops Mark allocation on each shop:
Comment on problem  Figure/s
= 9 marks total Advice 

Credit sales are Nil / Creditors being
NORTHVILLE SHOP Offer sales on credit to increase sales /
paid after 15 days – affects liquidity as
Manager: Nora Use credit terms to the maximum.
the stock takes 60 days to sell.
No discounts offered (75% mark up
Offer trade discounts to liquidate slow-
WESTVILLE SHOP achieved at all times) / Debtors taking
moving stock / Chase up slow-paying
Manager: Wally too long to pay (40 days) which affects
debtors.
liquidity.
The shop is doing well.
Offering discounts appears to be in-
Sales are high (R2.24m) / Gross profit
SOUTHVILLE SHOP creasing sales – maintain this policy /
is high (R640 000)
Manager: Sam Increase stock levels to ensure demand
Stock holding period too low (15
can be satisfied.
days).

Grade 11 Sample paper 2 1 2 3 4 5 6 QUESTION 7
Acc eqn Crs Recon BS & FA Interp Manuf Budgets Periodic TOTAL
PER
FINANCIAL ACCOUNTING Prob-solv TOPIC TOTAL TARGET
Concepts - partnerships 0
Concepts - GAAP 0
Selected ledger entries & documents - partnerships 20 20
Accounting equation - partnerships 10 10
Prepare bank reconciliations 0
Prepare creditors reconciliations 25 25
0 150 to
Final accounts - partnerships
176 180
Financial statements - IS - partnerships 0
Financial statements - BS - partnerships 33 33
Financial statements - Notes - partnerships 31 31
Financial statements - Differences Partnerships vs Non-Profit
Orgs 0
Analysis and interpretation of FS - partnerships 45 12 57
Calculate VAT 0
QUESTION QUESTION QUESTION QUESTION QUESTION QUESTION QUESTION TOPIC
MANAGERIAL ACCOUNTING 1 2 3 4 5 6 7 TOT TOTAL TARGET
Ledger accounts of a manufacturing business 27 27
60 to
Cost calculations and interpretation 4 4 61 75
Prepare cash budgets 30 30
QUESTION QUESTION QUESTION QUESTION QUESTION QUESTION QUESTION TOPIC
MANAGING RESOURCES 1 2 3 4 5 6 7 TOT TOTAL TARGET
Recording acquistion & disposal of fixed assets 16 16
Periodic inventory system - record transactions 28 28 60 to
Identify & analyse ethical behaviour using different scenarios 5 4 9 63 75
Internal control, internal audit, division of duties, docs, phys
controls 10 10
TOTAL PER QUESTION 30 35 80 50 35 30 40 300 300
Should be 300

PROBLEM-SOLV-
TARGET = 30% TARGET = 40% TARGET = 30% 30% 40% 30% ING
PROBLEM-SOLV-
BLOOMS TAXONOMY CHALLENGE ING
Q
NO. TOPIC Remember Understand Apply 1 Apply 2 Analyse 1 Analyse 2 Evaluate Create Easy Medium High Surface Deeo
1 Accounts 15 9 6
1 Amounts 5 3 2
1 Equation 10 5 5
2.1 Internal control 10 2 6 2 6

2.2 Entries in books 12 4 4 4
2.3 Creditors recon 13 3 6 4
3.1 Balance Sheet 14 19 14 10 9

3.2.1 Fixed asset note 2 14 2 7 7
3.2.2 Current account
note 5 8 5 4 4
3.2.3 Payables note 5 13 5 7 6
4.1 Solvency 4 2 2
4.2 Stock turnover 4 2 2
4.3 Liquidity 6 2 4
4.4 Operating ex-
penses 3 3
4.5 Interest 2 2
4.6 Calculate busi-
ness 5 3 2
4.7 Calculate partner 5 3 2
4.8 Comment busi-
ness 4 4
4.9 Comment partner 4 4
4.10 Debt equity 4 2 2
4.11 Withdrawals 4 2 2
4.12 Corp governance 5 2 3 5
5.1 Direct materials

cost 8 4 4
5.2 WIP stock ac-
count 8 5 8 3 2

PROBLEM-SOLV-
TARGET = 30% TARGET = 40% TARGET = 30% 30% 40% 30% ING
PROBLEM-SOLV-
BLOOMS TAXONOMY CHALLENGE ING
Q
NO. TOPIC Remember Understand Apply 1 Apply 2 Analyse 1 Analyse 2 Evaluate Create Easy Medium High Surface Deeo
5.3 Calculate NP 3 3 2 2 2
5.4 Comment ethics 4 4 2 4 2 8
6.1 Training & adver-

tising 4 4 4 2 2
6.2 Calculations 4 12 4 6 6
6.3 Comment remu-
neration 6 2 2 2 6
7.1.1 Calculate stock 6 2 2 2

7.1.2 Trading account 9 10 9 5 5
7.1.3 Calculate COS 3 3
7.1.4 Calculate MU% 3 3
7.2 Problem-solving 9 3 3 3 9
0 12 76 109 18 22 43 20 300 106 119 75 300 13 15
0% 4% 25% 36% 6% 7% 14% 7% 35% 40% 25% 4.3% 5.0%
TAR- TAR- TAR-
TARGET = 30% TARGET = 40% TARGET = 30% GET=30% GET=40% GET=30%

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NEW ERA

Copyright 2012 by New Generation Publishers

New Generation Publishers

Note to Teacher & Weekly Module 3 (Contd): Module 6:

New Era Accounting: Grade 11 (i) Teacher’s Guide

New Era Accounting: Grade 11 (ii) Teacher’s Guide

ICONS USED IN THIS BOOK

Tasks rated as ‘easy’.

Tasks rated as ‘moderate or of medium difficulty’.

Tasks rated as ‘difficult’.

NOTES CONCERNING THE TEACHING PLAN

Accounting: Grade 11 (iii) Teacher’s Guide

Accounting: Grade 11 (iv) Teacher’s Guide

Accounting: Grade 11 (v) Teacher’s Guide

Accounting: Grade 11 (vi) Teacher’s Guide

Accounting: Grade 11 (vii) Teacher’s Guide

Accounting: Grade 11 (viii) Teacher’s Guide

WEEKLY PLANNER FOR GRADE 11

Accounting: Grade 11 (ix) Teacher’s Guide

TASK 1.1  Identifying inclusions in a code of ethics

Expected responses – Expectations of customers:

New Era Accounting: Grade 11 1 Teacher’s Guide

1.2.2 What effect does this have on business practice?

1.2.3 In what manner should this be communicated to the stakeholders?

TASK 1.3  Providing good service to customers

TASK 1.4  Making good decisions

New Era Accounting: Grade 11 2 Teacher’s Guide

New Era Accounting: Grade 11 3 Teacher’s Guide

TASK 1.6  Examples of bad business practices

New Era Accounting: Grade 11 4 Teacher’s Guide

TASK 1.8  Interviewing an unethical businessperson

New Era Accounting: Grade 11 5 Teacher’s Guide

TASK 1.10  Worldcom

EXTENDED ACTIVITY FOR TASK 1.10

The other victims of Bernie Ebbers’s Fraud

New Era Accounting: Grade 11 6 Teacher’s Guide

TASK 1.11  Accountability: The environment

TASK 1.12  Accountability & Transparency: Cigarette manu-

New Era Accounting: Grade 11 7 Teacher’s Guide

TASK 1.13  Transparency: Bribes

TASK 1.14  The King Code

EXTENDED ACTIVITY FOR TASK 1.14

New Era Accounting: Grade 11 8 Teacher’s Guide

TASK 1.15  Transparency: Salaries & remuneration

Suggested marking grid:

TASK 1.16  Strikes in South Africa

New Era Accounting: Grade 11 9 Teacher’s Guide

Suggested marking grid:

TASK 1.17  Tender-rigging

New Era Accounting: Grade 11 10 Teacher’s Guide

Suggested marking grid:

New Era Accounting: Grade 11 11 Teacher’s Guide

TOPIC: Black economic empowerment

Can Black Empowerment address poverty?

When households are given non-cash assets, those with

New Era Accounting: Grade 11 12 Teacher’s Guide

BEE footprints finally have a spot in reports

New Era Accounting: Grade 11 13 Teacher’s Guide

When is the talk going to end and the action going

New Era Accounting: Grade 11 14 Teacher’s Guide