STUDENT GUIDE

BUSINESS AND MANAGEMENT SCIENCES

FACULTY

ACCOUNTING 512

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 STUDY GUIDE

MODULE: ACCOUNTING 512

(2nd SEMESTER)

Copyright © 2025
Richfield Graduate Institute of Technology (Pty) Ltd
Registration Number: 2000/000757/07
All rights reserved; no part of this publication may be reproduced in any form or by any means,
including photocopying machines, without the written permission of the Institution

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 TABLE OF CONTENTS

Topics Page No.

Preface
1. Welcome iv
2. Title of Modules v
3. Purpose of Module v
4. Learning Outcomes v
5. Method of Study v
6. Lectures and Tutorials vi
7. Notices vi
8. Prescribed & Recommended Material vi
9. Assessment & Key Concepts in Assignments and Examinations vii
10. Specimen Assignment Cover Sheet xii
11. Work Readiness Programme xiii
12. Work Integrated Learning xiii
ACCOUNTING 512 (2ND SEMESTER)

Topic 1: Introduction To Preparation Of Financial Statements 1

Topic 2: Recording Owner’s Equity In Partnerships 17
Topic 3: Close Corporations 38
Topic 4: Companies 53
Topic 5: Cash Flow Statements 69
Topic 6: Ratios 75
Topic 7: Value Added Tax (VAT) 87
Topic 8: Addendum 512(A) : Additional Questions 103
Topic 9: Addendum 512(B) : Typical Test Questions 111
Topic 10: Addendum 512(C) : Revision Questions 115

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 Accounting 512
Prologue to Study Guide
SAQA ID: 84948 | NQF Level 5 | 10 Credits | Duration: 1 Year

Welcome to Accounting 512, the second semester of your accounting studies. This course builds on
the foundational knowledge acquired in Accounting 511 and takes you deeper into more advanced
accounting principles and practices. As you progress through this course, you will refine your ability
to analyze complex financial information, further developing the skills necessary to become a well-
rounded and highly competent accounting professional.

Graduate Attributes
In Accounting 512, you are expected to continue developing critical graduate attributes such as
problem-solving, analytical thinking, and effective communication. You will be challenged to apply
accounting theory to real-world scenarios, interpret financial data, and make informed, ethical
decisions in a variety of business contexts. This course also aims to strengthen your quantitative and
computational skills, as these will be vital as you move into more advanced topics and specialized
areas of accounting.
Students are encouraged to develop a comprehensive understanding of the ethical, legal, and
regulatory frameworks that underpin the accounting profession. The ability to work both
independently and collaboratively will continue to be emphasized, with a particular focus on
managing complex tasks, navigating professional challenges, and meeting deadlines.

By the end of this course, you should be able to apply accounting principles in a wide range of
contexts, including financial reporting, auditing, and budgeting. These skills will prepare you for
specialized areas in your final years of study and your future career.

NQF Level 5
Accounting 512 is aligned with NQF Level 5, which emphasizes a higher level of cognitive ability and
skill in applying theoretical knowledge to practical situations. You will deepen your understanding of
financial accounting, cost accounting, and management accounting techniques, building on the
knowledge gained in the first semester. The aim is to ensure that you are well-prepared for more
complex and specialized topics in the coming years of your degree.

BCOM General or SAICA Specialization

This course continues as part of your BCom degree in General Accounting. If you are interested in
pursuing a specialization in accounting, particularly to qualify as a Chartered Accountant (CA(SA)),
you will need to consider further specialization in your third year. In the second year, students
pursuing the SAICA route will begin focusing on areas that are directly aligned with the requirements
for the professional CA(SA) qualification.

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Career Opportunities
Completing Accounting 512 will open up a wealth of career opportunities in various sectors of the
accounting profession. You will be well-equipped for roles in financial accounting, management
accounting, auditing, taxation, and corporate finance. As you advance in your studies, you may also
explore positions in financial analysis, consulting, and risk management.

Accounting graduates are in high demand, with opportunities in multinational corporations,

government agencies, non-profit organizations, and professional accounting firms. As you progress,
you will find that your degree allows you to work across a variety of industries, including banking,
insurance, consulting, and public practice. The knowledge and skills you gain in Accounting 512 will
be a key foundation as you move toward the specialization of your choice.

The learning areas are briefly described hereafter:

• Core accounting principles and practices
• Business ethics in financial management
• Excel in Accounting

SKILLS DEVELOPMENT PATHWAY

The programme develops core accounting competencies that include:
• Financial reporting and analysis
• Financial decision-making
• Communication and presentation of financial data

POTENTIAL CAREER OPPORTUNITIES

As you progress through Accounting 511 and your subsequent studies, numerous career
opportunities will open up to you. These include roles in financial accounting, management
accounting, auditing, taxation, and forensic accounting. Graduates from this program are highly
sought after by a wide range of employers, including large multinational corporations,
government agencies, auditing firms, and non-profit organizations.
Graduates of this programme are prepared for junior positions in:
• Public Sector Finance: financial control and reporting
• Technical Advisor on tax
• Accountant
• Financial services
• Account manager
• Executive Assistant
• Financial Reporting: Preparation and analysis of financial statements for businesses
• Financial Management: Budget control and performance analysis in large organizations
• Accounting Education: Teaching accounting principles at secondary
• Entrepreneur

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In addition to traditional accounting roles, you may also explore opportunities in financial
consulting, internal auditing, risk management, or even venture into entrepreneurial ventures
within the accounting and finance sector.

CONTINUOUS PROFESSIONAL DEVELOPMENT

The integration of advanced accounting theory and practical experience ensures graduates are
equipped with the necessary skills to contribute effectively in diverse accounting roles, uphold
the highest standards of financial governance, and drive organizational performance and growth.

Welcome to Accounting 512!

Let’s build on your previous successes and make this semester one of growth and achievement!

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1. WELCOME
Welcome to the Faculty of Business and Management Sciences at Richfield Graduate Institute of
Technology (Pty) Ltd. We trust you will find this module's contents and learning outcomes both
interesting and insightful as you begin your academic journey and eventually your career in the
business world.

This section of the study guide is intended to orient you to the module before the formal lectures
commence.

Please note that this study guide covers the content of various academic programmes at different
levels of the NQF. Your lecturers will provide further guidance and additional study materials covering
parts of the syllabi that may have been omitted from this study guide. Students undertaking the
Bachelor of Commerce Qualification may use the non-compulsory material supplied as additional
reading. This will however not be directly examinable.

The following lectures will focus on the common study units described:

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2. TITLE OF MODULES, COURSE, CODE, NQF LEVEL, CREDITS & MODE OF DELIVERY
Semester 2

Title of Module: Accounting 512

Code: ACC_512

NQF Level: 5

Credits: 10

Mode 0f Delivery: Contact/Distance

3. PURPOSE OF MODULE

3.1 Accounting 512 (2nd Semester)

The purpose of this module is to equip students with knowledge of accounting and the skills to apply
the acquired knowledge. Students will be taught the theoretical and conceptual approaches to
accounting as well as the informational and reporting functions of accounting.

4. LEARNING OUTCOMES

On completion of this module, students should have a fundamental practical and theoretical
knowledge of:
• Students will be able to prepare comprehensive financial statements, including income
statements, balance sheets, and statements of changes in equity. They will understand the
principles and standards guiding financial reporting and gain hands-on experience in
compiling these essential documents, ensuring accuracy and compliance with relevant
accounting regulations.
• Students will learn how to accurately record and manage the equity of owners in partnership
structures. This includes understanding the various types of partnership agreements,
allocating profits and losses, and handling capital contributions and withdrawals. They will
also gain insights into the adjustments required for changes in ownership or the dissolution
of partnerships.
• Students will explore the structure of close corporations, the treatment of member
contributions, and the financial statements applicable to these entities, ensuring students
can differentiate between them and other business forms, such as partnerships or
companies.

• Students will develop an understanding of the complexities involved in accounting for

companies, particularly in areas such as share capital, retained earnings, and dividends. They
will be equipped to prepare company financial statements in accordance with the relevant
legal and regulatory frameworks, including the Companies Act and International Financial
Reporting Standards (IFRS).

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 • Students will acquire the skills needed to prepare cash flow statements, a critical tool for
assessing a company’s liquidity and financial health. They will learn to differentiate between
operating, investing, and financing activities, and understand the importance of cash flow
statements in providing insight into an entity's ability to generate cash and meet financial
obligations.
• Students will be able to calculate and interpret key financial ratios such as liquidity ratios,
profitability ratios, and solvency ratios. This skill is vital for assessing an organization’s
performance, understanding its financial stability, and making informed business decisions.
Students will also learn how to use ratios in comparative analyses, both within the company
and against industry standards.

5. METHOD OF STUDY

The sections that must be studied are indicated under each topic. These form the basis for tests,
assignments, and examinations. To be able to do the activities and assignments for this module, and
to achieve the learning outcomes and ultimately to be successful in the tests and examinations, you
will need an in-depth understanding of the content of these sections in the learning guide and
prescribedbook. To master the learning material, you must accept responsibility for your studies.

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6. LECTURES AND TUTORIALS

Students must refer to the notice boards on their respective campuses for details of the lecture and
tutorial timetables. The lecturer assigned to the module will also inform you of the number of lecture
periods and tutorials allocated to a particular module. Prior preparation is required for each lecture
and tutorial. Students are encouraged to actively participate in lectures and tutorials to ensure
success in tests, assignments and examinations.

7. NOTICES

All information about this module such as test dates, lecture and tutorial timetables, assignments,
examinations etc. will be displayed on the notice board located on your campus. Students must
check the notice board on a daily basis. Should you require any clarity, please consult your lecturer,
programme manager, or administrator on your respective campus.

8. PRESCRIBED & RECOMMENDED MATERIAL

8.1 Prescribed material

Scott, D. (2020). About Financial Accounting Volume 2. 8th Ed. South Africa: LexisNexis Publishers.
ISBN:9780639008660

Meyer, D., & Naidoo, R. (2024). Principles of Financial Accounting (5th ed.). South Africa: Juta &
Company. ISBN: 9781485133743.

Van Zyl, E., & Smith, P. (2024). Introduction to Accounting and Financial Reporting (2nd ed.). South
Africa: Pearson Education. ISBN: 9781486824478.

Davies, R., & Bosman, S. (2024). Financial Reporting for the Modern Accountant (1st ed.). South
Africa: Oxford University Press. ISBN: 9780199043833.

8.2 Recommended Material

Myburgh, JE. (2019). Accounting an Introduction .13th Ed. South Africa: Lexis Nexis Publishers. ISBN:
9780639003566

Kew, J., Mettler, C., Walker, T. and Watson, A. 4th ed. 2013. Accounting: An Introduction. Cape Town:
Oxford.

8.3 Library Infrastructure

The following services are available to you:

8.3.1.1 Each campus keeps a limited quantity of the recommended reading titles and a larger variety
of similar titles which you may borrow. Please note that students are required to purchase
the prescribed materials.

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8.3.1.2 Arrangements have been made with municipal, state and other libraries to stock our
recommended reading and similar titles. You may use these on their premises or borrow
them if available. It is your responsibility to safely keeps all library books.
8.3.1.3 RGI has also allocated one library period per week as to assist you with your formal research
under professional supervision.
8.3.1.4 RGI has dedicated electronic libraries for use by its students. The computers laboratories, when
not in use for academic purposes, may also be used for research purposes. Booking is
essential for all electronic library usage.

9 ASSESSMENT

Final Assessment for this module will comprise two Continuous Assessment tests, an assignment and
an examination. Your lecturer will inform you of the dates, times and venues for each of these. You
may also refer to the notice board on your campus or the Academic Calendar which is displayed in all
lecture rooms.

9.1 Continuous Assessment Tests

There are two compulsory tests for each module (in each semester).

9.2. Assignment

There is one compulsory assignment for each module in each semester. Your lecturer will inform you
of the Assessment questions at the commencement of this module.

9.3 Examination

There is one two-hour examination for each module. Make sure that you diarize the correct date, time
and venue. The examinations department will notify you of your results once all administrative
matters are cleared and fees are paid up.

The examination may consist of multiple-choice questions, short questions and essay-type questions.
This requires you to be thoroughly prepared as all the content matter of lectures, tutorials, all
references to the prescribed text and any other additional documentation/reference materials is
examinable in both your tests and the examinations.

The examination department will make available to you the details of the examination (date, time and
venue) in due course. You must be seated in the examination room 15 minutes before the
commencement of the examination. If you arrive late, you will not be allowed any extra time. Your
student registration card must be in your possession at all times.

9.4 Final Assessment

The final assessment for this module will be weighted as follows:

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CONTACT AND DISTANCE LEARNING: EXAMPLE
Assessment Student's Weighted mark
Weighting
Task mark
CA Test 57 60% 34.20

Assignment 66 40% 26.40

Full period mark (FPM) 60.60

Mark in Exam 60% 50.00

Calculation of a Student's final mark:

40% of Full period mark (60.60x40 %) 24.24

60% of Exam Mark (50x60%) 30.00

Student's Final Mark 54.24

RESULT: PASSED

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9.5 Key Concepts in Assignments and Examinations

In assignment and examination questions you will notice certain key concepts (i.e. words/verbs) which
tell you what is expected of you. For example, you may be asked in a question to list, describe,
illustrate, demonstrate, compare, construct, relate, criticize, recommend or design particular
information/aspects / factors /situations. To help you know exactly what these key concepts or verbs
mean so that you will know exactly what is expected of you, we present the following taxonomy by
Bloom, explaining the concepts and stating the level of cognitive thinking that these refer to.

21st Century Skills

Integrating 21st-century skills into an accounting module is crucial to prepare students for the dynamic and
technologically advanced landscape of modern accounting. Here’s a comprehensive outline of how 21st-
century skills can be incorporated into an accounting module:
1. Critical Thinking and Problem Solving
• Analytical Skills: Develop students’ ability to analyse financial statements, identify trends, and
interpret financial data to make informed decisions.
• Case Studies: Incorporate case studies that require students to solve complex financial problems,
assess risks, and propose solutions.
• Scenario Planning: Engage students in scenario planning exercises to evaluate the financial impact
of different business strategies.
2. Communication and Collaboration
• Effective Communication: Teach students how to present financial information clearly and
concisely through reports, presentations, and discussions.
• Team Projects: Encourage collaboration through group projects where students work together to
complete financial analyses, audits, or business plans.
• Client Interaction: Simulate client meetings to practice explaining financial concepts and providing
financial advice in an understandable manner.
3. Information Literacy
• Research Skills: Train students to research and gather relevant financial data from various sources,
including financial databases, industry reports, and academic journals.
• Data Interpretation: Enhance skills in interpreting and critically evaluating financial data to support
accounting decisions.
• Continuous Learning: Foster a habit of continuous learning by staying updated with the latest
accounting standards, regulations, and industry practices.
4. Digital Literacy
• Accounting Software: Provide hands-on experience with accounting software such as QuickBooks,
SAP, or Oracle to manage financial transactions and reports.
• Data Analytics: Introduce data analytics tools to analyse financial data, identify trends, and make
data-driven decisions.
• Cybersecurity: Educate students on the importance of cybersecurity in protecting financial data
and ensuring compliance with data protection regulations.
5. Financial Literacy
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 • Understanding Financial Systems: Ensure students have a strong grasp of financial systems,
including how they integrate with broader business operations.
• Budgeting and Forecasting: Teach techniques for budgeting, forecasting, and financial planning to
support strategic business decisions.
• Risk Management: Equip students with the skills to identify, assess, and mitigate financial risks.
6. Adaptability and Flexibility
• Responding to Change: Prepare students to adapt to changes in accounting standards, tax laws,
and economic conditions.
• Versatility: Encourage versatility in handling diverse accounting tasks and working with various
industries.
• Resilience: Develop resilience to manage workload pressures, especially during peak periods like
audit seasons or financial year-end.
7. Ethical and Professional Responsibility
• Ethical Standards: Emphasize the importance of ethics in accounting, including integrity,
objectivity, and professional behaviour.
• Regulatory Compliance: Ensure students understand the need for compliance with accounting
standards, laws, and regulations.
• Sustainability: Incorporate discussions on sustainable and ethical financial practices, such as
corporate social responsibility and environmental accounting.
8. Global Awareness
• International Accounting Standards: Teach international accounting standards (IFRS) and compare
them with local GAAP to prepare students for global careers.
• Cultural Competence: Develop cultural competence by exploring how accounting practices vary
across different countries and cultures.
• Global Financial Trends: Analyse global financial trends and their impact on local and international
businesses.

The student is expected to gain the following competencies during the course of their studies:

Competence Skills Demonstrated

observation and recall of information knowledge of dates,
events, and places knowledge of major ideas mastery of subject
matter.
Question
Knowledge Cues
list, define, tell, describe, identify, show, label, collect, examine,
tabulate, quote, name, who, when, where, etc.

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 understanding information grasping meaning translate
knowledge into new context interpret facts, compare, contrast
order, group, infer causes predict consequences.
Question
Cues
summarize, describe, interpret, contrast, predict, associate, distinguish,
Comprehension estimate, differentiate, discuss, extend.
• Demonstrate an in-depth knowledge and rigorous understanding of
the subject matter.
• Demonstrate a comprehensive understanding of the fundamental
concepts of the subject matter.
Demonstrate a limited understanding of the subject matter
pertaining to non-routine situations and exceptions.

use information use methods, concepts, theories in

new situations solve problems using required skills
or knowledge.
Questions
Cues
apply, demonstrate, calculate, complete, illustrate, show, solve,
examine, modify, relate, change, classify, experiment, discover.

Identify & explain the significance and relevance of the subject matter
Application
and recognise the linkages with other subject matter(s).

• Apply the knowledge where some data is provided in a semi-

structured form and/or derived from a limited number of sources.
• Limited integrated thinking is expected.
Apply the knowledge where the data is unstructured and/or is
derived from multiple sources.
Integrated thinking is required.

seeing patterns
organization of parts
recognition of hidden meanings
identification of components
Question
Critical Analysis
Cues
analyse, separate, order, explain, connect, classify, arrange, divide,
compare, select, explain, infer.

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 use old ideas to create new ones
generalize from given facts relate
knowledge from several areas.
predict, draw conclusions.
Synthesis Question
Cues
combine, integrate, modify, rearrange, substitute, plan, create, design,
invent, what if, compose, formulate, prepare, generalize, rewrite

compare and discriminate between ideas assess

value of theories, presentations make choices
based on reasoned argument verify value of
evidence recognize subjectivity.
Question
Cues
assess, decide, rank, grade, test, measure, recommend, convince,
select, judge, explain, discriminate, support, conclude, compare,
summarize.
Evaluation and
problem- • Evaluate solutions for specified and implicit problems - applying a
solving high degree of rigour, and/or exercise sound judgement in making
recommendations / formulating solutions.
• Prepare and Analyse solutions for specified problems and applying
some judgement.
• Recognise issues when encountered and seek further depth /
guidance.

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The guide seeks to comply with the Associate General Accountant professional competencies.
The lesson objectives are aligned with these competencies:

Elements of the professional competencies

Professional values and I Ethics, values and I1 Personal ethics
attitudes attitudes I2 Business ethics
I3 Professional ethics
II Citizenship, values and II1 Personal citizenship
attitudes II2 Professional citizenship
II3 Corporate citizenship
III Lifelong learning, values III1 Self-development
and attitudes III2 Adaptive mind set and agility
Enabling competencies Z Business acumen Z1 Business internal environment
(defined as acumens) Z2 Business external environment
Z3 Innovation, creativity and
curiosity
Y Decision-making acumen Y1 Analytical/critical thinking
Y2 Integrated thinking
Y3 Problem solving
Y4
Judgement and decision-making
Y5 Professional scepticism
X Ralational acumen X1 Communication skills
X2 Leadership skills
X3 People skills
X4 Relationship-building skills
X5 Teamwork
X6 Self-management
X7 Managing others
X8 Emotional intelligence
W Digital acumen W1 Computational thinking
W2 Data knowledge and strategy
W3 Data analytics
W4 Automation
W5 New developments and
protocols (e.g. artificial
intelligence (AI), blockchain,
Internet of Things etc.)
W6 Cyber security
W7 User competencies
Technical competencies FR FINANCIAL REPORTING
AA ASSURANCE
MAF MANAGEMENT ACCOUNTING AND FINANCE
SRG STRATEGY, RISK MANAGEMENT AND GOVERNANCE
TX TAXATION

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TECHNICAL COMPETENCIES
1 2 3
Foundational level of competence Intermediate level of competence Advanced level of competence
Proficiency levels are distinguished with reference to:(i) level of knowledge of the subject matter, (ii) level of application and (iii) problem solving to
distinguish proficiency levels. Display technical competence by:
(i) Knowledge Identify and describe the key ideas / Demonstrate an in-depth knowledge and
dimension principles / fundamental concepts of the understanding of the fundamental rigorous understanding of the subject
subject matter [Technical expertise or concepts of the subject matter. matter
detailed knowledge not required]
the subject matter pertaining to non-
routine situations and exceptions.
(ii) Application Identify & explain the significance and
dimension relevance of the subject matter, and is provided in a semi-structured form
recognise the linkages with other subject and/or derived from a limited number of
matter(s). sources.

unstructured and/or is derived from

multiple sources.

(iii) Problem solving Recognise issues when encountered and Prepare and Analyse solutions for Evaluate solutions for specified and
dimension seek further depth / guidance specified problems and applying some implicit problems - applying a high degree
judgement of rigour, and/or exercise sound
judgement in making recommendations /
formulating solutions

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 FACULTY OF BUSINESS AND MANAGEMENT SCIENCES
ACCOUNTING 512 ASSIGNMENT COVER SHEET
2nd SEMESTER ASSIGNMENT
Name & Surname: ICAS No:

Qualification: Semester: Module Name:

Specialization: _ Date Submitted:

QUESTION NUMBER MARK ALLOCATION EXAMINER MARKS MODERATOR

MARKS

TOTAL
Examiner’s Comments:

Moderator’s Comments:

Signature of Examiner: Signature of Moderator:

The purpose of an assignment is to ensure that the student is able to:

• Demonstrate an understanding of accounting principles.
• Systematically record the financial aspects of business transactions.
• Prepare financial statements to know the result of business operations for a particular period of
time.
• To meet the financial information needs of the decision-makers and help them in rational
decision-making.
• Report the results and position of business to “Users” of financial statements.
• Presenting ‘true and fair’ view of financial transactions.
• Show accurate calculations for all transactions.

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10. WORK READINESS PROGRAMME (WRP)

In order to prepare students for the world of work, a series of interventions over and above the formal
curriculum, are concurrently implemented to prepare students. These include: Soft skills
• Employment skills
• Life skills
• End –User Computing (if not included in your curriculum)

The illustration below outlines some of the key concepts for Work Readiness that will be included in
your timetable.

SOFT SKILLS LIFE SKILLS

Time Management Manage Personal

Working in Teams Finance
Problem Solving Skills Driving Skills
Attitude & Goal Setting Basic Life Support & First
Etiquettes & Ethics Aid

WORK
READINESS
PROGRAMME

EMPLOYMENT SKILLS

CV Writing
Interview Skills
Presentation Skills
Employer / Employee Relationship
End User Computing
➢ Email & E-Commerce
➢ Spread Sheets
➢ Data base

It is in your interest to attend these workshops, complete the Work Readiness Log Book and prepare
for the Working World.

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11. WORK INTEGRATED LEARNING (WIL)

Work Integrated Learning forms a core component of the curriculum for the completion of this
programme. All modules which form part of this qualification will be assessed in an integrated manner
towards the end of the programme or after completion of all other modules. Prerequisites for
placement with employers will include:
• Completion of all tests & assignment
• Success in examination /Payment of all arrear fees
• Return of library books, etc.
• Completion of the Work Readiness Programme.

Students will be fully inducted on the Work Integrated Learning Module, the Workbooks & assessment
requirements before placement with employers.

The partners in Work Readiness Programme (WRP) include:

Good luck and success in your studies…

Registered with the Department of Higher Education as a Private Higher Education Institution under
the Higher Education Act, 1997. Registration Certificate No.2000/HE07/008

xxii
 TOPIC 1: INTRODUCTION TO PREPARATION OF FINANCIAL STATEMENTS

1.1 Measurement of The Elements of Financial Lecture 6-9

Statements

1.2 Layout of Statement of Comprehensive Income

Accounting Policy and Notes to the Financial Statements

1.3 Steps to Follow When Compiling Income Statements and

Balance Sheets Lecture 10-11

Lecture 12
1.4 The Effect of Inflation on the Reporting Function
TOPIC 2: RECORDING OWNER’S EQUITY IN PARNERSHIPS
2.1 Capital Account Lecture 13
2.2 Current Account Lecture 14
2.3 Other Accounts
2.4 Loans and Advances Lecture 15
2.5 Determination of The Profit
2.6 Distribution of The Net Profit for The Period Lecture 16-17
2.7 Partners’ Salaries
2.8 Bonus to Partners Lecture 18
2.9 Interest on Capital
2.10 Financial Statements of Partnerships Lecture 19-23
2.11 Changes in The Composition Of The Partnership
TOPIC 3: CLOSE CORPORATIONS

3.1 Limitations of a Close Corporation Lecture 24-26

3.2 Accounting and Disclosure Requirements

3.3 The Duties of The Accounting Officer Lecture 27-30
3.4 Resignation or Dismissal
3.5 The Tax Position of a Close Corporation and Its Lecture 21-33
Members
3.6 Conversion of a Company to A Close Corporation
3.7 Conversion of a Close Corporation to A Company Lecture 34-35
TOPIC 4: COMPANIES
4.1The Principle of Disclosure Lecture 36-38
4.2 Disclosure and Annual Financial Statements

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4.3 The Structure of Published Annual Financial Lecture 39-40
Statements
4.4 The Function of The Directors’ report
4.5 The Function of The Auditors’ Report Lecture 41-42

4.6 The Prospectus

4.7 Tax Position
4.8 Share Capital
TOPIC 5: CASH FLOW STATEMENTS

5.1 Cash Flow from Operating Activities Lecture 43-44

5.2 Cash Flows from Investing Activities
5.3 Cash Flows from Financing Activities Lecture 45-48
5.4 Net Increase (Decrease) In Cash and Cash Equivalents
TOPIC 6: RATIOS

6.1 Capital Structure (Leverage) Ratios Lecture 49

6.2 Profitability Ratios
6.3 Liquidity Ratios
TOPIC 7: VALUE ADDED TAX (VAT)

7. Value Added Tax (VAT) Lecture 50-51

TOPIC 8: ADDENDUM 512(A): ADDITIONAL QUESTIONS Lecture 52

TOPIC 9: ADDENDUM 512(B): TYPICAL TEST QUESTIONS Lecture 53

TOPIC 10: ADDENDUM 512(C): REVISION QUESTIONS Lecture 53

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 INTERACTIVE ICONS USED IN LEARNER GUIDES

Writing Activity
Learning Outcomes Study Read

Think Point Research Interactive

Glossary Questions

Review Questions Case Study Questions and Group work

Answers

Web Resource

Multimedia Resource

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 TOPIC 1

INTRODUCTION TO PREPARATION OF FINANCIAL STATEMENTS

LEARNING OUTCOMES
At the end of the topic, the student should gain the following technical
competencies:
• Understand the importance of compliance with accounting standards and
regulations, such as Generally Accepted Accounting Principles (GAAP) or
International Financial Reporting Standards (IFRS), and the role of regulatory
bodies like the Financial Accounting Standards Board (FASB) or the
International Accounting Standards Board (IASB) (I3 Professional ethics;
Transactional accounting processes, AA(F)1, Level 1) (Fundamental
reporting concepts, FR1, Level 3)
• Elaborate and examine ethical issues and dilemmas that may arise in
accounting practice, such as conflicts of interest, financial fraud, or
misrepresentation of financial information, and understand the importance
of ethical behaviour in the profession (Professional Values and Attitudes I3
Professional ethics; I1 Personal ethics Level 3).
• Encourage critical thinking and develop students' ability to exercise
professional judgment in applying the principles of IAS 1 and 2 to
various situations (Enabling competencies Y1 Critical thinking;
Transactional accounting processes, AA(F)1, Level 1) (Fundamental
reporting concepts, FR1, Level 3)
• Gain proficiency in preparing financial statements, including the balance
sheet, income statement, and statement of cash flows, from the information
contained in the general ledger and trial balance (Transactional accounting
processes, AA(F)1, Level 1) (Fundamental reporting concepts, FR1, Level 3).
• Develop the ability to analyze business transactions, determine their effects
on the financial statements, and record appropriate journal entries following
the principles of double-entry accounting (Transactional accounting
processes, AA(F)1, Level 1) (Fundamental reporting concepts, FR1, Level 3).
• Demonstrate the types of information generated by accounting and how
they meet the information needs of the various users of financial
information. (Transactional accounting processes, AA(F)1, Level 1)
(Fundamental reporting concepts, FR1, Level 3)

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1.1. MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENTS

Measurement is the process of determining the monetary value (amounts) at which the
elements are to be recognized and carried in the balance sheet and income statement.
This involves the selection of a particular basis of measurement. A number of different
measurement bases are employed to different degrees and in varying combinations in
financial statements. They include the following:

(a) Historical cost. Assets are recorded at the amount of cash or cash equivalents paid
or the fair value of the consideration given to acquire them at the time of their acquisition.
Liabilities are recorded at the amount of proceeds received in exchange for the obligation,
or in some circumstances (for example, income taxes), at the amounts of cash or cash
equivalents expected to be paid to satisfy the liability in the normal course of business.

(b) Current cost. Assets are carried at the amount of cash or cash equivalents that would
have to be paid if the same or an equivalent asset was acquired currently. Liabilities are
carried at the undiscounted amount of cash or cash equivalents that would be required
to settle the obligation currently.

(c) Realizable (settlement) value. Assets are carried at the amount of cash or cash
equivalents that could currently be obtained by selling the asset in an orderly disposal.
Liabilities are carried at their settlement values; that is, the undiscounted amounts of cash
or cash equivalents expected to be paid to satisfy the liabilities in the normal course of
business. (d) Present value. Assets are carried at the present discounted value of the

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future net cash inflows that the item is expected to generate in the normal course of
business. Liabilities are carried at the present discounted value of the future net cash
outflows that are expected to be required to settle the liabilities in the normal course of
business.

The measurement basis most commonly adopted by entities in preparing their financial
statements is historical cost. This is usually combined with other measurement bases. For
example, inventories are usually carried at the lower of cost and net realizable value,
marketable securities may be carried at market value and pension liabilities are carried at
their present value. Furthermore, some entities use the current cost basis as a response
to the inability of the historical cost accounting model to deal with the effects of changing
prices of non-monetary assets.

REQUIREMENTS OF IFRS

In terms of the requirements of IFRS the following financial statements must be presented
at the end of a financial year (IAS1.8):
• Statement of Financial Position
• Statement of Comprehensive Income
• Statement of Changes in Equity (SOCE)
• Cash Flow Statement
• Notes, including a summary of the significant accounting policies

1.2 LAYOUT OF STATEMENT OF COMPREHENSIVE INCOME

Statement of Comprehensive Income (Income Statement)

Information in the income statement is given in such a manner that the income and
expenses fully reflect the activities of the enterprise. At a minimum, the income
statement should show the following items separately: a) Revenue
b) The results of the operating activities
c) Finance costs
d) Tax expense
e) Profit or loss from ordinary activities
f) Net profit or loss for the year
In addition, an enterprise should present, either on the face of the income statement or
in the notes, an analysis of expenses using a classification based on either the nature of
expenses or their function within the enterprise. The choice of which method to follow
depends on operational factors as well as the size and nature of the enterprise.

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FORMAT OF A STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 20.2
Revenue XXX

Cost of Sales: (XXX)

Opening Stock xxx
Purchases ( + Carriage inwards – Returns) xxx
Closing Stock (xxx)

Gross Profit XXX

Other Operating Income XXX
Rent Income xxx
Credit losses recovered x
Discount Received xx

Profit on sale of asset xx

Gross Operating Income XXX

Other Operating expenses (XXX)

(distribution/administrative)

Director’s remuneration xx
Auditor’s remuneration xx
Credit losses xx

Bank charges xx
Stationery consumed xx
Loss on sale of assets xx
Depreciation xx

Profit before interest and tax XXX

Finance costs (XXX)
Interest expense (xxx)
Profit before tax XXX

Taxation (xxx)
Net Profit for the year XXX

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STATEMENT OF CHANGES IN EQUITY

An enterprise should present, as a separate component, a statement

showing: a) The net profit or loss for the year
b) Each item of income and expense, profit or loss that is recognized directly in equity
and the total of these items.
c) Capital transactions with and distributions to owners.
d) The balance of the accumulated profit and loss at the beginning of the year and at the
balance sheet date and movements thereof.
e) Reconciliation between the carrying amounts of each class of equity capital, share
premium and reserves at the beginning and end of the year and the movements
thereof.

CASH FLOW STATEMENT

The cash flow statement should provide information that gives the users a basis to assess
the ability of the enterprise to generate cash and cash equivalents and the ability of the
enterprise to utilize these cash flows.

ACCOUNTING POLICY AND NOTES TO THE FINANCIAL STATEMENTS

An accounting policy contains the specific principles, bases, conventions, rules and
practices adopted by an enterprise in preparing and presenting financial statements. This
policy must be stated in the notes to the financial statements.

FORMAT OF A STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

The Balance Sheet shows the financial position of an enterprise at a particular date. The
heading of the balance sheet is therefore, for example:

Statement of Financial position as at 31 March 2023

The following elements of the financial statements are dealt with in the balance sheet:
• Equity
• Liabilities
• Assets

The statement of financial position is divided into two sections, namely:

The equity and liabilities section. (Equity, non-current liabilities, and current liabilities)
The assets section. (Non-current assets and current assets)

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FORMAT OF STATEMENT OF FINANCIAL POSITION

NAME OF COMPANY.....................

STATEMENT OF FINANCIAL POSITION AS AT 28 XXX 20.X

ASSETS Notes 20.X

Non – current assets XXX

Fixed assets/Property, plant & Equipment 3 XX
Financial assets (e.g., Fixed deposit) xx
Current Assets XXX
Inventories 4 XX
Trade and other inventories 5 XX
Cash and equivalents 6 XX
Other financial assets (short-term)
Prepaid expense XX
TOTAL ASSETS XXX

EQUITY AND LIABILITIES

Capital reserves* XXX
Ordinary share capital 7 XX
Share premium 8 XX
Retained earnings 9 XX
Members ‘contributions
Non – current liabilities XX
Mortgage loan XX

Current liabilities XX
Trade and other payables 10 XX
Bank overdraft (if any) X
Current portion of long-term borrowings
Profit distribution payable
Current tax payable
TOTAL EQUITIES AND LIABILITIES XXX

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 • On the Balance Sheet, you should notice that everything is the
same for Companies, Partnerships and Sole traders. The only
difference is the Equity section.

• In a Company, owners buy shares (Ordinary share capital). The

shares can sometimes be sold above par value (at a premium).
This premium is part of the equity of a company.
• Retained earnings are the remaining profit that has not been
issued to the shareholders. This will be similar to Net Profit for
Partnerships and Sole traders.

FORMAT FOR NOTES TO THE FINANCIAL STATEMENTS

NAME OF THE COMPANY ............ NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 28 XXX 20. X
1 Interest income XX
Interest from fixed deposit XX
Interest from the current account XX
Interest from investment XX
Interest from overdue debtors XX

2 Interest expense XX
Interest on overdraft XX
Interest on a mortgage loan XX
XX

3 Property, Plant & Equipment

Land & Vehicles Equipment Total

Buildings

Carrying value at the beginning of XX XX XX XX

the year

Cost at the beginning of the year XX XX XX XX

Accumulated depreciation (XX) (XX) (XX)

Movements:
Additions at cost xx XX XX

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 Disposals at carrying value (XX) (XX)
Depreciation for the year (XX) (XX) (XX)
Carrying value at the end of the year (XX) (XX) (XX)

Cost at end of year XX XX XX XX

Accumulated depreciation (XX) (XX) (XX)

4 Inventories XX

Trading inventory XX
Consumable stores on hand XX

5 Trade and other receivables: xxx

Trade debtors XX
Provision for Credit losses (XX)
Net trade debtors xxx
Accrued income XX
Prepaid expenses XX
SARS: Income tax XX

6 Cash and cash equivalents XX

Fixed deposits (maturing within 12 months) XX

Savings account X
Bank XX
Cash float (XX) X
Petty cash (XX) X

7 Equity capital:
Authorised share capital
Ordinary shares at RX each XX
Issued share capital

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xxx shares at RX each is issued at the beginning of the year XX

xxx shares issued during the year XX

xxx shares at RX each is issued at end of the year XX

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 8 Share premium:
Balance at beginning of the year XX
Shares issue during the year XX
Balance at the end of the year XX

9 Retained earnings:
Retained earnings at beginning of the year XX

Net profit(loss) for the year XX

Ordinary dividends for the year (XX)
Paid X
Recommended X
Retained earnings at end of the year XX

10 Trade and other payables: xxx

Trade creditors XX
Accrued expenses X
Creditors for wages XX
Pension fund XX
Medical aid fund XX
South African Revenue Services XX
PAYE XX
Income tax XX
Shareholders for dividends XX
Income received in advance XX
Current portion of loan XX

1.3.1 EQUITY AND LIABILITIES

Equity and liabilities can be described as the ‘money’ used by the enterprise to
buy the goods and services required to carry on business. These requirements will
depend on the business activities of the entity. The money required may come
from a variety of sources, for example, the owners and banks. The goods and
services required are not necessarily bought for cash but may also be bought on
account, in which case they are paid for at a later stage or in instalments. The
suppliers of the goods are then also considered providers of funds. Instead of

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paying its suppliers immediately, an enterprise may use the cash for something
else in the meantime.

The providers of both cash and goods on account are creditors, therefore liabilities,
of the enterprise. These liabilities can be divided into current liabilities and non-
current liabilities.
The owners (or shareholders) of a company also provide funds for the activities of
the company. This is called equity. The total amount owing to the shareholders,
except for dividends, will be repaid only once the company ceases to exist. The
total amount owing to the shareholders is the capital contributed plus
accumulated reserves. (Note that a shareholder that sells his shares in the
company is not paid by that company, but by the person who buys the shares from
him.)

1.3.1.1 Capital and Reserves

The owners’ contribution to equity is twofold: a contribution as capital, and reinvestment

of profits earned (accumulated reserves)

Consider the following basic cycle:

Shareholders invest R200 000 cash. Equity then consists of:

Capital R200 000
And the company owes the shareholders R200.000
The company buys inventory for R200 and sells it for R300, thereby realizing a profit
of R100. Equity then consists of:
Capital R200 000
Accumulated reserves R100 000
R300 000

The shareholders can now either withdraw the R100000 or leave it (re-invest it) in the
company. If they re-invest the R100 000, the company will owe them R300 000.

1.3.1.2 Liabilities
Liabilities are divided into two categories, namely non-current (or long-term) liabilities
and current liabilities.

(a) Non-current liabilities

Non-current liabilities can originate:

Through the introduction of cash, as in the case of a loan. For example, a company
wishes to purchase certain property from where it will conduct its business. The
bond that it obtains from the bank to pay for the property is an example of a
noncurrent liability through the provision of cash funds. A public company may
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also obtain a ‘loan’ from the general public, through the issue of debentures, once
certain requirements have been complied with.
Through the supply of goods on account, as is the case where a supplier of e.g.
manufacturing equipment supplies the equipment under an instalment sale
agreement to the entity.

Note that in both instances mentioned above, the portion of the debt, which is
repayable within the next 12 months, is classified as a current liability. The balance
which becomes payable after 12 months, is classified as non-current.

(b) Current liabilities

Current liabilities can originate:
Through the introduction of cash, as in the case of a bank overdraft;
Through the supply of goods on account, as is the case where a supplier supplies
inventory on account to the company. Such an account is usually payable within
30 to 60 days;

Through amounts owing in respect of taxes; As a result of the short-term portion of non-
current liabilities.

1.3.2 ASSETS
The goods that a company buys with the funds it employs are the assets of the
entity. Assets will provide future benefits to the enterprise that owns the assets.
Some of the assets, such as machinery, are acquired to use by the company itself,
while other assets, such as inventory, are bought for resale.
But the funds of the company may also be employed in other ways, e.g. the
company may also supply goods on account to others. The company then
becomes the creditor of that buyer of the goods, and the buyer becomes the
debtor of the company.
It could also be that the company does not employ all its funds in the manner
described above. Surplus funds can then either be left in the bank, in which case
it can be withdrawn at any time, or notice of not more than twelve months.
If surplus funds will not be required in the short term, they can also be invested
for a longer period by, for example, buying shares in another company or any
other investment extending beyond 12 months.

Assets can be divided into two groups:

Non-current assets, which consist of:
• Tangible assets, such as property, plant and equipment;
• Intangible assets, such as goodwill, and
• Financial assets, such as investments, where funds are invested for longer than 12
months.
Non-current assets are typically used by the enterprise for periods of longer than
one year. But these assets will not, after five years have the same value as on the

12
day they were acquired. Some assets, like buildings, may be worth more while
others, like motor vehicles, may be worth less than the original cost.

In order to recognize this, assets which appreciate in value (become worth more), are
often re-valued at their market value. The total value of assets would increase by the
amount of the revaluation, while equity would also increase. Assets which depreciate over
time, are also re-valued, but in terms of the company’s depreciation policy. The original
cost of the assets is written off as depreciation against profits, over the useful life of that
asset.

Current assets, which consist of:

• Inventories, for re-sale or consumption
• Trade and other receivables
• Prepayments
• Cash and cash equivalents

It often happens that current assets, other than cash, will not realize in cash or
cash equivalents. This is the case, for example, where inventory becomes
obsolete. Think for a moment how rapidly computer technology has advanced
over the last few years. Also, people do not always pay their debts. It happens
frequently that companies have to write off amounts owing to them by their
debtors. These amounts are written off against profits as obsolete inventory and
credit losses respectively.

1.3 STEPS TO FOLLOW WHEN COMPILING INCOME STATEMENTS AND BALANCE SHEETS
The steps are as follows:

Step 1
Determine what is required. In practice, however, you have to determine what is
required. It is necessary to bear these requirements in mind when reading
through the given information.

Step 2
Read through the question to determine what type of information is given. You
are usually given basic information, for example, the partnership agreement and
a pre-adjustment trial balance plus a number of year-end adjustments, which
have to be taken into account.
Remember that each year-end adjustment requires a double entry which usually (not
always involves one entry in an income statement account and one in a balance
sheet account).

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Step 3
Now you can start planning the answer:
(a) You need a page for basic calculations, which should always form part of your
answer. (b) You need a page for each of the profit and loss and appropriation
sections of the income statement.
(c) Another page is needed for the summary of transactions with members in the case
of close corporations, etc.
(d) The last page is required for the balance sheet.

Step 4
Where specifically asked for, calculations should be done from the list of
adjustments on the basic calculation sheet. Calculations should be numbered to
enable cross-reference to the financial statements.
If an adjustment is simple, e.g. the writing off an irrecoverable debt, which entails
an addition to the expense item: Irrecoverable debts and a reduction of the
amount of debtors (asset account), this may be done directly in the given trial
balance.

Step 5
When you have determined and noted your year-end adjustments you must start
preparing the financial statements from the trial balance and basic calculations.
Mark off the items as you enter them in the different sections of the income
statement, in the following sequence:
1. Manufacturing section where applicable.
2. Trading section where applicable.
3. Profit and loss section.
4. Appropriation section.
5. Summary of partners’ current accounts in the case of partnerships.
6. Balance sheet.

1.4 THE EFFECT OF INFLATION ON THE REPORTING FUNCTION

The effect of inflation on accounting and particularly on the reporting function has
for the past number of years been investigated by the accounting profession and
other interested parties, like commerce industry and even government bodies
throughout the world. Despite all efforts, there still exists no agreement
between the parties concerned about a method of adapting the historically cost-
funded financial statements so that the effect of inflation thereon could be
accounted for.

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1.4.1 The problem of inflation

The term inflation implies a continuous increase in the price of goods and services,
that is, a continuous decrease in the purchasing power of money. The percentage
price increase is, of course, not consistent for all goods and/or services and the
effect thereof on individuals, on partnerships, companies, etc. will differ,
depending on the types of goods and services. During the past few years, the rate
of inflation has been high and continuous. A major problem due to inflation
originated in accounting:
The annual financial statements of any concern are supposed to be a fair
representation of the state of affairs and the business at the end of a particular
financial year, as well as of the profit or loss of that enterprise for the same year.
If annual financial statements are compiled according to historical cost, the
question arises whether the requirements of a fair presentation can still be
complied with.

1.4.2 The effect of inflation on financial reporting

The results of the activities of an enterprise, reflected in historical figures, are
often misleading because of the continuous price increases. The comparisons of
similar enterprises, and the comparison between different years in the same
enterprise, are, therefore, also misleading due to the figures. The effect of
inflation on the annual financial statements will now briefly be discussed with
regard to fixed assets, depreciation and cost of sales.

1.4.2.1 Non-current assets

Non-current assets, which are not shown at their current value in the books, can
cause the profit/loss, ultimately realized at the sale of such assets, to be a
misrepresentation of the actual position.

1.4.2.2 Depreciation
Non-current assets are consumed to earn income at current prices but
depreciation on such fixed assets is generally based on historical cost. Because the
historical cost of such assets often has no relation to the current replacement
cost, a lesser amount is debited against income regarding depreciation, which
results in an excessive profit (on which, of course, tax has to be paid)

1.4.2.3 Cost of sales

By taking the cost of sales in a period of increasing price levels will be insufficient to
replace stock sold during the year.

1.4.3 Possible methods of counteracting the problem

As a result of continuous efforts on the part of various bodies and institutions in
different countries of the world, various alternative methods have been
introduced in recent years for making financial statements more meaningful by
eliminating the influences of inflation.

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Three adjustments have to be made:
• Adjustment of depreciation.
• Adjustment of cost of sales.
• Financial gearing adjustment.

The guideline further stipulates that if the required information is available only
in respect of depreciation and cost of sales adjustments, this information must be
disclosed in the financial statements, but no current cost income statement needs
to be presented.

Characteristics Sole Ownership Partnership Close Corporation Company

1) Number of One – the owner Two or more One or more but Public
members may not exceed company:
10 Seven or more
with no upper
limit Private
company: One
or more but
limited to
50
2) Formation Simple: Only Simple: Should Fixed Strict
permits/licenses, preferably have a requirements, but requirements in
depending on partnership not complicated terms of the
the type of agreement Founding Companies Act
business/profession statement and Needs
certificate of certificate to
incorporation commence
business
3)Legal personality Not a separate Not a separate Legal entity. Legal entity.
legal entity. The legal entity. Limited Liability of
owner is Partners are liability shareholders in
responsible for the jointly and provided both types of
debts of the severally Liable certain companies is
business for debts of the solvability limited to the
business. And liquidity amount
requirements invested in
are complied shares of the
with company
4) Management Management Management by All members Public
by owner owners Mutual participate in company has
Responsibility and responsibility and management two or more
control are control unless otherwise directors
vested in the same stated in while a
person the association private
agreement company has
one or more

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 directors

5) Name of No legal No legal Name must be Public company:

enterprise requirements requirements followed by CC Name must
(English) and BK include
(Afrikaans) “Limited” is
Final word
Private
Company: Name
must end
with
“(Proprietary)
Limited”.
6)Changes in policy Unlimited within With common On mutual Limited –
the boundaries of consent agreement requires
the business approval by
directors and
shareholders
7) Provision of Limited to the Limited to the Limited to the Public company
capital capital capital interest thatprovides capital
contribution of one contribution members by issue
person – the of the contributed to of
owner separate partners the corporation shares to its
member’s
Private company
provides capital
by the issue of
shares
to founder
members
8) Income tax Profit of Every partner Close corporation The company
enterprise is pays separately pays taxes at pays
tax on its profits
taxed as the on his share of Company rates.
personal income the profit Members are not
of the owner taxed
undistributed
profits
9) Transfer of Transferable on the Not freely Members may Public company:
owner’s interest authority of the transferable – transfer their Shares are freely
owner requires interests with the traded and
consent of the consent of the transferred
partners other members.
An amended
founding

17
 statement is
required

10) Continuity of Theoretically the On withdrawal Unlimited Unlimited

existence enterprise ceases of one partner existence existence,
to exist when the the old except in the except in the
owner dies, partnership case of case of
although this is not dissolves and deregistration liquidation
always the case in anew or liquidation
practice partnership has
to be formed as
a result of the
changes in the
original
partnership

The guideline explains how calculations can be made and can, where appropriate, be
simplified by using indexes.

TYPES OF ENTERPRISES
• Sole Proprietorships
• Partnerships
• Close Corporations(cc)
• Companies

1. Define the following:

a) Historical cost
b) Realizable value
c) Present value
d) Current cost
2. Assets can be split into two categories namely and
.
3. Explain the characteristics of the different types of enterprises.

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 TOPIC 2

_ RECORDING OWNER’S S EQUITY IN PARTNERSHIPS

LEARNING OUTCOMES
At the end of the topic, the student should gain the following technical
competencies:
• Assess the financial impact of changes in a partnership structure, such as
the admission of new partners, withdrawal of existing partners, and
dissolution of the partnership (Enabling competencies Y1 Critical thinking 2
Integrated thinking; Y3 Problem-solving level 3).
• Maintain accurate capital accounts for each partner, reflecting
contributions, withdrawals, and allocated profits or losses (Enabling
competencies Y1 Critical thinking; Y2 Integrated thinking; Y3 Problem-
solving level 3).
• Prepare journal entries for common partnership transactions, including
capital contributions, profit and loss allocations, and partner withdrawals.
• Prepare partnership financial statements, including the statement of
financial position, income statement, and statement of changes in partners'
equity Enabling competencies Y1 Critical thinking; 2 Integrated thinking;
Y3 Problem-solving level 3)..
• Communicate financial information and reports related to partnerships
effectively to stakeholders, including partners, investors, and regulators (
Relational acumen X Communication skills level 3)
• Apply problem-solving skills to address complex issues in partnership
accounting, such as resolving disputes over profit distribution or capital
contributions(Enabling competencies Y1 Critical thinking 2 Integrated
thinking; Y3 Problem-solving level 3).
• (I3 Professional ethics; Transactional accounting processes, AA(F)1, Level
1) (Fundamental reporting concepts, FR1, Level 3)
• Elaborate and examine ethical issues and dilemmas that may arise in
accounting practice, such as conflicts of interest, financial fraud, or
misrepresentation of financial information, and understand the importance
of ethical behaviour in the profession (Professional Values and Attitudes I3
Professional ethics; I1 Personal ethics Level 3).
• Gain proficiency in preparing financial statements, including the balance
sheet, income statement, and statement of cash flows, from the information
contained in the general ledger and trial balance (Transactional accounting
processes, AA(F)1, Level 1) (Fundamental reporting concepts, FR1, Level 3).
• Develop the ability to analyze business transactions, determine their effects
on the financial statements, and record appropriate journal entries following
the principles of double-entry accounting (Transactional accounting
processes, AA(F)1, Level 1) (Fundamental reporting concepts, FR1, Level 3).
19
 • Demonstrate the types of information generated by accounting and how
they meet the information needs of the various users of financial
information. (Transactional accounting processes, AA(F)1, Level 1)
(Fundamental reporting concepts, FR1, Level 3)

INTRODUCTION
A partnership can be described as a legal relationship created by an agreement between
two or more natural persons. As soon as a business with no legal personality has more
than one owner, one can no longer talk of a sole proprietorship. Medical doctors, stock
brokers and accountants often conduct their business as partners in a partnership. All the
partners are owners of the business. Like the sole proprietorship, the partners in a
partnership are usually actively involved in the day-to-day running of the business.
Because of the lack of legal personality, the owners (partners), like the sole
proprietorship, are also liable in their personal capacities for the debts of the partnership,
as well as the tax on the partnership profits.

2.1 CAPITAL ACCOUNT

This account is used for recording the relatively permanent investment which a partner
makes in the firm.

2.2 CURRENT ACCOUNT

In addition to the capital account, it is customary to open a current account for each
partner in the books of the partnership to record all the current transactions which
influence the partner’s equity. This includes his share of the profit or loss, withdrawals,
interest on capital, interest on withdrawals and on his current account as well as goods
taken for personal use. A separate account is also frequently used to record a partner’s
withdrawals. The balances on these withdrawal accounts are then transferred to the
partners’ current accounts at the financial year-end.

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2.3. OTHER ACCOUNTS

2.3.1. Non-current assets: Non-current assets are shown in the partnership books at the
values at which they were taken over (as agreed upon), regardless of the original cost
price and the depreciation which has already been provided. The future depreciation on
the noncurrent assets will be based on the new values and the expected economic life of
each asset.

2.3.2. Debtors: Debtors are usually shown in the partnership books at carrying amount,
since at the time of valuation it may be difficult to determine which debtors will not settle
their accounts. Accordingly, the net result of the revaluation is determined by creating a
provision for doubtful debts, equal to the difference between the original carrying
amount and the revaluation.

2.3.3. Goodwill: Generally, “goodwill” is reflected in the books of an enterprise only if it

is actually purchased. However, in cases where a business is purchased or taken over and
a specified value is attached to the goodwill (i.e., a ‘price’ is paid for it), it will be reflected
as such in the balance sheet of the entity.

2.4. LOANS AND ADVANCES

Over and above their original capital contribution, partners may make a loan or advance
to the partnership (as a separate accounting entity) in their personal capacity. In the case
of such loans the partner is regarded as a creditor of the partnership, and the loan does
not form part of his ‘permanent’ investment (capital) in the partnership. Loans of this
nature usually bear interest at a specified rate. The interest on the loan is an expense
incurred in the normal course of business of the partnership and does not form part of
the profit distribution. In contrast to the capital contribution of the partner, the loan is
usually repayable after a certain period.

2.5. DETERMINATION OF THE PROFIT

The partnership agreement should stipulate the manner in which the net profit for the
period (or net loss) should be divided.

2.6. DISTRIBUTION OF THE NET PROFIT FOR THE PERIOD

In the absence of a fixed agreement between partners on the distribution of profit,
common law principles will apply as follows:
All partners are entitled to an equal share in the net profit for the period of the partnership
and must contribute equal shares to the losses which are incurred, and
Partners are entitled to interest on capital or salaries before the net profit for the period
is determined.

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Generally, the following methods are used in practice for the distribution of net profit for
the period:
• Specified (fixed) ratios
• Relative capital investments of partners
• Service contributions by partners

2.7. PARTNERS’ SALARIES

Partnership agreement usually makes provision for the allocation a salary to partners as
a compensation for services rendered by partners to the partnership e.g. where one
partner serves as a full time manager of the partnership. This must be taken into
consideration before the sharing of profits could take place.

2.8. BONUS TO PARTNERS

Partnership agreement normally provides for a bonus to the managing partner, based on
the percentage of the net profit for the period.

2.9. INTEREST ON CAPITAL

In order to compensate a partner who has made a larger capital contribution than
another partner, the interest on capital could first be brought into account, with the
remaining profit (or loss) only being apportioned thereafter. If the agreement stipulates
that 10% interest on capital should be brought into account first, it means that a limited
share of the profit will be apportioned in the ratio of the partners’ capital, while the
balance will probably be shared according to a different ratio.
Should the partners agree to calculate interest on capital, they will have to stipulate not
only the interest rate but also the basis for the calculation (average, opening or closing
balances on the capital accounts).

2.10. FINANCIAL STATEMENTS OF PARTNERSHIPS

Details of the distribution of the net profit for the period between partners usually
appear in the appropriation section of the income statement. Particulars of partners’
equity can be disclosed in the partnership’s balance sheet or in an explanatory note to
the balance sheet.

2.11. CHANGES IN THE COMPOSITION OF THE PARTNERSHIP

Dissolution
Partnerships are dissolved from a legal point of view as a result of the following:
Mutual agreement by partners
Changes in the membership of the partnership by
agreement End of the period for which the partnership was

22
originally formed Completion of the purpose for which the
partnership was formed.
A partner can dissolve a partnership by unilateral notice.
Under certain circumstances the other former partners for breach of contract may
possibly hold him liable.
• Death or insanity of a partner
• Insolvency of the partnership
• Insolvency of a partner
• When a partnership’s membership exceeds 20 (excluding the exceptions already
mentioned)
• On court order at the request of one of the partners, for example where the mutual
trust and good relationship between partners have been irrevocably damaged as a
result of misconduct or gross negligence.

In order to facilitate the systematic treatment of the accounting aspects relating to the
dissolution of a partnership, the following are main categories:

2.11.1. Admission of a new partner

On the approval of the existing partners, a new partner can be admitted to the partnership
in one of the following ways:
• By purchasing an interest directly from one or more of the present partners.
• By contributing cash and/or assets to the partnership in order to acquire an interest,
or
• By being admitted without any form of payment
• By admission without goodwill
• By admission with goodwill
• By revaluation of an asset on admission.

2.11.2. Retirement or death of a partner

A partner may retire from a partnership by selling his interest, with the consent of the
other partners, to a new partner. This will then be a personal transaction between the
retiring and new partner, with the new partner taking over the interests of the old partner
in the firm. However, it is also possible that the remaining partners take over the interests
of the retiring partner.

23
2.11.3. Liquidation of a partnership
In this context liquidation means the complete dissolution and termination of the
partnership. Apart from the reasons, which may lead to this, the liquidation of a
partnership has the following implications:
• The assets of the partnership must be liquidated with minimum of losses.
• The process is known as the realization of assets
• The available funds as well as funds acquired from the realisation of the assets
must in the first place be used to settle all the debts of the partnership. Profits or
losses on the realisation of assets are to be shared amongst the partners, and
• The remaining cash (if any) is to be allocated to the partners in the ratio in which
they were the joint owners of the common assets of the partnership (as
represented by their capital accounts).

If the partnership is solvent

PROFIT ON REALISATION

On the realisation of the assets, one of two procedures can be followed:

The proceeds on the sale of each individual asset are credited to the relevant asset
account, till all the assets of a particular nature have been sold. The net profit for the
period or loss on the realisation of the asset is then transferred from the relevant asset
account to a realisation account.

All assets are debited at their carrying amount (cost less accumulated depreciation) to a
realisation account. The proceeds on the sale of the assets are credited to the account,
as total net profit or loss for the period on the realisation is determined in the realisation
account after the sale of all the assets and transferred to the capital accounts of the
partners in their profit-sharing ratio.

Sometimes a partner takes over some of the partnership assets for his own account, at a
value agreed to by partners, instead of selling the asset. The amount in which the asset is
taken over will be debited to that particular partner’s capital account and credited to the
realisation account.

LOSS ON REALISATION
If losses arise on realisation, there are two possibilities, which determine the treatment:

No shortage on the capital account

This occurs when all partners have sufficient credit in their capital accounts to be able to
absorb a pro rata share of the loss arising on the realisation.

24
Shortages on capital accounts
However, it may be that a partner’s interests are not sufficient to cover the losses arising
on realisation and that he has a shortfall of capital, as represented by a debit balance on
his capital account. In such cases the partnership has a claim against him for the amount
of the shortfall. Again, one or two procedures can be followed, depending on whether the
partner has sufficient personal assets to cover the shortfall or not.

The conversion of a partnership into a private company

In the case of conversion of a company, attention needs to be paid particularly to the

following matters:

The determination of the purchase price

The purchase price will be determined after fair values have been assigned to all assets
(including goodwill) and liabilities of the partnership. The surplus or shortfall of the
revaluation is usually transferred to the partners in their profit- sharing ratio before the
conversion takes place.

Settlement of the purchase price

If a company is specially formed to take over the partnership, it will have only the cash
of the partnership at its disposal, unless new shareholders are admitted to the company
at the same time. It is thus customary that the purchase price (the net asset figure, as
revalue) be settled by the issue of shares in the company to the partners. The company
accordingly becomes the owner of the assets of the former partnership, while the former
partners become owners of the shares of the company.

The distribution of the profit

Usually only sufficient shares are allocated to settle the balances on the capital accounts
of the partners. However, the problem is that future earnings of the company accrue to
the former partners as shareholders in the ratio in which they hold the (ordinary) shares
(i.e. according to the balances on their capital accounts), while this does not necessarily
correspond to their profit-sharing ratio the problem can be overcome by making use of
the fact that the net profit for the period is, amongst others, the profit remaining after
the payment of directors’ remuneration. As controlling shareholders, the partners can
determine the directors’ remuneration at their discretion, taking into account the profits
of the company.

25
The transfer of control
In partnership the partners usually have an equal share in the affairs of the partnership
but in a company voting rights are linked to a person’s shareholding. It may
therefore be necessary to make a provision in the articles of association of the company
for some or other form of weighted voting rights, for example, by issuing preference
shares. However, care must be taken not to incorporate extremely complicated schemes.

The take-over of a partnership by an existing company

If a partnership is sold as a going concern to a company already in existence, the purchase

price can be settled partly in shares and partly in cash.
The partners themselves will have to decide on the division of such shares and cash in the
final settlement.

Conversion of a partnership into a close corporation

Because a partnership is not a legal entity, the conversion of a partnership into a

Close Corporation does not involve the same requirements as conversion of a company
to a
Close Corporation or vice versa. Since the membership of a Close
Corporation is limited to ten natural persons, the requirements that should be adhered
to be that no more than ten partners should be involved and that each partner should
be a natural person.
The partners can become members of a close corporation by signing the founding
statement of the close corporation and making the respective member’s contribution set
out in it. Where necessary the non-current assets of the partnership (such as the fixed
property and vehicles) as well as registered liabilities (such as a bond over fixed property)
which were previously registered jointly in the names of the partners, will now have to be
registered in the name of the close corporation.

Refer to the following fully worked example to enhance your

understanding.

26
Example
(i) – Appropriations of profit

The following information relates to Amit and Burton Partnership firm for the year ended
31 December 2015:

Amit and Burton are in partnership sharing profits in the ratio 3:2. The partnership’s profit
for the year was R65 460. The partnership agreement provides for:

• Interest to be paid on the partners’ opening capital balances at a rate of 5% per

annum
• Interest on drawings at a rate of 8% per annum on all drawings during the year
partners’ salaries are as follows:
Amit R9 000
Burton R5 000

At the beginning of the year, the partners’ capital and current account balances were:
Capital Current
Amit R120 000 Cr R15 655 Cr
Burton R80 000 Cr R4 137 Dr

During the year, Amit’s drawings were R18 000 and Burton’s drawings were R31000.

Based on the above information, you are required to:

• prepare the Partnership Appropriation Account

• calculate each partner’s share of the residual profit and total profit share
prepare the partners’ current accounts

27
Suggested solution:

28
(ii) – Change in partnership

Amit and Binta have been in partnership, sharing profits and losses in the ratio 4:3.
They agreed to admit Chen to the partnership, with profits and losses being shared
between Amit, Binta and Chen in the ratio 3:2:1. On the date of the change in
partnership, the partners’ capital and current account balances were:
Capital Current
Amit R60 000 Cr R12 800 Cr
Binta R40 000 Cr R9 500 Cr

It was agreed that, at the date of Chen’s admission, the partnership was to be valued at
R164, 300.

29
Step 1 – Calculate goodwill

The total book value of the partnership is equal to the combined value of the partners’
capital and current accounts, or R122 300 (R60 000 + R12 800 + R40 000 + R9 500) the
partnership is valued at R164 300.

Therefore, the goodwill is valued at R42, 000 (R164, 300 – 122 300).

Step 2 – Create goodwill asset in books

The goodwill account is created by a debit entry of R42 000.

This value is credited to the old partners in the old profit and loss sharing ratio – i.e.
4/7 (or R24, 000) to Amit and 3/7 (or R18 000) to Binta.

Thus, the new capital balances are:

Amit R84 000 Cr (R60 000 Cr and R24 000 Cr)
Binta R58 000 Cr (R40 000 Cr and R18 000 Cr)

If goodwill is to be carried in the books, no further entries are needed, as the only
change is that a new asset of goodwill has been created, and the capital balances of
the old partners have increased by the same value.

Step 3 – Eliminate goodwill (if required by question)

If goodwill is not to be carried in the books, it is eliminated by a credit entry in the

goodwill account, and debit entries in the partners’ capital accounts, based in the new
profit and loss sharing ratio:
Amit R21 000 (R42 000 x 3/6)

Binta R14 000 (R42 000 x 2/6)

Chen R7 000 (R42 000 x 1/6)

As a result, the new capital balances are:

Amit R63 000 Cr (R84 000 Cr and R21 000 Dr)
Binta R44 000 Cr (R58 000 Cr and 14 000 Dr)
Chen R7 000 Dr (share of goodwill eliminated)

30
 Step 4 – Contribution of capital by new partner (if required by question)

If the question requires a contribution by any of the partners (or a repayment of capital)
we simply need to follow the normal principles of double-entry bookkeeping.

For example, the question may require the new partner to contribute cash so that the
opening capital balance is nil.

In this case, a credit of R7, 000 is needed in Chen’s capital account, so this is the amount
of cash that must be contributed.

The entries will therefore be:

Debit: Bank R7 000

Credit: Capital Chen R7 000

Table 1 – Summary of entries

Profit for year Debit Income statement
Credit Appropriation account

Partners’ salaries Debit Appropriation account

Credit Partners’ Current Accounts
Interest on capital Debit Appropriation account
Credit Partners’ current accounts
Interest on drawings Debit Partners’ current accounts
Credit Appropriation account
Residual profit if profit is greater than total of appropriations:
Debit Appropriation account
Credit Partners’ current accounts
if total of appropriations is greater than profit for year:
Debit Partners’ current accounts
Credit Appropriation account
Interest on loan from Debit Income statement
partner Credit Bank account* or
Accrued expenses**
Loan made by partner Debit Credit Bank account† or Capital account‡
Loan account
* if the interest has been paid to the partner
** if the interest remains unpaid

†
if funds were deposited in the partnership bank account
‡
if capital was converted into a loan

31
 Refer to the following fully worked example to enhance your
knowledge

The following information was obtained from the partnership of Handy and Andy.
R
Capital account 28/02/2000
Handy 60 000
Andy 40 000
Drawings for the year ended 28/02/2001
Handy 14 000
Andy 23 000
Net profit for the year ended 28/02/2001 57 000

Additional information
The partnership agreement provided for:
1 Partners Handy and Andy to share profits and losses in the ratio 3: 2
2 Interest at 10% on the opening balances of the capital accounts
3 A managerial salary of R27 000 per annum to Handy and a bonus of R10000 to Andy.
NB: All amounts paid to partners are recorded in their respective drawings accounts.

Required:
1. Draw up the Statement of Comprehensive Income the partnership for the year
ended 28 February 2023.
2. Prepare the Owner’s Equity section of the Statement of Financial Position of the
partnership at 28 February 2023.
3. Determine the amounts to be paid in or withdrawn by each partner in order to bring
his capital balance in line with his profit-sharing ratio without changing the total
amount of the owners’ equity.

32
 Solution
1. Statement of Comprehensive Income of Handy and Andy for the year ended 28 February
2023 (Appropriation section)
R
Net profit 57 000
Interest on capital:
Handy R60 000 x 10% 6 000
Andy R40000 x 10% 4 000
Salary: Handy 27 000
Bonus: Andy 10 000
Profit share: Handy 3/5 x 10000 6 000
Andy 2/5 x 10 000 4 000

2. Owners’ Equity Section of the Balance Sheet of Handy and Andy at 28 February 2023

Handy Andy Total

R R R

Capital 28/02/2000 60 000 40 000 100 000

Add: Interest on capital 6 000 4 000 10 000

Salary/ Bonus 27 000 10 000 37 000

Profit share
6 000 4 000 10 000
Less: Drawings
(14 000) (23 000) (37 000)
Capital 28/02/2001 85 000 35 000 120 000

33
Amounts to be paid in or withdrawn R
Total owners’ equity 120 000
Contribution required by each partner
Handy 3/5 x 120 000 72 000
Andy 2/5 x 120 000 48 000

Handy: 120 000

Existing balance
Required amount to be withdrawn 85 000
72 000
Andy:
13 000
Existing balance
Required amount
Amount to be paid in 35 000
48 000

13 000

34
QUESTION 1
The following information relates to the partnership of J Jack and T Tim

Income Statement for the year ended 28 February 2023

R R
Sundry administrative Expenses 33 750 Sales 100 000

Returns inwards 860 Discount received 1 050

Stock – 1 March 2000 21 530 Returns outwards 850
Purchases 44 000 Stock – 28 February 2001 19 100
Discount allowed 1 900
Bad debts 2 440
Drawings:
J Jack 3 880
T Tim 1 800
Depreciation:
Furniture and fittings 940
Motor vehicles 3 000
Interest on capital:
J Jack 2 140
T Tim 1 070
Net profit 3 690
121 000 121 000

35
2) Balance Sheet as at 28 February 2023
R R
Motor vehicles at cost 36 000 Capital account balances at 28
February 2000:
Furniture and fittings at cost 12 000
J Jack 40 000
Sundry debtors 23 520 T Tim 20 000
Land and buildings 20 000
Stock – Merchandise 19 100 Bank overdraft 4 922

Current account balances at 28 Accumulated depreciation:

February 2022: Furniture and fittings 5 298
J Jack 500 Motor vehicles 14 800
T Tim 600
Net profit 3 690
Provision for credit losses 2 300
Interest on capital 3 210
Creditors 17 500
111720 111 720

(3) Additional information:

(i) J Jack and T Tim share profits and losses in the ratio of 2: 1.
(ii) On 28 February 2023 salaries for services rendered according to the partnership
agreement were paid to the partners as follows: J Jack R6 000 and T Tim R4 000. Both
these amounts were, however, included in sundry administrative expenses.

Required:
The Statement of Comprehensive Income and Statement of Financial Position of the
partnership of J Jack and T Tim to comply with generally accepted accounting practice.

36
QUESTION 2

Preparation of the financial statements of a partnership

Work through the exercise taking special note of how to make year-end adjustments and to
prepare the financial statements of a partnership by applying knowledge of FAC 1502, the
Conceptual Framework, IAS and partnership in general.

Given information

The information below was taken from the accounting records of Toypork Traders, a
partnership with T Toy and P Porky as partners, 28 February 20.3 (the financial year end
of the partnership).

TOYPORK TRADERS

BALANCE AS AT 28 FEBRUARY 20.3

R
Sales 100 000
Settlement discount received 1 450
Purchases returns 840
Administrative expenses 33 750 860
Sales returns 44 000
Purchases 2 400
Settlement discount granted 2 440
Credit losses 3 880
Drawings: T Toy 1 800
Drawings: P Porky 3 940
Depreciation 20 000
Land and buildings 36 000
Motor vehicle at cost 12 000
Inventory (1 March 20.2) 21 530
Debtors control 23 520
Allowance for settlement discount received 400
Current account: T Toy (1 March 20.2) (Dr) 500
Current account: P Porky (1 March 20.2) (Dr) 40 000
Capital: T Toy (1 March 20.2) (Dr) 20 000
Capital: P Porky (1 March 20.2) (Dr) 4 922
Bank overdraft 5 298
Accumulated depreciation: Furniture and fittings 14 800
Accumulated depreciation: Motor vehicles 500
Allowance for settlement discount granted 2 300
Allowance for credit losses 17 500
Creditors control

37
Additional information
1. T Toy and P Porky share profit and losses in the ratio of 2:1 respectively.
2. On 28 February 20.3, salaries for service rendered according to the partnership
agreement were paid to the partners as follows: T Toy R6 000 and P Porky R4 000.
Both these amount were recorded as administrative expenses.
3. Interest on the partners’ capital accounts amounted to R2 140 for T Toy and R1 070
for P Porky.
4. Inventory on 28 February 20.3 amounted to R19 100.
5. Depreciation amounted to R940 on furniture and fitting and R3 000 on motor vehicles.

REQUIRED
a) Prepare the following in respect of Toypork Traders to comply with the requirements
of IFRS (comparative figures are not required) appropriate to the business of the
partnership.
(i) Statement of profit or loss and other comprehensive income for the year
ended 28 February 20.3
(ii) Statement of changes in equity for the year ended 28 February 20.3.
(iii) State of financial position as at 28 February 20.3.
(iv) The note pertaining to property, plant and equipment for the year ended 28
February
20.3.
b) Prepare the appropriation of the partners, properly balanced the general ledger of
Toypork Traders for the year ended 28 February 20.3. Show the correct contra ledger
accounts.
c) Prepare the partners current account, properly, balanced, in the general ledger of
Toypork Traders for the year ended 28 February 20.3. Show the correct contra ledger
accounts.

38
QUESTION 3
The following information was obtained from the accounting records of L Figo and Z Zidane at
31 March 2023 who are trading as equal partners:
R
Capital: Figo 50 000
Capital: Zidane 60 000
Current account: Figo 2 000
Current account: Zidane 5 000
Long-term loan from Zidane (01/04/2022) 40 000
Trade debtors 53 300
Furniture and equipment at cost 35 000
Accumulated depreciation: Furniture and equipment (31/03/2022) 3 500
Allowance for credit losses 2 000
Credit loss 105
Inventory (1/04/2022) 80 500
Purchases 200 500
Interest paid on long-term loan from Z Zidane 1 800
Stationery 600
Salaries and wages 6 500
Rent expense 2 000

Additional information:
1. The partnership agreement provides for:
• Interest on capital at 9% per annum
• Interest on current accounts (opening balances) at 7% per annum
• A managerial salary of R6 000 per annum to Zidane
• A bonus to Figo equal to 10% of distributable profit after the above has been taken
into account.
2. Credit losses of R300 must be written off.
3. Allowance for credit losses should be maintained at 5% of sundry debtors.
4. Interest payable on the long-term loan from Zidane amounted to 12% per annum.
5. Provide for depreciation at 15% per annum on furniture and equipment on the
diminishing balance method.
6. Inventory on hand at 31 March 2023: Merchandise- R61 000, Stationery- R 100
7. The profit mark-up on sales is maintained at 20%.

39
REQUIRED:
Prepare the Statement of Comprehensive Income for the year ended 31 March 2023.
For a summary of partnership accounting refer the following website:

www.agnel.org/documents/10188/12610/XII-CHAP-1.pdf

40
41
 TOPIC 3
CLOSE CORPORATIONS

Learning Outcomes
At the end of the topic, the student should gain the following technical
competencies:

• differentiate Close Corporations from other business

enterprises. ( Enabling competencies Y1 Critical thinking; Y 2
Integrated thinking; Y3 Problem solving level 3).
• Explain the registration process of a Close Corporation.
• understand the tax position of a Close Corporation.
• Prepare financial statements for a Close Corporation
know the requirements for converting from a Close Corporation to a
Company and vice versa. (Enabling competencies Y1 Critical
thinking; Y 2 Integrated thinking; Y3 Problem solving level 3).
• Analyze financial statements of close corporations to assess
financial health, profitability, and equity position. Enabling
competencies Y1 Critical thinking; Y 2 Integrated thinking; Y3
Problem solving level 3).
• Evaluate different methods for distributing profits among members,
considering factors such as member agreements and capital
contributions. Enabling competencies Y1 Critical thinking; Y 2
Integrated thinking; Y3 Problem solving level 3).
• Impact Assessment: Assess the financial impact of changes in the
close corporation's structure, such as the admission of new
members, withdrawal of existing members, and dissolution.
Enabling competencies Y1 Critical thinking; Y 2 Integrated thinking;
Y3 Problem solving level 3).

INTRODUCTION
The close corporation as a business form has been very popular in South Africa since 1985.
A close corporation may have a minimum of one and a maximum of ten owners (called
members). It has its own legal personality, and its members are personally liable for its
debts only where certain conditions prevail or where the members are required to sign
surety for the debts of the corporation. The members of the close corporation are usually
also actively involved in its daily business activities. The letters CC after the name of a

42
close corporation denotes it as such, for example: HOME BUILDERS CC.

3.1 LIMITATIONS OF A CLOSE CORPORATION

It must prepare its financial statements in accordance with generally accepted accounting
practice. The flexibility and informality of a close corporation makes it vulnerable to fraud
and unauthorized activities. The restriction on the number and the nature of membership
can be a hindrance to expansion and prosperity. Decision-making may be slowed down
by the fact that 75% of the members must consent before a decision can be implemented.

3.2 ACCOUNTING AND DISCLOSURE REQUIREMENTS

A close corporation must maintain proper books of account and record all of its business
transactions, including:
• Contributions by and payments to members;
• Loans to and from members;
• Keeping a register of non-current assets and liabilities;
• Compiling statements of annual stocktaking and records to be used in valuing
inventory at year-end;
• Keeping source documents on file.

43
At the end of the financial year, the following statements must be prepared:
• A Statement of Comprehensive Income;
• A Statement of Financial Position
• A Cash Flow Statement;
• Notes to the annual financial statements;
• The report of the Accounting Officer;
• An audit report (which is not compulsory); and
• A Statement of the members’ net investment in the close corporation.

Additional information must be disclosed in the notes to the financial statements, in order
to show the following (in aggregate amounts):
• Contributions by members;
• Undrawn income;
• Revaluations of fixed assets;
• Loans to and from members; Transactions with members.

3.3 THE DUTIES OF THE ACCOUNTING OFFICER

Within three months of finalising the annual financial statements of the close corporation,
the accounting officer must:
• determine whether the annual financial statements agree with the accounting
records;
• determine the accounting policies used in preparing the financial statements;
• report on the above-mentioned points to members of the close corporation;
• report on the nature of any contravention of the Act that occurred during the financial
year.

3.4 RESIGNATION OR DISMISSAL

On resignation or dismissal an accounting officer must without delay inform every
member of the corporation in writing and also send a copy of the letter to the latest
known address of the registered office of the corporation. He must also inform the
Registrar without delay per certified post:
• That he has resigned or been dismissed
• Of the date of his resignation or dismissal
• Of the date up to which he performed his duties.
• That at the time of his resignation or dismissal from office he was not aware of any
matters pertaining to the financial affairs of the corporation which contravened the
provisions of the CC Act.

44
3.5 THE TAX POSITION OF A CLOSE CORPORATION AND ITS
MEMBERS
A corporation is defined in the Income Tax Act as a company and is regarded as a private
company for income tax purposes. A member of a corporation is included in the definition
of ‘shareholder’ as incorporated in the Income Tax Act. A member is regarded as an
‘officer’ who is actively involved in the corporation’s affairs and accordingly the fringe
benefit provisions of the Income Tax Act will be applicable to him as an employee in the
normal manner. A member of a corporation who is usually a resident of the Republic of
South Africa will be a provisional tax payer, unless the Commissioner for Inland Revenue
determines otherwise.

3.6 CONVERSION OF A COMPANY TO A CLOSE

CORPORATION The requirements are that:
• Every member of the company must become a member of the corporation.
• An application form must be signed by all the members and lodged with the
• Registrar and must contain a statement that upon conversion the assets of the
corporation, fairly valued, will exceed its liabilities and that the corporation will be
able to pay its debts as they become due in the ordinary course of its business.
• A written statement by the auditor of the company to the effect that he has no reason
to believe that a material irregularity has taken place regarding the company or is
taking place on the date of conversion, must be lodged with the Registrar, and A
founding statement must be submitted.

3.7 CONVERSION OF A CLOSE CORPORATION TO A COMPANY

A CC may be converted to a company provided that:
All members agree to the conversion and registration as a company in writing and every
member of the close corporation becomes a member of such a company
The application is accompanied by the necessary documentation, such as a memorandum
and articles of association, and the application for conversion is accompanied by:

A statement that the paid-up capital is an amount which is not greater than the fair value
of the assets which the company will stand to gain, over the liabilities which will be taken
up by the company on the conversion. The company may treat any portion of such excess
which is not shown as paid- up capital as an amount available for distribution as dividends,
and A statement by the Accounting Officer of the close corporation that he is not aware
of any contravention of the Close Corporations Act.

45
Example
The following information relates to Socca CC: Balances on 30 June 20.2
Member’s contributions
S Soc (60%) 324 000
C Ca (40%) 216 000

Land and buildings, at cost 494 000

Vehicles, at cost 198 000

Accumulated depreciation on vehicles 42 000

Debtors 145 560

Creditors 23 400

Bank (Dr) 27 360

Investments, at cost: 14%fixed deposit 19 200

12% debentures- unsecured 108 000

Retained income on 30/6/20.1 35 880

Loan to S Soc 40 800

Loan from C Ca 36 000

Revenue 1450000

Purchases 970 000

Stock on 1/7/20.1 204 888

Depreciation 15 000

Discount allowed 3 800

Interest received on deposit 2 688

Stationery 5 000

Telephone 6 500

Freight on purchases 4 500

Insurance 3 200

Sundry expenses 2 500

Salaries and wages 80 000

Water and electricity 4 700

Interest on debentures 12 960

46
Additional information:
Provision must still be made for the following:
1. SA normal tax amounting to R 156 000
- Interest of 15% per year on the loan to the member
-Interest of 20% per year on the loan from the member
- A profit distribution of 60% of the available income to the members
2. During the year an amount of R 20 000 was paid to member S Soc as
remunerationfor special services rendered to the corporation.
3. The original loan of R61 200 to member S Soc, was granted on 1 January 20.0. The
first annual payment was made on 1 January 20.2.
4. The original loan from C Ca, amounting to R 24 000 was negotiated three years
ago.The additional amount was borrowed from C Ca on 1 October
20.1
5. On 30 June 20.2 inventory amounted to R 183 000

Required
1. Prepare the Statement of Comprehensive Income of Socca Close Corporation for the
year ended 30 June 20.2
2. Prepare the Statement of Financial Position for Socca CC as of 30 June 20.2
3. Preparing a Statement of Changes in Equity for the year ended 30 June 20.2

Remark
Comparative figures and secondary tax on the distribution of income were ignored in the
solution

47
SOCCA CLOSE CORPORATION STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR
ENDED 30 JUNE 20.2
R
Revenue 1 450 000
Less: cost of sales (996 388)
Inventory on 1/7/20.1 204 888
Plus: purchases 970 000
Freight 4 500
Inventory on 30/06/20.2 (183 000)
Gross profit 453 612
Operating expenses (120 700)
Salaries 80 000 4
Water and electricity 700
Depreciation 15 000
Discount allowed 3 800
Stationery 5 000
Telephone 6 500
Insurance 3 200
Sundry expenses 2 500
Operating profit 332 912
Interest income 10 338
Interest on fixed deposit 2 688
Interest on loan to member (calculation 1) Net profit for the 7 650
period before interest paid 343 250
Less: interest expense (19 650)
Interest on debentures 12 960
Interest on loan from members (calculation 2) 6 600
Net profit for the period before tax 323 690
Less: tax (156 000)
Net profit for the period 167690

48
Analysis of transactions with members

SSoc CCa Total

R R R
Payment for special services 20 000 20 000
rendered
Interest on loan paid by CC (7 650) (7 650)
Receipt of Interest on loan 6 600 6 600
12 350 6 600 18 950

SOCCA CLOSE CORPORATION

STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.2
ASSETS
Non – current assets 650 000
Land and buildings 494 000
Vehicles Cost 198 000
Accumulated depreciation (42 000)
Investment: 14% fixed deposit 19 200

Current assets Inventories 404 370

Receivables 183 000
Loan to members 145 560
Accrued income 40 800
Bank 7 650
Total assets 27 360
1 073 570
EQUITY AND LIABILITIES Members interest
Capital-member contributions 642 956
Accumulated profit 540 000
Non-current liabilities 102 956
12%debentures unsecured Loan 144 000
from member 108 000
Current liabilities 36 000
Payables 286 614
Members for share of profit 23 400
Receiver of revenue 100 614
Accrued expenses 156 000
Total equity and liabilities 6 600
1 073 570

49
 SOCCA CLOSE CORPORATION STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30
JUNE 20.2

SOCCA CLOSE CORPORATION STATEMENT OF MEMBERS’ INTEREST AND TRANSACTIONS AS AT

30 JUNE 20.2

CALCULATIONS
1. Interest owing by member
(15/100*61 200/1*6/12) + (15/100*40 800/1*6/12) = R 7 650

2. Interest owing to member

(20/100*24 000/1*345/12) + (20/100*36 000/1*9/12) = R6 600

50
 Assessment Questions
Please refer to the relevant chapter in your book and answer the
following questions.

1. Can a CC give loans to its members?

2. When should members of a CC prepare their annual financial statements?
3. Who qualifies as an accounting officer of a CC?
4. Who determines the accounting officer’s remuneration?
5. What are the primary duties of the accounting officer?

6. What are the elements of a CC’s annual financial statements?

7. When a member of a CC makes a contribution to the CC, should it always be in cash?
Discuss.
8. May a CC acquire the interest of one of its members? Motivate your answer and give
conditions.
9. May a CC give financial support to its members? Motivate your answer and give
conditions, if any.
10. Should a CC have an accounting officer at all times? Motivate your answer and give
conditions, if any.

Refer to Berry et al. (2014: 201-243) and attempt to do the following questions

51
The following information has been obtained on 31 December 2023 from the financial
records of Korea CC:
KOREA CC TRIAL BALANCE AT 31 DECEMBER 2023
Dr Cr
R R
Loans and buildings at cost price 100 000
Equipment at cost price 28 000
Vehicles at cost price 26 000
Accumulated depreciation: Equipment 6 200
Vehicles 8 900
Inventory (31/12/2022) 52 000
18% long-term loan (secured by first bond over land & buildings) 60 000
Trade debtors 41 000
Provision for credit losses 850
Bank 7 000
Trade creditors 27 200
Allowance tax payments 7 100
Sales 354 100
Purchases 201 700
Excise duties 1 600
Carriage on purchases 3 100
Repairs 1 200
Property tax 820
Delivery cost 210
Discount granted 1 280
Salaries and wages 27 900
Credit losses 490
Remuneration of accounting officer 4 200
Loss on sale of non-current asset 310
Insurance 820
Water and electricity 1 900
Interest: Income from 10% investment (World Bank) 530
Investment 10 900
Unsecured loans from members: Soon 10 000
Moon 7 000

52
 Interest expense 9 400
Members’ contributions: Soon 15 379
Moon 13 454
Yoon 9 610
Accumulated profit (31/12/2022) 13 710
526 930 526 930

Additional information:
1. Members interest:
Soon 40%
Moon 35%
Yoon 25%
The 10% investment was made at the Bank of Japan on 1 June 2022.
2. Salaries and wages include an amount of R8 000paid to member Moon for his special
participation in the management of the close corporation.
3. Interest expense includes R1 410 which is 12% per annum, paid to Soon and Moon
relating to the loans made by them to the CC. Loans were granted on the following
dates:
Soon (1/1/2023)
Moon (1/10/2023)
4. Provision for depreciation of R1 700 on equipment and R2 700 on vehicles still has to
be made.
5. Provision for credit losses has to be adjusted to 4% of net debtors.
6. On 31 December 2023 trading inventory was valued at R58 300.
7. Income tax payable for the year amounted to R18 100.
8. Profit distribution of R1 200 to members according to members’ interest still has to
be done.
9. The mortgage is repayable in five equal annual capital instalments from 31
December 2024.

Required:
1. The Statement of Comprehensive Income of Korea CC for the year ended 31 December
2023.
2. The Statement of Changes in equity for the year ended 31 December 2023.
3. The Statement of Financial Position as at 31 December 2023.
4. The following notes:
• Members’ interest and contribution made
• Analysis of transactions with members

53
 Please refer to the following tutorials and attempt them in preparation
for your assessment.

TUTORIAL 1
The following information relates to Delta Traders CC at 31 December 2023

Furniture and equipment at cost price 43 000

Vehicles at cost price 35 000

Accumulated depreciation: Furniture and 8 000

Equipment
Accumulated depreciation: Vehicles 12 000

Inventory (1/1/2023) 71 300

15% log-term loan, acquired on (1/06/2022) 60 000

10% loan from member B Beta, acquired on 30 000

(1/1/2023)
Debtors 30 500

Provision for credit losses (31/12/2022) 480

Allowance tax paid 9 200

Sales 430 000

Purchases 320 000

Import duties on purchases 2 060

Rail age on purchases 3 400

Repairs and maintenance 2 100

Rates and taxes 905

Commission on sales 2 600

Delivery expenses on sales 960
Discount allowed 1 780

54
Salaries and wages 41 500
Stationery 750
Loss on sale of non-current assets 300
Insurance 530
Water and electricity 3 200
Investment – 15 000 shares in Hilton Limited at 20 000
Interest expense 7 500
Accumulated profit (31/12/2022) 9 300
Distribution to members 21 000

Additional Information

1. Included in salaries and wages is an amount of R15 000 which was paid to member
O. Omega as remuneration for his special contribution to the management of the
enterprise.
2. Interest expense includes R3 000 for the year to member B Beta in respect of al loan
he made to the close corporation.
3. Depreciation should be provided for as follows:
Furniture and equipment 10% on the diminishing
balance Vehicles 20% on cost price.
4. A debt of R200 should still be written off as bad and the provision for credit losses
must be adjusted to 5% of outstanding debtor’s balances.
5. Inventory on 31 December 2001: R89 000.
6. South African normal tax payable for the year amounted to R22 000.
7. Hilton Limited declared a dividend of 10 cents per share on 15 September 2023
payable on 15 January 2024

55
Required:
Prepare the Statement of Comprehensive Income for Delta Traders CC for the year ended
31 December 2023 in accordance with generally accepted accounting practice.

TUTORIAL 2 BALANCES ON 31 DECEMBER 20.2

R
Members’ contributions
N Note (60%) 120 000
B Book (40%) 80 000
Land and buildings 612 000
Equipment at cost 40 000
Vehicles at cost 200 000
Accumulated depreciation on equipment 12 000
Accumulated depreciation on vehicles 72 000
Trade debtors 35 000
Trade creditors 48 000
Bank (Dr) 14 000
Fixed deposit (14% per annum) 80 000
Long-term loan secured by a mortgage over land and
buildings (12% per annum) 320 000
Provision for credit losses 1 500
Accumulated profits on 31 December 20.1 18 000
Loan to N Note 40 000
Loan from B Book 60 000
Sales 670 000
Purchases 210 000
Inventory on 31 December 20.1 30 000
Salaries and wages 96 000
Water and electricity 16 000
Discount allowed 1 700
Stationery 2 900
Carriage on purchases 6 500
Telephone and fax expenses 8 200
Insurance 4 000
Maintenance of vehicles 4 400
Credit losses 800

56
Additional information

1. Inventory on 31 December 20.2 amounted to R42 000.

2. An additional amount of R2 000 must be written off as irrecoverable. The allowance for
credit losses must be adjusted to 5% of outstanding trade debtors.
3. Depreciation must be provided for as follows:
Vehicles: 20% per annum on the diminished balance. Equipment: 10% per annum (fixed)
on the cost price.
4. Provision must still be made for interest on fixed deposit and interest on the long-term
loan.
5. During the year an amount of R15 000 was paid to member N Note as remuneration
for special services rendered to the corporation.
6. The loan to member N Note was granted on 1 April 20.0. According to the agreement
30% of the original amount will be repaid by N Note on 1 June 20.3. Interest is
calculated at 12% per annum and paid by the member in January.
7. On 1 July 20.2 an amount of R60 000 was borrowed from member B Book. The first
repayment of R20 000 will be made on 30 June 20.3. Interest is calculated annually at
a rate of 10% per annum and brought into account on 31 December.
8. Provision must be made for a distribution of 80% of the net profit for the year to
members. An amount of R83 625 must be provided for SA normal tax.

Required

(1) Prepare the Statement of Comprehensive Income of Note Book CC for the year ended
31 December 20.2

(2) Prepare the Statement of Changes in equity for the year ended 31 December 20.2

(3) Prepare the Statement of Financial Position as at 31 December 20.2 (4) Show the
necessary notes to the financial statements.

57
 TOPIC 4
COMPANIES

At the end of the topic, the student should gain the following technical
competencies:

• Apply the concepts of income and expenditure to determine the gross and
net profits (or losses) and their effect on equity. (Fundamental reporting
concepts, FR1, Level 3) (Significant differences between full IFRS and IFRS
for SMEs, FR10, Level 3) (Financial analysis, MAF(F)16, Level 2)
• Apply accounting principles such as accrual accounting, matching principle,
and consistency in preparing financial statements to ensure accuracy and
compliance with Generally Accepted Accounting Principles (GAAP) or
International Financial Reporting Standards (IFRS) (Decision making
Acumen Y4 Judgement and decision-making Level 3; I3 Professional ethics
level 3; II2 Professional citizenship level 3)
• Interpret financial statements to evaluate a company's financial
performance, position, and cash flow, and make informed decisions based
on this analysis (III2 Adaptive mind set and agility Level 3).
• Understand the sources and uses of cash within a business and be able to
prepare a statement of cash flows that categorizes cash flows into
operating, investing, and financing activities (Business Acumen Z1 Business
internal environment Level 3).
• Understand the need for adjusting entries to ensure that financial
statements reflect the correct financial position and results of operations,
and be able to make these adjustments accurately (Decision making
acumen Y5 Professional skepticism level 2).
• Organize financial information into appropriate categories and accounts,
ensuring that transactions are properly classified for presentation in
financial statements (Decision Making acumen Y1 Critical thinking ; Y4
Judgement and Decision making ).
• Compile a balance sheet that accurately reflects a company's assets,
liabilities, and equity at a specific point in time, using information from the
general ledger and trial balance (Decision Making acumen Y1 Critical
thinking Level 2).
• Prepare an income statement that summarizes a company's revenues,
expenses, gains, and losses over a specified period, providing insight into its
profitability (Decision Making acumen Y1 Critical thinking; Integrated
Thinking level 3).
• Effectively communicate financial information through the presentation of
financial statements, ensuring clarity and transparency for stakeholders
(Relational acumen X1 Communication skills).

58
4.1 THE PRINCIPLE OF DISCLOSURE
The principle of disclosure is fundamental t o S o u t h African Company legislation. In
terms of this principle, the Companies Act demands the disclosure of specified
information for the benefit of interested parties. The same result is achieved by instituting
broad disclosure guidelines in respect of companies, as with detailed legislation in this
regard. There is a functional connection between requiring disclosure and dispensing with
regulatory legislation. The company in the process of formation is granted its
incorporated status by the registration of constitutive documents, the Memorandum and
the Articles of Association, with the Registrar of Companies where they will then be
available for public inspection.
The disclosure requirements of the Act extend throughout the life of the company. At its
incorporation, its constitutive documents are made available to public scrutiny. On its
dissolution, the Registrar of Companies publishes a notice thereof in the Government
Gazette. Whenever the company offers shares to the public, certain prescribed
information must be included in the prospectus. The financial position of a public
company is also disclosed. A copy of the latest annual financial statements is available
for inspection at the registrar of Companies.

4.2 DISCLOSURE AND ANNUAL FINANCIAL STATEMENTS

Disclosure remains the principal safeguard on which the Companies Act pins its faith.
Schedule 4 of the Companies Act 1973 regulates the contents of annual financial
statements in detail. The requirements of continuous disclosure of the latest financial

59
information of companies by publication of annual financial statements (and interim
annual financial statements) and interim reports serves to round off the disclosure
requirements of the Act. This “publication” takes place by dispatching copies of the
annual financial statements to shareholders and holders of debentures, and the
submission of copies to the Registrar and the presentation of annual statements to the
annual general meeting.

4.3 THE STRUCTURE OF PUBLISHED ANNUAL FINANCIAL STATEMENTS

An important factor in improving the comprehensibility of annual financial statements,
viz. for shareholders (whom mostly have no accounting knowledge) is in the form of
presentation. In this regard the narrative form fulfils an important requirement, since it is
easier to understand than the conventional T- account form of presentation.

4.4 THE FUNCTION OF THE DIRECTORS’REPORT

4.4.1 In terms of the requirements of the Companies Act annual statements, which have
to comply with generally accepted accounting practice, must fairly reflect the state of
affairs of the company as at the end of a particular financial period.

4.4.2 Such a fair representation has to be brought about by means of

(a) Figures and,
(b) A narrative report to supplement and where necessary, explain figures in the
financial statements. The prescribed narrative report is the directors’ report.

4.4.3 Section 299 of the Companies Act stipulates that every company has to present a
directors’ report on its annual general meeting as part of its annual financial statements.

4.5 THE FUNCTION OF THE AUDITORS’ REPORT

4.5.1 Section 282 describes the statutory duties of the auditor of a company and
stipulates that he has to report to the members of a company in the manner and on
the matters required by the Act (these requirements are set out in section 300 of
the Act) and perform all other duties imposed upon him by the Companies Act or any
other Act.

4.5.2 When the auditor has complied with the requirements of and satisfied himself to
the matters stated in Section 300, he shall make a report to the members of the
company that he has examined the annual financial statements and that in his opinion
they fairly present the financial position of the company and the results of its operations
in the manner required by the Act.

4.5.3 In the event of the auditor being unable to make such a report or to make it without
qualification, he shall include a statement in his report with that effect, and set forth
the facts or circumstances, which prevent him from making his report or making it
without qualifications.

60
 4.6 THE PROSPECTUS
A public company normally obtains most of its capital by inviting the public to become
members or to buy one or more shares (usually in multiples of hundreds) in a
document of advertisement, which is called a prospectus. The Companies Act
prescribes the information that must be set out in a prospectus. On the basis of this
information, the potential investor is able to decide on the merits of the shares offered
or debentures asan investment.
A public company, which does not offer shares or debentures to the public, must issue a
statement in lieu of a prospectus. A private company, by the very nature of its limited
private ownership, can never issue a prospectus, and is in fact prohibited from inviting
public subscription.

4.7 TAX POSITION

Companies in South Africa pay many different taxes, such as normal tax and secondary
tax on companies (STC). The size and nature of their operations make it compulsory for
companies to register for VAT.

4.8 SHARE CAPITAL

The capital which shareholders invest in a company is known as share capital. Pay special
attention to the following:

Explain the following concepts

Shareholders
Authorised Share Capital
Issued Share Capital
Share Premium
Classes of Shares

Form and general contents of published annual financial statements

Annual financial statements are the statements which are presented at the annual
general meeting and must include the following:
• Statement of Comprehensive Income (Income Statement)
• Statement of Financial Position (Balance Sheet)
• Statement of Changes in Equity
• Cash flow statement
• Notes to the annual financial statements
• Directors’ Report
• Auditors’ Report

61
Detailed requirements with regard to the contents of annual financial statements Schedule 4

In the interest of fairly presenting the state of affairs of a company at its accounting date
(the end of the financial year), the Companies Act and especially Schedule 4 contain
detailed provisions regarding:

(1) What items of shareholders’ interest, liabilities and assets must be specifically
shown in the Balance Sheet?
(2) What information must be disclosed concerning such items?

The Act further prescribes what information must be disclosed in the income statement
to comply with the fair presentation of profit or loss of the company for the financial year.

Prescribed information

For the purpose of this module, you do not need to be familiar with details of the
prescribed information. You only need to be informed about the following items:

Part 1 – Statement of Financial Position (The Balance Sheet): Assets

Non-current assets

Property, Plant and Equipment

Clearly show the cost price, accumulated depreciation, and carrying amount of every
main class of non-current assets. This is done in the form of a note to the Balance Sheet.
On the face of the Balance Sheet only the carrying amount of property, plant and
equipment are disclosed.

Investments

Investments must be shown at cost. Distinguish between listed and unlisted investments.
If available, show the name of the company, the number, class, and nominal value of
shares held. The market value in the case of listed and the directors’ valuation in the case
of unlisted investments must also be shown. (All the information about
investments is usually given in a note to the balance sheet, though it can be on the face.
In this module we will give the information on investments on the face of the balance
sheet).

62
(3) Current assets

The following must be disclosed:

• Inventories (this includes merchandise and consumables such as stationery, packing

and cleaning materials)
• Trade and other receivables, which can be shown separately or as one amount,
includes debtors less provision for credit losses, bills receivable and income arrears
• Prepayments
• Cash and cash equivalents (i.e. favourable bank, petty cash, cash float)

Part 2 – The balance sheet: Equity and liabilities.

(1) Authorized share capital

Par value shares

Distinguish between the various classes as follows: Ordinary shares: number, par value
and total amount Preference shares: number, par, value and total amount

NB: These totals do not form part of the total of the balance sheet.
No par value shares
Distinguish between the various classes as follows: Ordinary
share: number
Preference shares: number
Any particular class of share can consist only of either par value or no par value shares,
never both. For example, the ordinary shares of a company cannot consist partly of shares
with a par value and partly of shares without par value.

(2) Issued share capital

The disclosure for each class of share must be as follows:

Par value shares: the number, the par value and the total amount of the issued share
capital No par value shares: the number and the total amount of the stated share capital
account.
The total amount of the issued shares forms part of the total of the balance sheet.

63
 (3) Reserves
Non-distributable reserves
Only the capital redemption reserve appears in problems in this course. You do not need
to know the origin thereof.
Distributable reserves
Only the general reserve is of importance in this course

(4) Accumulated profits/

(losses) and Liabilities
(1) Non-current liabilities

An interest bearing borrowing is a long-term liability with a repayment date of more than
12 months after the date of the balance sheet concerned.
The following information in respect of each non-current liability must be disclosed. How
it is secured (mortgage or otherwise)
Interest rate
Repayment conditions (dates and instalments)
Instalments payable within the next 12 months must be shown as a current liability.

(5) Current liabilities

Trade and other payables: These can be shown as one amount or separately and include
trade creditors, bills payable, accrued expenses and income received in advance
Bank overdraft
Short-term borrowings
Current portion of interest bearing borrowings
(I.e. instalments that are payable during the following 12 months)
Income tax payable (provision minus provisional tax paid)
Dividends payable

Part 3 – The income statement

1. The revenue for the year must be disclosed.
2. The net profit or loss for the year.
- Income from investments, distinguishing between
- Listed investments and
- Unlisted investments
• Profits on the disposal of property, plant and equipment o Losses on the disposal of
property, plant and equipment o
Depreciation of property, plant and equipment
• Finance costs
• Directors’ remuneration (no details)
• Auditor’s remuneration (no details)
• Income tax expense (no details)

64
Part 4 – The Statement of Changes in Equity

This statement is required in terms of the revised October 1998 Statement of

Generally Accepted Accounting Practice AC101.

Notes on taxation in financial statements

When the tax liability (if any) for the year has been estimated, the income tax
expense account is debited with the provision for the income tax, while the
taxation payable account is credited. The taxation expense account is the n
closed off to the profit and loss account and is shown in the balance sheet
under the heading “Current Liabilities”. Three provisional tax payments are
made in respect of each financial year.
When these payments are made, the bank account is credited and the taxation
payable account is debited, thereby reducing the amount owed to the SA
Revenue Service. This treatment is the same as the treatment of an ordinary
creditor.

65
EXAMPLE
Make use of the information below and draw up the following:
1. STATEMENT OF COMPREHENSIVE INCOME
2. STATEMENT OF FINANCIAL POSITION
BURNWOOD LIMITED PRE-ADJUSTMENT TRIAL BALANCE ON 28 FEBRUARY 20.2
Balance Sheet Accounts Section DEBIT CREDIT
(R) (R)
Ordinary share capital (R1 each) 280 000
Ordinary share premium 30 000
Retained Income 41 000
Loan from Umgeni Bank (15% p.a.) 27 000
Land and Buildings 360 000
Equipment 50 000
Accumulated depreciation on equipment 20 000
Inventory 82 000
Trade debtors 40 000
Allowance 1 500
Bank 16 300
Cash float 750
Petty cash 250
Trade creditors 12 800
SARS (Income tax) 7 000

Nominal accounts section

Sales 476 000
Sales returns 8 000
Cost of sales 208 000
Salaries and wages 90 000
Directors fees 17 000
Audit fees 4 000
Interest on loan 2 000
Credit losses 1 400
Rent income 9 900
Commission income 7 700
Packing material 2 600
Insurance 400
Sundry expenses 11 200
Dividends on ordinary shares (interim) 5 000
905 900 905 900

66
Adjustments to be effected on 28 February 20.2
1. The following was found as per physical count.
1. 1. Trading Stock R80 300
1. 2. Packing Material R700
2. Depreciate equipment at 10% p.a. on the diminishing balance method.
3. Write of further credit losses of R2000.
4. Adjust allowance for credit losses to 5% of trade debtors.
5. Provide for the outstanding interest on loan.
6. Provide rates at 2% on value of land and buildings.
7. Final Dividends of 5 cents per share was declared on 28 February 20.2
8. Income Tax is calculated at 40%of net profit

67
BURNWOOD LIMITED
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 28 FEBRUARY 20.2
Note R
Sales(476000-8000) 468 000
Cost of sales (208 000)
Gross profit 260 000
Other operating income 17 600
Rent income 9 900
Commission income 7 700
Gross operating income 277 600
Operating expenses (140 200)
inventory deficit(82000-80300) 1 700
Salaries and wages 90 000
Directors fees 17 000
Audit fees 4 000
Depreciation (30000*10%) 3 000
Rates (360 000 * 2%) 7200
Insurance 400
Credit losses (1400+2000 + 400) 3 800
Packing material (2600- 700) 1 900
Sundry expense 11 200
Operating profit 137 400
Interest income Nil
Profit before interest expense/financing cost 137 400
Interest expense/financing cost (2000+2050) (4 050)
Net profit (loss) before tax for the Year. 133 350
Income tax/Taxation (40% of 133 350) (53 340)
Net profit after tax for the year 80 010

68
 BURNWOOD LIMITED
STATEMENT OF FINANCIAL POSITION AT 28 FEBRUARY 20.2
Notes R

ASSETS

Non-current assets 387 000

Tangible assets (Fixed assets) 3 387 000

Financial assets (investments> 12 months) Nil

Fixed deposits Nil

Current assets 134 400

Inventories 4 81 000

Trade and other receivables 5 36 100

Cash and cash equivalents 6 17 300

Total assets 521 400

EQUITY AND LIABILITIES

Share capital and reserves 412 010

Shareholders’ equity

Ordinary share capital 7 280 000

Share premium 8 30 000

Distributable reserves 9 102 010

Non-current liabilities 27 000

Mortgage loan 27 000

Current liabilities 82 390

Trade and other payables 10 82 390

Bank overdraft Nil

Total equity and liabilities 521 400

69
NOTES TO THE FINANCIAL STATEMENTS
1. Interest income nil
From investments (e.g. fixed deposits)
From overdue debtors
From current account
2. Interest expense 4 050
Interest on mortgage loans 4 050
Interest on overdraft

3. Tangible assets(fixed assets Land & B Equipment Total

Cost 360 000 50 000 410 000
Accumulated depreciation Nil (20000) (20000)
Carrying value (Last date of previous 360 000 30 000 390 000
year)

Movements:
Additions at cost
Disposals at carrying value
Depreciation for the year (3000) (3000)
Carrying value (last date of current 360 000 27 000 387 000
year )

Cost 360 000 50 000 410 000

Accumulated depreciation (23 000) (23 000)

4. Inventories
Trading inventory 80 300
Consumables stores 700
81 000
5. Trade and other receivables
Trade debtors 38 000
Provision for bad debts (1900)

70
 Net trade debtors 36 100
Deposit on electricity , etc. Nil
Accrued income Nil
Prepaid expenses Nil
36 100
6. Cash and cash equivalents
Fixed deposits (maturing < 12 months)
Savings accounts
Bank 16 300
Cash float 750
Petty cash 250
17 300
7. Ordinary share capital
Authorized
350 000 ordinary shares of R1 each 350 000

Issued
280 000 shares of R1 each (last date of previous 280 000
year)
Shares issued during the year. Nil
280 00 shares of R1 (closing date) 280 000

8. Share premium
Balance (last date of previous year) 30 000
…..shares issued during the year Nil
Balance (closing date) 30 000

9. Distributable reserves/Retained income

Balance (last date of previous year) 41 000
Net profit after tax for the year /period 80 010
Total amount available for distribution 121 010
Distribution of ordinary share dividends (19 000)
Paid (interim) 5 000
Recommended(final) 14 000
Balance (closing date) 102 010

71
 10. Trade and other payables
Trade creditors 12 800
Accrued expenses (2050 + 7200) 9 250
Income received in advanced/ Deferred Nil
Income
Creditor for wages/salaries Nil
Pension fund Nil
Medical aid fund Nil
South African Revenue Services 46 340
………P.A.Y.E. Nil
…….Income tax (53 340 – 7 000) 46 340
Shareholders for dividends 14000
82 390

CLASS EXERCISE:

You are presented with the following “Statement of Financial Position”, prepared by
Jackson:

Statement of Financial Position of Fame Limited as at 28 February 2001:

R R
Stock 100 000 Ordinary share of R1 each 300 000
Various book debts 85 000 Less: Un-issued shares 50 000
Land and buildings (cost price) 280 000 Redeemable preference shares 175 000
Machinery and plant: 25 000 preference shares redeemed 25 000
Carrying amount 130 000 out of own funds
Cost price 220 000
Bank balance 15 000 Retained earnings 10 000
Furniture & equipment: General reserve 140 000
Carrying amount 140 000
Cost price 250 000
SA Revenue Service (net) 3 500
Dividends (paid March 2001) 35 500
First mortgage over property 50 000
Other open accounts 61 000
750 000 750 000

72
Required:
Prepare the Statement of Financial Position in vertical (narrative) format so as to comply
with the specific requirements of the Companies Act 1973. Use the available information
only and pay particular attention to headings, classifications and terminology.

Please refer to the following tutorials and attempt them in preparation

for your assessment.

TUTORIAL 1

The following information is in respect of Lager Limited for the financial year ended 31
December 2001:

1. Lager Limited was registered with an authorized share capital of:

50 000 10% redeemable preference shares of R2 each
300 000 ordinary shares of R1 each

The following shares were issued on 1/01/2001:

80 000 10% redeemable preference shares issued at R2, 20
each 100 000 ordinary shares issued at R1 each.

On 2 January 2001, 20 000 10% redeemable preference shares were redeemed at par
value.
The redemption was performed as follows:
6 000 shares were redeemed out of profits, and the rest were financed by an issue of
ordinary shares at R1, 50 each.

2. Summarized provisional income statement: R

Net profit before taxation 200 000

Taxation (50%) 100 000

Net profit 100 000

Accumulated profit at the beginning of the Year 225 000

73
 3. Included in the net profit before taxation are the following items:

Depreciation: Machinery 20 100

Truck 2 500
Interest expense on long-term loan 1 900

Interest income on fixed deposit 1 110

Interest expense on overdrawn bank Account 2 215

Rates and taxes 800

Bank charges 340

Advertising 4 600
Credit losses 200
Net sales 300 000
Cost of sales 60 000

4. The following items have not yet been taken into account:

Profit on the expropriation of land and Buildings 53 000

Profit on sale of machinery (taxable) 14 000

5. A dividend of 10 cents per ordinary share was declared on 31 December 2001.

No entry has been made yet.

Required:

Prepare the Statement of Comprehensive Income and applicable notes for Lager
Limited for the year ended 31 December 2001.

74
 TOPIC 5

CASH FLOW STATEMENTS

Learning Outcomes

At the end of the topic, the student should gain the following technical
competencies:

• Demonstrate knowledge of the structure and components of a

cash flow statement, as per relevant accounting standards (e.g.,
IFRS, GAAP).FR 1) Decision Making acumen Y1 Critical thinking
; Y4 Judgement and Decision making ).
• Understand the differences between the direct and indirect
methods of preparing cash flow statements. Decision Making
acumen Y1 Critical thinking ; Y4 Judgement and Decision
making ).
• Analyze cash flow statements to assess an organization’s
liquidity, solvency, and overall financial performance. Decision
Making acumen Y1 Critical thinking ; Y4 Judgement and
Decision making ).
• Perform trend analysis on cash flow data to identify patterns
and predict future cash flow trends. Decision Making acumen
Y1 Critical thinking ; Y4 Judgement and Decision making ).
• Assess the impact of various business activities on cash flows,
including changes in working capital, capital expenditures, and
financing activities. Decision Making acumen Y1 Critical
thinking ; Y4 Judgement and Decision making ).
• .

INTRODUCTION

The objective of the statement of cash flow is to provide meaningful information

concerning cash generated (the source of cash) and cash utilized (the application of cash)
of all financial resources during the period under review, hence the heading: for the year
75
ended….

The statement of cash flow represents, in a prescribed format, a summary of an

enterprise’s cashbook. The elements of a statement of cash flow consist of:
• net cash flow from operating;
• cash utilized in investing activities;
• cash effects of financing activities; and
• net change in cash and bank balances

Note that putting figures in brackets in the statement of Cash flow indicates an outflow
of funds whilst inflows of cash are shown without brackets.

Note also that the cash flow statement deals with the flow of cash only. Other items,
which may materially affect the balance sheet (such as the issue of shares in exchange
for assets other than cash) and income statement (such as depreciation provided for)
do not enter into the statement of cash flow.

76
5.1 CASH FLOW FROM OPERATING ACTIVITIES

This section identifies the cash retained from (or utilized in) the operating activities.

The definition of operating activities according to AC 118 (par 07) is:

“The principal revenue-producing activities of the enterprise and other activities that
are not investing or financing activities.” In other words, operating activities generally
result from the transactions and other events that have an effect on the determination
of net profit or loss, therefore those items dealt with in the income statement. Some
examples of cash flows from operating activities are:
• Cash receipts from the sale of goods and the rendering of services; Cash
payments to suppliers for goods and services; Cash payments to and on behalf
of employees.

AC 118 uses two methods in calculating the cash flows from operating activities namely:
• The direct method, whereby major classes of gross cash receipts and gross cash
payments are disclosed, or
• The indirect method, whereby net profit or loss is adjusted for the effects of
transactions of a non-cash nature, and income or expenses associated with
investing or financing activities.

5.2 CASH FLOWS FROM INVESTING ACTIVITIES

The second section describes the cash utilized for investing activities. The investing
activities referred to here are investments in non-current assets. Investment could be
made either to maintain operations at its present level, or to expand operations. Cash
retained from operating activities should be sufficient for investment to maintain
operations. Any replacement of tangible assets is considered as an investment to maintain
current levels of operating activities, while additions to tangible assets may be considered
as an investment to expand operations. This distinction is useful in financial statement
analysis.

Any investment made will indicate an outflow of funds, while the sale of investments
indicates an inflow of funds. Note that, because we are working with the flow of cash,
the gross amounts received or paid are shown - hence an adjustment to net income
from noncash depreciation and profit/loss on disposal is required.

5.3 CASH FLOWS FROM FINANCING ACTIVITIES

Where the cash inflow from operating activities is more than cash outflow for
investment activities, the result would be a decrease in liabilities and / or an increase in
cash and cash equivalents. This is so because the surplus funds generated by the
77
operating activities and not used for investment had to be applied elsewhere. Where
the cash outflow for investment activities is more than the cash inflow from operating
activities, i.e. more money was invested than generated the operating activities, the
result would be an increase in liabilities (and / or equity) and / or a decrease in cash and
cash equivalents. This is so because funds would have to be obtained to cover the
shortfall.

5.4 N E T INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

The results of net cash inflow from operating activities, investing activities and financing
activities reflect the net change which occurred in cash and bank balances during the year.

Do you still remember the three main sections (activities) of a statement

of Cash Flow?

Which one involves buying and selling? Buying tangible assets? Getting
money in and out of the business?

STEPS IN THE PREPARTION OF A CASH FLOW STATEMENT

STEP1: Calculate cash received from customers
STEP2: Calculate cash paid to suppliers and employees
STEP3: Calculate cash generated from operations-make necessary adjustment to
income. STEP4: Calculate changes in working capital & compare current assets and
current liabilities from one year to the next
STEP5: Calculate changes in cash and cash equivalents
STEP6: Calculate amount paid for interest, income tax and dividends
STEP7: Transfer all the information to the cash flow and calculate the cash flows from
operating activities
STEP8: Calculate increase in non-current assets and proceeds from non-current assets
sold
STEP9: Calculate cash flow in investing activities
STEP10: Record any increase or decrease in non-current liabilities.
STEP11: If there was an issue of shares, record the proceeds
STEP12: Calculate cash flows from financial activities
STEP13: Calculate increase or decrease in cash –check against the bank amounts, if they
have been given.

78
FORMAT OF STATEMENT OF CASH FLOW

79
80
NOTES TO THE STATEMENT OF CASH FLOW FOR THE YEAR ENDED

1 Reconciliation between profit before taxation and cash generated

from operations
Profit for the period before taxation
Adjusted for:
Depreciation
Investment
Finance charges
Operating profit before changes in working
capital Increase in trade debtors/ Accounts
receivable Decrease in inventory

2 Decrease in account payable/ trade creditors

Cash generated by operations

3 Cash and cash equivalents

Bank
Interest paid
Amount owing at the end of the previous year
Interest as per income statement

4 Amount owing at the end of the current year

Amount paid
Dividend paid
Amount owing at the end of the previous year
Dividends paid and recommended

5 Amount owing at the end of the current year

Amount paid
Taxation paid

81
TUTORIAL 1

Comparative balance sheet as at 31 December 2023

2023 2022
ASSETS R R
Non-current assets 201 000 237 000
Land 10 000 30 000
Buildings 150 000 150 000
Accumulated depreciation on buildings (40 000) (20 000)
Equipment 101 000 89 000
Accumulated depreciation on equipment (20 000) (12 000)
Current Assets 134 200 56 200
Bank 44 000 22 000
Account receivable 26 000 28 000
Inventories 60 000
Prepaid expense 4 200 6 200
Total Assets 335 200 293 200
EQUITY & LIABILITIES
Shareholders' Equity 202 200 123 200
Ordinary share 170 000 100 000
Retained Income 32 200 23 200
Non-Current Liabilities 100 000 140 000
Loan payable 100 000 140 000
Current Liabilities 33 000 30 000
Account payable 33 000 30 000
Total Equity & Liabilities 335 200 293 200

Income Statement for the year ended 31 December 2023

Revenue 800 000
Cost of sale (475 000)
Operating expenses (220 000)
Interest expenses (8 000)
Loss on sale of equipment (2 000)
Income from operation 95 000
Income tax expense (38 000)
Net Income 57 000

Additional information
1. Operating expenses include depreciation expenses of R34 000 and amortisation of prepaid expenses of
R2 000.
2. Land was sold at its book value for cash.
3. Cash dividend of R48 000 was paid in 2018.
4. Interest expense of R8 000 was paid in cash.
5. Equipment with a cost of R36 000 was purchased for cash. Equipment with a cost of R24 000 and a
book value R18 000 was sold for R16 000 for cash.
6. Loans were redeemed at their book value for cash.
7. Ordinary shares were for cash.
82
 Required
Draw up the cash flow statement for the year ended 31 D e ce m be r 2023 of Ntsako
Limited. Make use of the direct & indirect method

TUTORIAL 1

Vutomi Limited is involved in the manufacture of concrete products and its financial statements are as
follows:

83
Vutomi Limited Statement of Comprehensive and Other Income for the year-ended 30 November 2019

Additional information:
1. Property with a carrying value of R320 000 was sold for R280 000.
2. Depreciation of property, plant and equipment during the year amounted to R114 000.
3. Dividends paid during the year amounted to R188 000.

Required

Prepare a Statement of Cash Flows for the year ended 30 November 2019 for Vutomi
Limited.

84
SOLUTIONS
Tutorial 1

DIRECT METHOD

Ntsako Limited cash flow statement 31 December 2023

R
Cash generated from operating activities
Cash receipt from customers 802 000
Cash paid to suppliers (532 000)
Cash paid to employees (184 000)
Cash paid for interest expense (8 000)
Cash paid for taxation (38 000)
Cash paid for dividends (48 000)
Cash outflow from operating activities (8 000)
Cash flow from investing activities
Purchase of equipment (36 000)
Proceeds from sale of land 20 000
Proceeds from sale of equipment 16 000
Cash outflow/inflow from investing activities 0
Cash flow from financing activities
Proceeds from shares issued 70 000
Payment of long term loan (40 000)
Cash inflow from financing activities 30 000
Net change in cash and cash equivalent 22 000
Cash and cash equivalent at the beginning of the year 22 000
Cash and cash equivalent at the end of the year 44 000

85
INDIRECT METHOD
Ntsako Limited cash flow statement 31 December 2023
Cash generated from operating activities R
Profit before taxation 95 000
Adjusted for:
Depreciation 34 000
Loss on sale of equipment 2 000
Changes in working capital
Increase/decrease in inventories (60 000)
Increase/decrease in receivables 2 000
Increase/decrease in payables 3 000
Increase/decrease in prepaid expenses 2 000
Interest paid -
Income tax paid (38 000)
Dividends paid (48 000)
Cash outflow from operating activities (8 000)
Cash flow from investing activities
Purchase of equipment (36 000)
Proceeds from sale of land 20 000
Proceeds from sale of equipment 16 000
Cash outflow/inflow from investing activities 0
Cash flow from financing activities
Proceeds from shares issued 70 000
Payment of long term loan (40 000)
Cash inflow from financing activities 30 000
Net change in cash and cash equivalent 22 000
Cash and cash equivalent at the beginning of the year 22 000
Cash and cash equivalent at the end of the year 44 000

86
Tutorial 2

Vutomi Limited Statement of cash flows for the year ended 30 June 2021
Cash generated from operating activities R
Profit before taxation 300 000
Adjusted for:
Depreciation for PPE 114 000
Loss on sale of property 40 000
Changes in working capital
Increase/decrease in inventories 27 000
Increase/decrease in trade receivables (15 000)
Increase/decrease in trade payables 32 000
Increase/decrease in current tax payable 12 000
Adjustments for other non-operating terms:
Interest paid (42 000)
Income tax paid (76 000)
Dividends paid (188 000)
Cash outflow from operating activities 204 000
Cash flow from investing activities
Purchase of non-current asset (469 000)
Proceeds from sale of property 280 000
Cash outflow/inflow from investing activities (189 000)
Cash flow from financing activities
Proceeds from shares issued 100 000
Proceeds from shares premium 30 000
Payment of long term loan (20 000)
Cash inflow from financing activities 110 000
Net change in cash and cash equivalent 125 000
Cash and cash equivalent at the beginning of the year (81 000 - 18 000) 63 000
Cash and cash equivalent at the end of the year (198 000 - 10 000) 188 000

87
 TOPIC 6

RATIOS

LEARNING OUTCOMES
At the end of the topic, the student should gain the following technical
competencies:
• Discuss the importance of compliance with accounting standards
and regulations, such as Generally Accepted Accounting Principles
(GAAP) or International Financial Reporting Standards (IFRS), and
the role of regulatory bodies like the Financial Accounting
Standards Board (FASB) or the International Accounting Standards
Board (IASB) (I3 Professional ethics; Transactional accounting
processes, AA(F)1, Level 1) (Fundamental reporting concepts,
FR1, Level 3)
• Elaborate and examine ethical issues and dilemmas that may arise
in accounting practice, such as conflicts of interest, financial ratios,
or misrepresentation of financial information, and understand the
importance of ethical behaviour in the profession (Professional
Values and Attitudes I3 Professional ethics; I1 Personal
ethics Level 3).
• Demonstrate knowledge of the formulas and calculation methods
for various financial ratios, including their components from
financial statements ( Y critical thinking; Y 3 Problem-solving Y
5 Professional judgement and decision making)
• Interpretation: Understand the significance and implications of
different ratios in assessing the financial health and performance
of organizations. ( Y critical thinking; Y 3 Problem-solving Y 5
Professional judgement and decision making)
• Critically analyze financial statements and ratio results to assess
the strengths and weaknesses of organizations, identifying key
performance drivers and areas for improvement. ( Y critical
thinking; Y 3 Problem-solving Y 5 Professional judgement and
decision making)
• Compare and benchmark financial ratios against industry norms,
competitors, and historical performance to gain insights into
relative performance and trends( Y critical thinking; Y 3
Problem-solving Y 5 Professional judgement and decision
making).
• Apply financial ratios to forecast future financial performance and
88
 make informed predictions about the future prospects of
organizations. ( Y critical thinking; Y 3 Problem-solving Y 5
Professional judgement and decision making)
• Ratio Calculation: Calculate and interpret a comprehensive range
of financial ratios using data from financial statements, including
balance sheets, income statements, and cash flow statements. ( Y
critical thinking; Y 3 Problem-solving Y 5 Professional
judgement and decision making)
• Financial Statement Analysis: Apply ratio analysis techniques to
evaluate the financial position, profitability, liquidity, and solvency
of organizations. ( Y critical thinking; Y 3 Problem-solving Y 5
Professional judgement and decision making)
• Decision Making: Use ratio analysis results to support decision-
making processes, such as investment decisions, credit
evaluations, and strategic planning ( Y critical thinking; Y 3
Problem-solving Y 5 Professional judgement and decision
making) g.
• Prepare journal entries following the principles of double-entry
accounting (Transactional accounting processes, AA(F)1, Level
1) (Fundamental reporting concepts, FR1, Level 3).
• Demonstrate the types of information generated by accounting
and how they meet the information needs of the various users of
financial information. (Transactional accounting processes,
AA(F)1, Level 1) (Fundamental reporting concepts, FR1, Level
3)

A ratio is calculated by dividing one Rand amount reported in the financial statements by
another Rand amount reported. Ratio analysis is one commonly used tool of financial
statement analysis. The use of ratios allows the analyst to develop a set of statistics that
reveal key financial characteristics about the enterprise under scrutiny. Key financial
ratios most often used will be discussed in three categories. These categories are:
• Capital structure (or leverage) ratios
• Profitability ratios
• Liquidity ratios

89
All the ratios to be discussed in these categories are based on amounts reported in the
balance sheet and income statement.

6.1 CAPITAL STRUCTURE (LEVERAGE) RATIOS

Also referred to as long-term solvency ratios, capital structure ratios are designed to
measure to what extent and to what effect the enterprise is using debt to finance its
activities. In general, the term leverage (also called gearing) refers to the extent to which
an enterprise employs debt capital to finance its operations.

Debt Ratio
This ratio measures the relationship between total liabilities and total assets and is
calculated as follows:
Total liabilities ÷ Total assets

Where liabilities would include all creditors who have a prior claim to the assets of the
enterprise in the event of liquidation. Total liabilities may therefore also include certain
categories of preference shareholders. Because of this prior claim to assets that creditors
have, this ratio is important to both non-current creditors and shareholders.

90
Debt to Equity Ratio
The debt to equity ratio shows the amount of the enterprise’s assets provided by creditors
in relation to the amount provided by shareholders. It measures the extent to which the
enterprise is leveraged (or geared). The larger the debt to equity ratio, the more fixed
obligations (e.g. to make interest payments) the enterprise has and the riskier the
situation.

The debt to equity ratio is calculated as follows:

Total liabilities ÷ Owners’ equity

Times Interest Earned Ratio

This ratio measures the enterprise’s ability to periodically pay interest from current
earnings. It is calculated as follows:
(Net profit for the period + finance cost + income tax expense) ÷ Finance cost.

6.2 PROFITABILITY RATIOS

Profitability ratios are designed to measure the earnings potential and profitability record
of the enterprise. Four commonly used measures of profitability are profit margins,
return on assets (ROA), return on equity (ROE) and earnings per share (EPS).

Profit Margins
Profit margins used to evaluate the profitability of an enterprise are the:
Gross profit margin Operating profit margin, and Net profit margin.
These margins are calculated as follows:

Gross profit margin: Gross profit ÷ Revenue

Operating profit margin: Profit from operations ÷ Revenue

Net profit margin: Net profit for the period ÷ Revenue

Either increasing selling prices or decreasing costs may improve these margins.

Return on Assets (ROA)

This ratio is also referred to as return on investment (ROI), meaning the investment of
assets in the enterprise, is calculated as follows:
Net profit for the period ÷ Total assets. Profits come from revenue. Revenue arises from
the productive use of assets. The key to profitability is therefore to recognize that it arises
not only from the profit margin on revenue, but also from the effective use of capital.

Return on Equity (ROE)

The ROA does not measure the return earned on the investment by shareholders. The
return to the shareholders may be greater or less than the return on assets, depending
on the enterprise’s use of financial leverage. Return on equity is calculated as follows:

91
Net profit for the period ÷ Total equity (capital and reserves)
Earnings per Share (EPS)
One of the most widely used measures of profitability is the earnings per (ordinary) share.
EPS is provided in the income statement, as a requirement of AC 104.

6.3 LIQUIDITY RATIOS

Liquidity ratios are designed to measure the ability of the enterprise to pay its short-term
liabilities as they become payable.

Two measures of liquidity are the:

• Current ratio and the
• Quick ratio

Current Ratio
The current ratio is based on the working capital of the enterprise. Working capital is
current assets minus current liabilities. The current ratio expresses the ratio of current
assets to current liabilities:
Current assets ÷ current liabilities
In essence, current liabilities are paid out of the proceeds of current assets.

One common rule-of-thumb maintains that this ratio must be at least two to one
(expressed as 2:1). However, in order to determine whether a ratio of more than

2:1 is good, or a ratio of lower than 2:1 bad, one would have to compare it with the
enterprise’s current ratio (past trends of the company), and with similar measures of
successful companies in the same industry (industry norms).

Quick Ratio/Acid Test Ratio

The quick (or acid-test) ratio is a more rigorous test of short-term solvency than the
current ratio because it aims to measure the relationship between assets that can be
quickly converted into cash and current liabilities. There are alternative ways of
determining the quick ratio, but most commonly it is calculated as:

(Current assets – inventory) ÷ Current liabilities.

The higher the ratio, the more liquid the enterprise is considered to be. The rule- of-thumb
in this instance indicates a ratio of 1:1, but again past trends and industry norms should
be applied. The reason that the mentioned rule-of-thumb cannot be applied uniformly
across all enterprises is because the nature of the different industries differs. Consider for
example the working capital structure of a grocery store with that of furniture store. In
comparison, the grocery store will carry large inventories, because the inventory turnover
(i.e. the rate at which it sells) is a lot higher than that of the furniture store. Also, the
grocery sells for cash only, while the furniture store sells on account. The profit margin of
grocery stores is also a lot lower than that of furniture stores.

92
Two final liquidity ratios, which are often classified as activity ratios, measure the speed
with which accounts receivable and inventories are converted into cash and debtors
respectively, i.e. a more liquid form of current assets.

The average debtors’ collection period measures the speed with which receivables are
converted into cash, and is calculated as follows:
Accounts receivable ÷ average daily sales
Where average daily sales = revenue ÷ 365 (days per year)

The inventory turnover ratio measures the speed with which inventories are turned into
accounts receivable (upon the sale of the inventory). The ratio is calculated as follows:
Cost of sales ÷ closing inventory

From this ratio, we can also establish how many days’ sales are held in inventory:
Days sales in inventory = 365 days ÷ inventory turnover. Or closing inventory ÷ (cost of
sales ÷365)

93
Fully Worked Example
You receive the following abridged financial statements of Paolo Limited on 30 June 2017:

STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2017

2017 2016
Assets R R
Non-current assets at carrying amount 42 000 40 000
Investments at cost price 16 000 16 000
Total Non-Current Assets 58 000 56 000
Current assets 223 000 169 800
Inventory 100 000 80 000
Trade Debtors 120 000 85 000
Prepaid expenses 3 000 800
Bank - 3 600
Total Assets 281 000 225 800

Equity and liabilities

Equity 74 000 64 000
Issued share capital: R1 ordinary shares 60 000 60 000
Distributable reserve: Accumulated profits 14 000 4 000

Non-current liability: 40 000 30 000

Debentures (12%) 40 000 30 000

Current liabilities 167 000 131 000

Trade Creditors 144 000 122 000
Bank overdraft 10 000 -
Accrued expenses 1 000 800
Receiver of Revenue 2 000 1 000
Shareholders for dividends 10 000 8 000
Total Equity and liabilities 281 000 225 000

94
The interest rate on the bank overdraft is 15% per year.

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE ENDED
30 JUNE 2017
2017 R 2016 R
400 000 320 000
Sales: Credit 160 000 120 000
Cash 560 000 440 000
Total Sales (440 000) (360 000)
Less: Cost of sales
Inventory
Purchases(credit) 80 000 60 000
Less: Inventory 460 000 380 000
100 000 80 000
Gross profit
Income from investments
120 000 80 000
Less: Expenses
Depreciation
Sundry expenses (93 600) (65 600)
Interest paid 4 000
5 600
Net profit for the year 83 600
6 000 55 800
Less: Taxation
4 200
Net profit for the period 28 000
16 000

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2017

Share Accumulated Total

Capital profit
60 000 4 000 64 000
Balance at the beginning of the year - 20 000 20 000
Net profit for the year - (10 000) (10 000)
Dividends declared
60 000 14 000 74 000
The following calculations illustrate some of the ratios which could be computed from the
available information:

95
1. Current ratio
= Current assets: Current liabilities

= 223 000: 167 000

= 1, 34: 1

2. Acid test ratio

= Current Assets-Inventory: Current liabilities

= 223 000-100 000:167 000

= 123 000-167 000

=0.74: 1

3. Debtors’ collection period

Average debtors 360

X
Credit sales 1

(120 000+85 000)

÷2
= X
400 000

= +/- 92 days

4. Creditors’ payment period

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠
360

x
𝐶𝑟𝑒𝑑𝑖𝑡 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 1

(144 000+122
000)/2
= x
460 000

= +- 104 days

96
5. Inventory turnover rate
𝐶𝑜𝑠𝑡 𝑜𝑓
𝑆𝑎𝑙𝑒𝑠
=
𝐴𝑣𝑒𝑟𝑎𝑔𝑒
𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

= +/−𝑡𝑖𝑚𝑒𝑠
6. Number of days’ sales on hand
=Average inventory x 360
Cost of sales 1

= 90 000 x 360
440 000 1

= +/- 74 days

7. Owners’ equity ratio

= Total owners’ equity: Total liabilities

= 74 000: 40 000 + 167 000

= 74 000: 207 000

= 0, 36: 1

Rate of return ratios

1. Gross profit percentage

= 120 000 x 100

560 000 1

= 21, 43%

97
2. Net profit as a percentage of turnover
=Net profit before income from loan finance, interest and tax x 100
Turnover 1
= 32 400 x 100
560 000 1
= 5,79%

3. Rate of return of the enterprise

= Net profit before interest and tax x 100

Average total assets 1

= 34 000 x 100
(42 000+16 000+223 000) + (40 000+16 000+169 800)

= 34 000 x 100
253 400 1

= 13.42%

4. Profitability of investments in the operating process

= Net profit before income from outside investments, interest and tax /total assets –
outside investments x 100/1

= 32 400 x 100
253 400-16 000 1

= 32 400 x 100
237 400 1

= 13, 65%

98
5. Profitability of the outside investments

= Income from outside investments x 100

Outside investments 1

= 1 600 x 100
16 000 1

= 10%

6. Profitability of own capital

= Net profit before interest paid and tax x 100

Average owners’ equity 1

= 34 000 x 100
(74 000+ 64 000) ÷2 1

= 49, 28%

7. Net earnings per share

= Net profit after tax x 100

Number of ordinary shares issued 1

= 20 000 x 100
60 000 1

=33, 33cents

8. Dividends per share

= Total dividend x 100

Ordinary shares 1

= 10 000 x 100
60 000 1

= 16,67cents

99
 Use the information provided below for Pamela Traders to answer the
following questions: Calculate the following ratios:
1. Gross profit as a percentage of sales
2. Net profit as a percentage of sales
3. Current ratio
4. Quick ratio (acid-test ratio)
5. Debtors turnover
6. Debtors collection period in day

Pamela Traders Statement of Profit or Loss and other Comprehensive Income for the year
ended 31 December 2017
R R
Sales (100% credit) 90 000
Less: Cost of sales 50 000
Opening Stock 5 000
Purchases 125 000
Closing Stock (80 000)
Gross Profit 40 000
Less: Expenses 10 000
Salaries 4 000
Advertising 6 000
Net income for the year 30 000

100
Pamela Traders Statement of Financial Position as at 31 December 2017
R R
ASSETS
Non-current assets 30 000
Property, plant and equipment 30 000
Current assets 160 000
Inventory 80 000
Trade and other receivables 20 000
Cash and cash equivalents 60 000
TOTAL ASSETS 190 000
EQUITY AND LIABILITIES
Equity 100 000
Capital 100 000
Current liabilities 90 000
Trade and other payments 90 000
TOTAL EQUITY AND LIABILITIES 190 000

101
 TOPIC 7

VALUE-ADDED TAX (VAT)

LEARNING OUTCOMES
At the end of the topic, the student should gain the following technical
competencies:

• Develop VAT planning strategies to minimize VAT liabilities,

optimize input VAT recovery, and ensure compliance with VAT
regulations. Y critical thinking; Y 3 Problem-solving Y 5
Professional judgement and decision making).
• Assess the VAT compliance obligations of businesses, including
VAT registration, filing VAT returns, and maintaining VAT
records. Y critical thinking; Y 3 Problem-solving Y 5
Professional judgement and decision making).
• Calculate VAT liabilities and refunds accurately, considering
applicable VAT rates, exemptions, and thresholds. Y critical
thinking; Y 3 Problem-solving Y 5 Professional
judgement and decision making).
• Prepare VAT accounting entries and records, ensuring
compliance with VAT regulations and reporting requirements Y
critical thinking; Y 3 Problem-solving Y 5 Professional
judgement and decision making).

• Complete and submit VAT returns to tax authorities, providing

accurate information on taxable supplies, input VAT, and VAT
payable/refundable. (Y critical thinking; Y 3 Problem-
solving Y 5 Professional judgement and decision
What is VAT?
making).
Value-Added Tax is commonly known as • VAT. VAT is an indirect tax on the consumption
of goods and services in the economy. Revenue is raised for government by requiring
certain businesses to register and to charge VAT on the taxable supplies of goods and
services. These businesses become vendors that act as the agent for government in
collecting the VAT.

VAT is charged at each stage of the production and distribution process and it is
proportional to the price charged for the goods and services.

VAT is presently levied at the standard rate of 15% on the supply of most goods and
services and on the importation of goods. The VAT on the importation of goods is
collected by customs. There is a limited range of goods and services which are subject to
102
VAT at the zero rate or are exempt from VAT.

Who should register for VAT?

Any person that carries on a business may register for VAT. The term person is not only
limited to companies but also includes, amongst others, individuals, partnerships, trust
funds, foreign donor funded projects and municipalities. In order to register, an
application form must be completed and a specific process must be followed, both of
which you can find on our page how to register for VAT.

It is mandatory for a person to register for VAT if the taxable supplies made or to be made
is, in excess of R1 million in any consecutive twelve-month period.

A person may also choose to register voluntarily if the taxable supplies made, in the past
period of twelve months, exceeded R50 000. As from the 1st of March 2012, qualifying

103
micro businesses that are registered for Turnover Tax may also choose to register for VAT
provided that all the conditions for voluntarily registration for VAT are met.

A person who is obliged to register for VAT is referred to as a vendor.

VAT CONCEPTS
Zero-rated items Zero-rated items are goods or services which are taxed at a rate of 0%,
e.g. milk, brown bread, maize, fruit, etc.

VAT-exempted items These items involve services that are not subject to VAT at either the
standard rate or zero rate, e.g. childcare services, educational services,
etc.

Standard rate In South Africa Standard-rated supplies are taxed at the rate of 15%.

VAT-able items These items are goods or services that are subject to VAT.
VAT Output VAT paid on items purchased and can be claimed back from SARS. It is
VAT, which your company would charge on items, which it, sells. Thus a
company could wish to sell an item and added to the amount a standard
rate tax would be charged.

VAT Input VAT on Sales and income and must be paid over to SARS. It is VAT that
you pay on all your business expenses and for which you have a tax
invoice. It also relates to VAT that is paid on other goods and services
bought or rented for the business.

VAT Control Is a summary of the VAT Input and Output and shows whether the
business owes SARS money or whether SARS owes the business money?

104
VAT CALCULATIONS

How to add VAT (Value Added Tax) to a price (15%)

This is the calculation you need to use when you know a PRICE BEFORE TAX (THE NET
PRICE) but want to find out the PRICE AFTER TAX (THE GROSS PRICE).
VAT rate of 15%.

Net price Multiplied by 1.15 = Gross price

Price before tax Multiplied by 1.15 = Price after tax

105
Calculations:

The VAT standard rate is rate of 15% First, get

the multiplier:
15 100 = 0.15
0.15 + 1 = 1.15 The
multiplier is 1.15 So...

Net price Multiplied by 1.15 = Gross price

Price before tax (Net price) Multiplied by 1.15 = Price after tax (Gross price)
E.g.:
R100 Multiplied by 1.15 = R115
R100 + Tax = R115 incl. Tax

How to deduct VAT from a price - (15%)?

People can often add VAT to a figure, but when it comes to taking it off it is a problem.

So here it is...

Taking-off VAT (Tax) from a price

This is the calculation you need to use when you know a PRICE AFTER TAX (THE GROSS
PRICE) but want to find out the PRICE BEFORE TAX (THE NET PRICE).
VAT rate of 15%.

Gross price (price after tax) Divided by 1.15 = Net price

Price after tax Divided by 1.15 = Price before tax (Net price)

Calculations:
The VAT standard rate is rate of 15% First,
get the divisor:
15 100 = 0.15
0.15 + 1 = 1.15
The divisor is 1.15
So the back calculation for 15% VAT is ...

Gross price Divided by 1.15 = Net price

106
 Price after tax Divided by 1.15 = Price before tax

E.g.:

R115.00 Divided by 1.15 = R100

R115.00 incl. Tax = R100 + Tax

THREE BOOKKEEPING ACCOUNTS

For the purposes of Value Added Tax (VAT) records, three bookkeeping accounts must be
kept.
1. The VAT on inputs account.
2. The VAT on output (transactions) account.
3. VAT Control (Debit and Credit) account.

The VAT on Inputs Account –This account will usually show a debit (the VAT SARS "owe"
you money for the VAT you have paid and you are entitled to receive from them).

▪ The VAT on Output (Transactions) Account –This account will usually show a credit
(the VAT SARS are "entitled" to receive the VAT from you that you have collected on
their behalf. The money is not yours and it is only temporarily in your possession until
the due date for the payment of VAT.
▪ The VAT Control (Debit and Credit) Account. This is the account to which the 2 first
accounts are posted. The account balance may show a credit, when the periodic
report to the VAT is for a payment to be made, or it may show a debit when the
periodic report shows that that money is to be returned.
Refer to the following fully worked example on Vat input and Vat
output

1. The wholesaler sells the product to the retailer at R100 + 15% VAT = R115.00
2. The wholesaler collects VAT of R15.00 from the retailer and pays it over to SARS,
thus taking the VAT out of the business (VAT Output)
3. The retailer claims back the VAT (R15) from SARS, thus put it back into the
business (VAT Input)
4. The retailer adds a mark-up of 100% to the product and sell it to the consumer for
R200 + VAT of R30.00.
5. The retailer collects the VAT (R30) from the consumer and pays it over to SARS,
thus taking the VAT out of the business (VAT Output).
107
 6. The consumer cannot register for VAT and cannot claim back the VAT.
7. SARS collected VAT to the amount of R30 instead of only R15 due to value being
added to the product in the form of a mark-up percentage.

Example 1:
1) Purchase goods on credit from R. Adams, R22 800 (ISP).

+ INVENTORY (A) -
Creditors 19826.19

- CREDITORS (L) +
Inventory 19826.19
Input VAT 2 973.91

+ INPUT VAT (A) -

Creditors 2973.91

22 800 x 15/115 = 2 973.91

2) Paid R. Adams R22 000 in full settlement of our account.

+ BANK (A)
-
Creditors 22 000

- CREDITORS (L) +
Bank 22 000
Discount received & 800
Output VAT

- ECEIVED (I)
DISCOUNT +
Creditors 695.65

- OUTPUT VAT (L) +

Creditors 104.34

800 x 15/115 =104.34

108
3) Sold merchandise on credit to T. Tax, R22 914 (ISP). The mark- up is 20% on cost price.

+ DEBTORS (A) -
Sales 19925.21
Output VAT 2 988.79

- SALS (I)
+
Debtors 19925.21

- OUTPUT VAT (L) +

Debtors 2988.79

+ INVETORY (A) -
Cost of Sales 16 604.35

+ COSTOF SALES (E) -

Inventory 16 750

22 914 x 15/115 = 2 988.78

22 914 – 2 988.78 = 19925.22
19925.22 x 100/120 = 16 604.35

4) T. Tax paid us R22 014 in full settlement of his account.

+ DEBT RS (A) -
Bank 22 014
Discount allowed & Input VAT
900

+ BANK (A) -
Debtors 22 014

+ DISCOUNT ALLOWED (E) -

Debtors 789-47

109
+ INPUT VAT (A) -
Debtors 117.39

900 x 15/115 = 117.39

900 – 117.39 = 782.61

5) A debtor S. Sunny’s debt of R11 400 must be written off as irrecoverable.

+ DEBTORS (A)
- Bad debts & Input
VAT 11 400

+ BAD DEBTS (E) -

Debtors 9913.05

+ INPUT VAT (A) -

Debtors 1 486.95

11 400 X 15/115 = 1 486.95

6) The owner takes stock for his own use, R1 140.

- DRAWINGS (OE)
+
Inventory & Input VAT 1 140

+ INVENTORY (A) -
Drawings 991.31

+ INPUT VAT (A) -

Drawings 148.69

1 140 x 15/115 = 148.69

7) Issue a credit note to a debtor for damaged goods, R75.

+ DEBTORS (A)
-
Debtors allowance &
Output VAT 75

110
+ DEBTORS ALLOWANCE (E) -
Debtors 65.22

- OUTPUT VAT (L) +

Debtors 9-78

75 x 15/115 = 9-78

8) Receive a credit note from a creditor for damaged goods returned, R114.

- CREDITORS (L) +
Inventory & Input VAT 114

+ INVENTORY (A) -
Creditors 99.14

+ INPUT VAT (A) -

Creditors 14.86
114 x 15/115 = 14.86

NOTE
Issue a credit note: debtor returned goods.

Received a credit note: business returned goods

NB.

Although students are not required to draw up journals, in this example journal entries are
provided for better understanding of the ledger account.

Example 2:
30.1.09 - The total purchases that you made amount to R 1,000 by EFT plus R 150 VAT on
inputs.
30.1.09 - The total cash sales you made amount to R 4,000 plus R600 VAT on outputs.
15.2.09 - You paid the balance that was owing to SARS.

111
The bookkeeping records will look as follows:
1. Debit Credit
Purchases / Inventory 1,000
VAT on Input 150
Bank 1,150
(30.1.09) Purchases recorded for January
2.
Bank 4,600
Sales 4,000
VAT on Output 600
(30.1.09) Sales recorded for January
3.
VAT on Output 600
VAT on inputs 150
VAT Control Account 450
(30.1.09) Transfer of surplus to Control Account
4.
VAT Control Account 450
Bank 450
(15.2.09) Payment of VAT reported for January
Dr VAT Input Account Cr

Aug. 31 Bank 150 Aug. 31 VAT Control 150

Dr VAT Output Account Cr

Aug. 31 VAT Control 600 Aug. 31 Bank 600

Dr VAT Control Account Cr

Aug. 31 VAT input 150 Aug. 31 VAT Output 600

Bank 450

112
QUESTION 1
On 17 March, Tilly sells goods to the four customers shown in the table. The value of the
goods is also shown. VAT has not yet been included in the invoice price of the goods.

Calculate the value of VAT in each case and the total value of the invoice to be sent to
each customer.
CUSTOMER VALUE OF GOODS VAT INVOICE TOTAL
SOLD

Nina R 54.67

Khentsane R 132.91

Phuti R 17.54

Bongi R2 381.92

QUESTION 2

On 4 September, Harry receives invoices for goods that he purchased. The invoices show
the total price of the goods including VAT.

Calculate the value of goods that Harry received and the amount of VAT added to this to
produce the invoice total.

SELLER INVOICE TOTAL VALUE OF GOODS VAT

PURCHASED
Cindi R 325.76
Xolani R 54.22
Tinyiko R 4 571.09
Azwindini R 72.77

NB. The most difficult calculation involving VAT is encountered when cash discount is
involved.

113
QUESTION 3

Fill in the gaps.

Two types of discount are used in the business world:

a. is a reduction in price when goods are supplied to other businesses

(usually in the same line of business). This reduced price is not available to the general
public.

This type of discount is generally shown on the invoice (source document), but is not
included in the double-entry records.

b. is an allowance that can be deducted from the total amount charged for
goods if the debt is settled within a time specified by the supplier.

This type of discount is only recorded when advantage is taken of the reduction.

SOLUTIONS

QUESTION 1
Calculate the value of VAT in each case and the total value of the invoice to be sent to
each customer.
CUSTOMER VALUE OF GOODS VAT INVOICE TOTAL
SOLD

Nina R 54.67 R 8.20 R 62.87

Khentsane R 132.91 R 19.94 R 152.85

Phuti R 17.54 R 2.63 R 20.17

Bongi R2 381.92 R357.28 R2 739.20

114
QUESTION 2
Calculate the value of goods that Harry received and the amount of VAT added to this to
produce the invoice total.
SELLER INVOICE TOTAL VALUE OF GOODS VAT
PURCHASED

Cindi R 325.76 R 276.90 R 48.86

Xolani R 54.22 R 46.09 R 8.13

Tenyeko R4 571.09 R3885.43 R685.66

Azwindini R 72.77 R 61.86 R 10.91;

QUESTION 3

Fill in the gaps.

A. Trade discount
B. Cash discount

115
SUMMARY

VAT (Only basic info)

• Tax levied by Government on the supply of goods and services

• Comprehensive tax – virtually on all goods & services
• Current VAT rate – 15%
• Must register as VAT-vendor if taxable supplies exceeded R1 000 000 in preceding 12-month
period
• Two types of supplies:
– Taxable supplies:
• Standard rate (15%)
• Zero rated (0%) - (Vendor may claim input VAT): e.g.
• Brown bread
• Petrol & oil
– Exempt supplies (Vendor unable to claim input VAT): e.g.
• Financial services.

• Output VAT – Input VAT = VAT payable to SARS

• VAT on e.g. settlement discount received when payment is made –
Output VAT & not deducted from Input VAT.
• Calculation of VAT on amount excluding VAT:
– Amount without VAT R100
– VAT R 15
– Amount VAT inclusive R115
• Calculate the VAT amount if VAT was included:
– Amount VAT inclusive R115
– Calculation of VAT: R115 x (15÷115) = R15
– Amount without VAT R100

116
VAT CALCULATIONS

1. Selling Price =R230

Selling Price includes VAT of 15%

Required: Calculate VAT

VAT = 15/115 X 230= R30

2. Calculate selling price without VAT

Selling Price =R230

Selling Price Includes VAT

Required: Calculate the selling price without VAT

230X 100/115=200

3. If VAT = R30, calculate the selling price Including VAT

30 X 115/15= 230

117
REVIEW QUESTIONS 1:
Review questions
Assume VAT of 15%
The following transactions occurred during April 2011. Prices that are quoted
are inclusive of vat unless otherwise stated:
• Purchased inventory on credit from Clothes Suppliers Ltd, R1 390.80
paid by EFT
• Paid wages, R4 560
• Sold inventory for cash, received R1 755.60
• Purchased stationery for R570, paid by EFT
REQUIRED:
Record the transactions in the general ledger of Jessica Stores.

REVIEW QUESTIONS 2:
1. What is output VAT?
2. What is input VAT?
3. On what sort of items is VAT levied?
4. Can you think of any items on which VAT is not levied?
5. Is inventory recorded inclusive or exclusive of VAT in the statement
of financial position? Explain your answer.
6. Why are expenses and income recorded as VAT exclusive?
7. Are receivables (debtors) and payables (amounts owed to suppliers)
inclusive or exclusive of VAT?

118
 Writing Activity:
Refer to your lecture notes and answer the questions that follow

WM Traders uses the periodic system to record inventory. The business is a registered VAT vendor.
Assume VAT at 15%.
The following amounts, among others, appeared in the trial balance as at 28 February 2011:
R
SARS (VAT) (Cr) 3 945
Purchases 180 500
Rates and taxes 8 760
Stationery on hand 1 520
Salaries and wages 57 860
Electricity and water 3 640
Sales 310 700
Returns inwards 2 000

The following transactions occurred during March 2011:

1. Paid SARS the balance outstanding as at 1 March 2011
2. WM Traders purchased inventory costing R3 135 from Steady Suppliers for cash
3. WM Traders paid March wages amounting to R7 752 by EFT
4. Purchased stationery from Waltons, paid by EFT 570
5. Sold inventory on credit for R7 809
The inventory on hand as at 31 March 2011 amounted to R75 000. There was no stationery on hand
as at the end of March.

You are required to:

1. Prepare the VAT control account in the general ledger.

2. Prepare the entry (in general journal format) to record transactions 3 and 5.
3. Prepare the Statement of comprehensive income as at 31 March 2011.

119
 TOPIC 8
_

ADDENDUM 512 (A): ADDITIONAL QUESTIONS

QUESTION ONE (30 MARKS)

Malamute and Brador have been in partnership for several years, with their financial year ending on
31 March and sharing profits in the ratio 3:2 after allowing for interest on capital account balances at
5% per year.
Extract from Malamute and Brador’s Trial Balance
Notes R
Capital accounts Alamute 50 000
Brador 50 000
Current account Alamute 3 800 Cr
Brador 2 600 Dr
Drawings account Alamute 48 400
Brador 36 900
Office equipment Cost 1 48 300
Accumulated depreciation 1 April 2002 12 800

Stock 1 April 2002 2 15 600

Trade debtors 3 68 400
Allowance for credit losses 1 April 2002 3 3 800
Sales revenue 448 700
Purchases 184 600
Rent paid 4 30 000
Salaries 88 000
Insurance 5 4 000
Sundry expenses 39 400

120
Additional information:

1. Office equipment should be depreciated at 20% p.a. on diminishing balance method.

2. Closing stock amounted to R21 400.
3. Debts of R2 400 are to be written off, and the allowance for credit losses is to be adjusted
to 5% of outstanding trade debtors.
4. Rent still owing amounts to R11 000.
5. Insurance paid in advance amounted to R1 500.

REQUIRED:

2.1 Prepare the partnership’s Trading and Profit and loss account and Appropriation account for the year
ended 31 March 2003. (17)
2.2 Draw up the partners’ Current accounts for the year ended 31 March 2003. (13)

121
QUESTION TWO (30 marks)

BURNWOOD TRADERS LIMITED PRE-ADJUSTMENT TRIAL BALANCE ON 28 FEBRUARY 20.2

Balance Sheet Accounts Section DEBIT CREDIT
Ordinary share capital (R1 each) 280 000
Ordinary share premium 30 000
Retained Income 41 000
Loan from Umgeni Bank (15% p.a.) 27 000
Land and Buildings 360 000
Equipment 50 000
Accumulated depreciation on equipment 20 000
Inventory 82 000
Trade debtors 40 000
Allowance 1 500
Bank 16 300
Cash float 750
Petty cash 250
Trade creditors 12 800
SARS (Income tax) 7 000

Nominal accounts section

Sales 476 000
Sales returns 8 000
Cost of sales 208 000
Salaries and wages 90 000
Directors fees 17 000
Audit fees 4 000
Interest on loan 2 000
Credit losses 1 400
Rent income 9 900
Commission income 7 700
Packing material 2 600
Insurance 400
Sundry expenses 11 200
Dividends on ordinary shares (interim) 5 000
905 900 905 900

122
Adjustments to be effected on 28 February 20.2:
1. The following was found as per physical count.
1.1 Trading Stock R80 300
1.2 Packing Material R700
2. Depreciate equipment at 10% p.a. on the diminishing balance method.
3. Write of further credit losses of R2000.
4. Adjust allowance for credit losses to 5% of trade debtors.
5. Provide for the outstanding interest on loan.
6. Provide rates at 2% on value of land and buildings.
7. Final Dividends of 5 cents per share was declared on 28 February 20.2
8. 8. Income Tax is calculated at 40%of net profit

REQUIRED:
1. Prepare the Statement of Comprehensive Income 28 February 20.2
2. Prepare the Statement of Financial Position 28 February 20.2

123
QUESTION THREE (40 Marks)

The summarised management statements of Dunmore Limited are as follows:

DUNMORE LIMITED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED31 DECEMBER
2013
R R

Sales 300 000

Cost of sales (202 000)

Gross profit 98 000

Interest received 5 000

Profit on disposal of equipment 5 000

Interest paid 6 000

Depreciation

Equipment 30 000

Vehicles 9 000

Loss on disposal of vehicle 1 000

Other expenses 16 500

Profit before taxation 45 500
Income tax expense (23 500)
Profit for year 22 000

124
DUNMORE LIMITED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2013
Share capital Share Premium Retained earnings Total

R R R R
Balance on 1 100 000 - 22 500 122 500
January 2013
Profit for 22 000 22 000
the year

Dividends (2 000) (2 000)

Issue of shares 105 000 15 000 120 000
Balance on 31 205 000 15 000 42 500 262 500
December 2013

125
DUNMORE LIMITED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2013
2012 2013
R R
ASSETS 96 000 230 000
Equipment 70 000 200 000
Cost price 100 000 240 000
Accumulated depreciation (30 000) (40 000)
Vehicles 26 000 30 000
Cost price 56 000 62 000
Accumulated depreciation (30 000) (32 000)
Investments - 50 000
Current assets 50 000 78 500
Inventories 20 000 18 000
Debtors 15 000 30 000
Bank 15 000 30 500
Total assets 146 000 358 000
EQUITY AND LIABILITIES
Share capital 100 000 205 000
Share premium - 15 000
Retained earnings 22 500 42 500
122 500 262 500
Non-current liabilities
Debentures - 60 000
Current liabilities 23 500 36 000
Creditors 20 000 10 000
South African Revenue 3 000 24 500
service
Shareholders for dividends 500 1 500
Total equity and liabilities 146 000 358 500

Additional information:

1. Equipment originally bought for R50 000, with a net book value of R30 000 was sold during the
year. New equipment was bought to replace the equipment sold.

2. The capacity of the plant was expanded through the purchase of new equipment to the value of
R100 000.

126
 3. A vehicle which cost R10 000, with a net book value of R3 000, was sold during the year. A new
vehicle was bought to replace the vehicle disposed of.

REQUIRED:

3.1 Prepare the statement of cash flows for Dunmore Limited for the ended 31 December
2013 using the indirect method (26)

3.2 Explain the difference between the direct method and indirect method of presenting cash flow
statements. (14)

127
 TOPIC 9
_

ADDENDUM 512 (B): TYPICAL EXAMINATION QUESTIONS

RICHFIELD
FACULTY OF LEADERSHIP AND BUSINESS ADMINISTRATION
ACCOUNTING 512

Duration: XXX Hours Marks: XXXX Date: XXXXX

Examiner: XXXXXXX Moderator: XXXXXX

This paper consists of 4 Questions of 4 pages including this page.

PLEASE NOTE THE FOLLOWING:

1) Ensure that you are writing the Correct Examination paper, and that there are no missing pages.

2) You are obliged to enter your student number and centre name on all answer sheets. The answer
sheets provided are the property of the Business College and all extra sheets must be handed to
your invigilator before you leave the examination room. Number your answer sheets and ensure
that they are stapled in the correct sequence.

3) If you are found copying or if there are any documents / study material in your possession, or
writing on parts of your body, tissue, pencil case, desk etc., your answer book will be taken away
from you and endorsed accordingly. Appropriate disciplinary measures will be taken against you
for violating the code of conduct of the Business College Examinations Board. Therefore, if any of
these materials are on your person you are requested to hand these over to your invigilator before
the official commencement of this paper.

4) This question paper has four sections answer ALL questions:

SUGGESTED TIME REQUIRED TO ANSWER THIS QUESTION PAPER
NUMBERS QUESTIONS MARKS TIME IN MINUTES
1 Question One 10 30
2 Question Two 30 20
3 Question Three 30 40

128
Question One (10 Marks)

Provide definitions of the following accounting concepts:

1.1Accounting

1.2Accrued expenses

1.3Prepaid Expenses

1.4Pre-adjustment trial balance

1.5Liability

Question Two (30 Marks)

2.1 Briefly discuss any five (5) external users of financial information and give reasons why the
information is needed (15)
2.2 On 1 January 2000 Zach Ltd purchased 40% of ordinary shares in Toy Story Ltd for R130 000. Toy
Story Ltd made a net profit of R400 000 at the end of year 2000 and declared a total dividend of R75
000.

Required:

Make the necessary journal entries in the books of Zach

NB: Show all your workings and narratives must be included in your answer

129
 Question Three (30 Marks)
Pre- Adjustment Trial Balance of Jolly Good on 28 February 2007

Debit Credit

Capital Contribution 80 000

Mortgage loan 50 000

Land and buildings 150 000

Motor Vehicle 100 000

Equipment 75 000

Accumulated Depreciation on Motor Vehicle 20 000

Accumulated Depreciation on Equipment 10 000

Accounts payable 30 000

Accounts receivable 25 000

Inventory 35 000

Cash and other cash equivalents 20 000

Sales 300 000

Cost of sales 150 000

Rent income 28 000

Commission income 7 000

Discount Received 700

Rent Expense 3 500

Advertising 2 000

Discount allowed 300

Bad debts 700

Water and electricity 1 200

Telephone 900

Salaries 15 000

Insurance 18 000

Repairs 1 100

Stationery 800

130
Additional information:

1. The physical stock count revealed that the inventory balance at the end of the year is
R33500.

2. Water and electricity account for February, R300 still has to be paid.

3. On 1 September 2006 the business rented one office from Allied Building. Rent is payable
at R1000 per month.

4. A debtor owing R1 000 could not be traced and his account must be written off as
irrecoverable.

5. Rent is receivable at R2 000 per month.

6. A commission income earned but not yet received amounted to R700.

7. Depreciation on Vehicle must be provided for at 20% per annum, on cost price.

8. Depreciation on Equipment must be calculated at 10% per annum, on diminishing balance

method.

Require
Prepare income statement for the year ended 28 February 2007. (30)

131
 TOPIC 10
_

ADDENDUM 512 (C): REVISION QUESTIONS

_

QUESTION ONE (20 MARKS)

1.1 Discuss briefly what is meant by accrual and the going concept as assumptions when
preparing financial statements. (4)
1.2 Name and explain 5 measurement bases. (10)
1.3 State and explain the 3 major activities analysed by a cash-flow Statement. (6)

QUESTION TWO (25 MARKS)

2.1 Two Lawyers Jay and Ray. Practice as lawyers

The following information is available to finalise the books at year-end 31 December 2005:

Debit Credit
Capital: Jay 30 000
Capital: Ray 35 000
Current account: Jay 3 000
Current account: Ray 2 500
Drawings: Jay 45 000
Drawings: Ray 38 000
Equipment 75 000
Accumulated depreciation on equipment 15 400
Trade Debtors 18 200
Trade Creditors 2 600
Bank 16 300
Fees Earned 175 000
Credit loss 2 000
Salaries and wages 30 000
Rent expense 18 000
Water and electricity 6 000
Telephone 5 800
Sundry expenses 4 200
261 000 261 000

132
Additional information
1. The partnership agreement includes the following stipulations:
• Partners are allowed interest at 8% per annum on capital accounts, as well as on credit
balances of current accounts.
• Interest is charged at 8% per annum on debit balances of current accounts.
• Opening balances are used for the calculation.
• Remaining profit is divided equally between the partners
2. The balances of the capital and current accounts remained unchanged during the year.
3. R10 000 of the profit for the year must transferred to the Asset replacement reserve.
4. Depreciation on equipment is provided at 10% per annum according to the straight line
method.
5. An allowance for credit losses of R364 must be created.

Required
a. Enter the adjustments and the stipulations of the partnership agreement in the general journal
of Jay and Ray.
b. Prepare the following accounts in the Ledger of Jay and Ray for the year ended 31 December
2005:
• Statement of comprehensive Income (10)
• Appropriation Account (5)
• Current Account (5)
• Capital account (5)

133
 QUESTION THREE (30 MARKS)

The following balances were taken from the accounting records of Side-to-Side Limited on 28 February
2003, before taking into consideration adjustments that followed.

Ordinary Share Capital (R2 each) 400 000

10% Redeemable preference shares (R3 each) 600 000
Share Premium 65 000
Retained Earnings 84 000
Asset Replacement Reserve 30 000
Mortgage Bond 200 000
Land & buildings 1080 000
Equipment 246 000
Accumulated Depreciation on equipment 52 000
Fixed Deposit 50 000
Inventory 85 000
Debtors Control 46 000
Creditors Control 38 000
Bank (DR) 172 000
South African Reserve Services 60 000
Sales 2 348 000
Cost of Sales 1 467 500
Interest Income 5 000
Interest expense 18 000
Rent Income 36 000
Distribution costs 81 000
Administrative Costs 460 500
Credit losses 12 600
Depreciation 64 000
Sundry Expenses 45 400

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Consider the following Adjustments:
1. On November 2002, 50 000 ordinary shares were issued at R2.5 each and the issue was
recorded correctly.
2. Income Tax must be provided for the current year. The tax rate is 28%. R60 000 provision
was paid during the year.
3. On 20 February 2003, the dividend on preference shares, as well as a dividend of 18 cents
per ordinary share was declared on all issued ordinary shares registered by 28 February 2003.
4. Land & buildings were valued at R1090 000 by a sworn appraiser. The revaluation must be
recorded in the accounting records.
5. The Asset Replacement Reserve must be increased with R15 000.

Required:

a. The Statement of Comprehensive Income for the year ended 28 February 2003 (15)
b. The Statement of Changes in Equity for the year ended 28 February 2003 (10)
c. The Retained Earnings or Appropriation Section (5)

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 REFERENCES

Davies, R., & Bosman, S. (2024). Financial Reporting for the Modern Accountant (1st ed.). South
Africa: Oxford University Press. ISBN: 9780199043833.

Kew, J., Mettler, C., Walker, T. and Watson, A. 4th ed. 2013. Accounting: An Introduction. Cape Town:
Oxford.

Meyer, D., & Naidoo, R. (2024). Principles of Financial Accounting (5th ed.). South Africa: Juta &
Company. ISBN: 9781485133743.

Myburgh, JE. (2019). Accounting an Introduction .13th Ed. South Africa: Lexis Nexis Publishers. ISBN:
9780639003566

Scott, D. (2020). About Financial Accounting Volume 2. 8th Ed. South Africa: LexisNexis Publishers.
ISBN:9780639008660

Van Zyl, E., & Smith, P. (2024). Introduction to Accounting and Financial Reporting (2nd ed.). South
Africa: Pearson Education. ISBN: 9781486824478.

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 Epilogue to Study Guide
SAQA ID: 84948 | NQF Level 5 | 10 Credits | Duration: 1 Year

Congratulations on completing the first semester of your Accounting 512 course! This marks a
significant milestone in your academic journey, and you should be proud of the progress you’ve
made in developing the foundational knowledge and skills necessary for a successful career in
accounting.

Throughout this semester, you have not only deepened your understanding of core accounting
principles, but also developed essential skills in critical thinking, problem-solving, and effective
communication. These skills are crucial as you continue to build your academic foundation and
progress through your studies. Whether you are preparing for further specialization in
accounting or planning to explore a broader range of career opportunities, the knowledge gained
in this course will serve as a cornerstone for your future learning and professional growth.
As you reflect on your achievements, take note of the areas you’ve excelled in, as well as those
that may require further attention. This self-awareness will be essential as you prepare for the
challenges and more advanced topics in the next stages of your degree. Remember, accounting is
a dynamic field that requires ongoing learning and adaptation to new trends and technologies.
Your ability to apply the concepts you’ve learned to real-world scenarios will be vital as you
continue your studies and pursue a successful career in the accounting profession.
On completion of this module, the graduate will demonstrate
• AGA competencies
• 21st century skills
• Personal Attributes consistent with Richfield's vision and mission

Looking ahead, your journey is just beginning. The skills you’ve developed in Accounting 511 and
512 will lay a solid foundation for the specialized courses in your second year and beyond.
Whether you choose to pursue the AGA or CA(SA) qualification or other accounting
specializations, this course has prepared you for the academic and professional challenges that
lie ahead.

We encourage you to continue building on the knowledge and skills you’ve gained in this
semester. Embrace every learning opportunity with curiosity, commitment, and a focus on
excellence. Your dedication to mastering the principles of accounting will be a key driver of your
future success.

We wish you all the best in your future studies and look forward to seeing the achievements you
will make in the coming semesters. Keep pushing forward—your future as a skilled and ethical
accounting professional is within reach!

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