Accounting 602

Year 2 Semester 2
 FACULTY OF BUSINESS AND MANAGEMENT SCIENCES

STUDY GUIDE

MODULE: ACCOUNTING 602

(2ND SEMESTER)

Copyright © 2023
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
Preface
1. Welcome v
2. Title of Modules v
3. Purpose of Module vi
4. Learning Outcomes vi
5. Method of Study vi
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 x
11.Work Readiness Programme xi
12.Work Integrated Learning xii
13. Interactive Icons used in this Learner Guide xiii
TOPIC 1: INTRODUCTION TO COMPANIES ACCOUNTING
1.1 The company concept & the regulatory environment 1
1.2 Formation (or birth) of a company 4
1.3 Types of companies 5
1.4 Information requirements for companies 8
1.5 Conclusion 12
TOPIC 2: SHARE CAPITAL ACCOUNTING
2.1 Share capital 15
2.2 Accounting for par value shares 18
2.3 Accounting treatment of share issues 18
2.4 Under subscription and over subscription of share issues 24
2.5 Accounting implications of companies act, 71 of 2008 24
2.6 Bonus shares or capitalization shares 26
2.7 Redemption of preference shares and share buy back 27
2.8 Acquisition of company’s own shares 31
TOPIC 3: CONSIGNMENTS
3.1 Relevant concepts 34
3.2 Accounting entries in the books of the consignor 36
3.3 Accounting entries in the books of the agents 36
3.4 Financing consignments by means of bills 36
REVIEW QUESTIONS
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TOPIC 4: JOINT VENTURES
4.1 Introduction 38
4.2 Appropriation of profit and compensation of partners for their contributions 38

4.3 Interim determination on profit and mutual settlements of debts 40

REVIEW QUESTIONS

TOPIC 5: NON-PROFIT ORGANISATION

5.1 Introduction 44
5.2 Receipt and payment statement 44
5.3 Income and expenditure statement 44
5.4 Special funds 45
5.5 Entrants fees 45
REVIEW QUESTIONS
TOPIC 6: BUDGETS
6.1 Introduction 52
6.2 The advantages of budgeting 52
6.3 Types of budgets 53
REVIEW QUESTIONS
TOPIC 7: RATIOS
7.1 Capital structure (leverage) ratios 57
7.2 Profitability ratios 58
7.3 Liquidity ratios 58
REVIEW QUESTIONS

TOPIC 8: ADDENDUM 622 (A): ADDITIONAL QUESTIONS 62

TOPIC 9: ADDENDUM 622 (B): TYPICAL TEST QUESTIONS 67

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PREFACE
1. WELCOME
Welcome to the Faculty of Business and Management Sciences at Richfield Graduate Institute of
Technology (RGI). We trust you will find the contents and learning outcomes of this module 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 orientate you to the module before the commencement of
formal lectures.

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

Study unit 1: Orientation Programme Lecture 1

Introducing academic staff to the students by academic head. Introduction of

institution policies.

Study unit 2: Orientation of Students to Library and Students Facilities Lecture 2

Introducing students to physical structures

Study unit 3: Distribution and Orientation of Accounting 602 Study guides, Lecture 3
Textbooks and Prescribed Materials

Study unit 4: Discussion on the Objectives and Outcomes of Accounting 602 Lecture 4

Study unit 5: Orientation and guidelines to completing Assignments Lecture 5

Review and Recap of Study units 1-4

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

Semester
2

Title of Module: Accounting 602

Code: ACC_602
NQF Level: 6
Credits: 10
Mode of Delivery: Contact/Distance

3. PURPOSE OF MODULE
Accounting 602 (2nd Semester)
This module is to give the learner an opportunity to understand the aspects of bookkeeping and accounting
perspectives.
4. LEARNING OUTCOMES
On completion of this module, learners should have a basic / fundamental practical and theoretical
knowledge of:
General aspects of financial reporting
• Financial reporting in trading organisations and other organisations for gain
• Financial reporting in organisations and societies not for gain
• Financial planning and evaluation
5. METHOD OF STUDY
The sections that have to be studied are indicated under each topic. These form the basis for tests,
assignments and examination. 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 examination, you will need
an in- depth understanding of the content of these sections in the learning guide and prescribed book. In
order to master the learning material, you must accept responsibility for your own studies. Learning is not
the same as memorizing. You are expected to show that you understand and are able to apply the
information. Use will also be made of lectures, tutorials, case studies and group discussions to present this
module.
6. LECTURES AND TUTORIALS
Learners must refer to the notice boards on their respective campuses for details of the lecture and tutorial
time tables. 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.
Learners are encouraged to actively participate in lectures and tutorials in order to ensure success in tests,
assignments and examinations.

7. NOTICES
All information pertaining to this module such as tests dates, lecture and tutorial time tables, assignments,
examinations etc. will be displayed on the notice board located on your campus. Learners must check the
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notice board on a daily basis. Should you require any clarity, please consult your lecturer, or programme
manager, or administrator on your respective campus?
8. PRESCRIBED & RECOMMENDED MATERIAL
8.1 Prescribed Material
Myburgh, JE. (2019). Accounting an Introduction .13th Ed. South Africa: Lexis Nexis Publishers. ISBN:
9780639003566

8.2 Recommended Material

Scott, D. (2020). About Financial Accounting Volume 1. 8th Ed. South Africa: LexisNexis Publishers.
ISBN:9780639008646

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

8.3 Library Infrastructure

The following services are available to you:
8.3.1 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 learners are required to purchase the prescribed materials.
8.3.2 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
responsibilities to safe keep all library books.
8.3.3 RGI has also allocated one library period per week as to assist you with your formal research under
professional supervision.
8.3.4 RGI has dedicated electronic libraries for use by its learners. 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 the 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.

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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 learner 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:

Continuous Assessment Test 1

Continuous Assessment Test 2 40%

Assignment 1

Examination 60%

Total 100%

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 to 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 theses refer to.

Competence Skills Demonstrated

observation and recall of information knowledge of dates, events, places knowledge

of major ideas mastery of subject matter
Question Cues
list, define, tell, describe, identify, show, label, collect, examine, tabulate, quote,
name, who, when, where, etc.
Knowledge

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 understanding information, grasp 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,
estimate, differentiate, discuss, extend

Comprehension

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
Application

seeing patterns organization

of parts
recognition of hidden meanings identification
of components
Question Cues
Analysis
analyze, separate, order, explain, connect, classify, arrange, divide,
compare, select, explain, infer

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

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

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 10 SPECIMEN ASSIGNMENT COVER SHEET
FACULTY OF BUSINESS AND MANAGEMENT SCIENCES
ACCOUNTING 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 Learner 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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NB: All Assignments are compulsory as they form part of continuous assessment that counts towards the
final mark.

11WORK READINESS PROGRAMME (WRP)

In order to prepare learners for the world of work, a series of interventions over and above the formal
curriculum, are concurrently implemented to prepare learners. 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.

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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 12 WORK INTEGRATED LEARNING (WIL)

Work Integrated Learning forms a core component of the curriculum for the completion of this
programme. All modules making 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.

Learners 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…

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 INTERACTIVE ICONS USED IN LEARNER GUIDES

Writing Activity
Learning Outcomes Study Read

Think Point Research Glossary Interactive

Questions

Review Questions Case Study Questions and Answers Group work

Web Resource

Multimedia Resource

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 TOPIC 1

INTRODUCTION TO COMPANIES ACCOUNTING

Learning Outcomes
At the end of the chapter, the learner should:
• know the types of companies
• be able to name the users of annual financial statements
• know how Generally Accepted Accounting Statements originate
• know the background of accounting policy
• know the framework for the preparation and presentation of
financial statements

1.1. THE COMPANY CONCEPT & THE REGULATORY ENVIRONMENT

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WHAT IS A COMPANY?
A company is an association of persons with a common goal. A company is recognized by law a legal or
juristic person separate from its owners (Flynn & Koornhof, 2014).
A company is therefore capable of acquiring rights and duties that are separate from those of its owners i.e. it can
sue or be sued on its own.
A company by law as a legal person should have the same rights and obligations as those of a natural person except
in cases where the company cannot, by nature, exercise such rights e.g. right to marriage.
1.1.2. REGULATORY ENVIRONMENT
In South Africa, companies are regulated by Companies Act, No. 61 of 1973 as well as Companies Act, No.
71 of 2008. These Acts are administered by The Registrar of Companies in Pretoria, Gauteng Province.
1.1.3. SEPARATE LEGAL ENTITY
A company is a separate legal person, which is distinct from the shareholders. In other words the company
can acquire its own assets and liabilities and register them in its name not in the name(s) of its shareholders.
Shareholders by law cannot claim anything from the company except when dividends are declared to them.
This therefore means that the life of a company is independent to that of shareholders and therefore a
company can continue to survive even if its shareholder(s) die(s).
Ownership of a company can change hands without affecting the life and existence of the company.
Shareholders may change from time to time but the company will remain operative and entitled to its assets
and liabilities. This is called perpetual succession.
1.1.4. THE DOCTRINE OF LIMITED LIABILITY AND THE LIFTING OF THE CORPORATE VEIL
Limited liability means that the shareholders and directors are generally protected against being personally
liable for the debts of the company (Kew & Watson, 2010). The shareholders’ liability is limited to the capital

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that they put into the business. Creditors of the company cannot claim anything from personal assets of
shareholders or directors unless they have guaranteed for the liabilities of the company with their personal
assets.
In exceptional cases, South African courts can hold the directors and shareholders of a company personally
liable for debts of a company if there is evidence of criminal wrongdoing or dishonesty. This is called lifting
or piercing or pulling aside the corporate veil. (Kew & Watson, 2010).
1.1.5. SEPARATION OF OWNERS AND MANAGEMENT
The doctrine of separation of ownership and management is prescribed by The King Report III on Corporate
Governance. Shareholders contribute capital to the business but are not expected to run the business.
Management of the affairs of the business is done by a separate management team. Generally speaking
management, though accountable to shareholders, should act in the best interests of the company not on
the interests of shareholders.
Shareholders elect a board of directors which formulates policies of the company and oversee its affairs. The
board of directors, in turn appoints executive staff to manage the day to day activities of the company on its
behalf. The board of directors is under the control of a chairperson who can either be executive or non-
executive. The board will appoint an executive who will oversee day to day affairs of the company. Generally,
this person is called a Chief Executive Officer (CEO). The CEO will appoint a team of executives to help him or
her to discharge his or her duties.
1.1.6. THE ENTITY CONCEPT
Transactions of the company are recorded separate from the personal transactions of the shareholders or
owners and those of directors. This therefore means that a company should maintain its books of records
for all its transactions and dealings between a company and its stakeholders should be recorded separately
in the company’s books and in the stakeholders’ books.
1.2. FORMATION (OR BIRTH) OF A COMPANY
Since we have said that a company is a legal “person”, it should be born for it to exist just like a natural
person is born to start living or existing. The birth of a company is called “incorporation”.
1.2.1. FORMATION, REGISTRATION AND INCORPORATION OF A COMPANY IS REGULATED BY THE PIECE OF
LAW CALLED COMPANIES ACT, NO. 71 OF 2008.
A company is formed by founding members or simply by founders. These are the people who come up with
an idea and then decide to form a company as a vehicle to realize their idea. Before registration the founders
of the company should submit documents collectively called Memorandum of Incorporation (MOI) in
prescribed forms together with a registration fee to the Companies and Intellectual Property Commission
(CIPC).
The MOI of a company outlines the relationship of the company with internal and external stakeholders or
parties. Common issues in the MOI includes the following:
▪ The name of the company
▪ The purpose of the company and its main business
▪ Details of share capital
▪ Meetings
▪ Voting rights and procedures

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 ▪ Borrowing capacity
▪ The powers and duties and directors
(Flynn & Koornhof, 2014)
If all conditions are met, the CIPC will then issue “a birth certificate” to certify the birth of the company. This
is called a certificate of incorporation. A company can only start operating once a certificate of incorporation
issued.
1.2.2. RIGHTS AND DUTIES OF SHAREHOLDERS
DUTIES
▪ Shareholders have a duty to provide capital for the company to operate optimally. Should the
directors see need for additional resources, they may ask the shareholders to pump in more capital
for the company to acquire the resources.
▪ Again shareholders have a duty to respect the independence of management of the company. In other
words they should not interfere the way the affairs of the business are being run. Their influence is
limited to the election of the board of directors and voting for resolutions at their Annual General
Meetings (AGMs).
RIGHTS
Since shareholders take the ultimate risk by providing their capital in the company they normally do not
manage, they have rights and claims against the company. Some of them are listed below:
▪ Right to elect and dissolve the board of directors
▪ Right to attend and vote at shareholders’ meetings
▪ Right to receive a proportional share of profits declared as dividends
▪ Right to exit the company by changing their ownership in the company by selling their shares Right
to be given periodic reports of the performance of the company.
▪ Right to receive a proportional share of the assets on liquidation of the company after all payables
claims have been settled.
1.2.3. RIGHTS AND DUTIES OF DIRECTORS
DUTIES
The duties of directors are laid down by common law in form of employment contracts with the company
and in the Companies Act. The clear duties and responsibilities of directors are issued as Codes of
Corporate Governance as Kings Report series, among other things as:
▪ directors owe duties to the corporation, and not to individual shareholders, employees or creditors outside
exceptional circumstances

▪ directors' core duty is to remain loyal to the company, and avoid conflicts of interest
▪ directors are expected to display a high standard of care, skill or diligence
▪ directors are expected to act in good faith to promote the success of the corporation

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RIGHTS
Directors have rights against the company since they are put in control of the major functions for the
company on behalf of the shareholders. Some of the rights include among others, the following:
▪ Right to receive fair remuneration for their services
▪ Right to make independent judgment without interference of shareholders
▪ Right to enter into contracts on behalf of the company
1.3. TYPES OF COMPANIES
There two broad classifications of companies i.e. Profit companies and Non-profit companies. Profit
companies are formed with the aim of realizing profits from its operations. Non-profit companies are formed
for socio-economic reasons other than profits.
1.3.1. PROFIT COMPANIES
These can also be called limited liability companies. These companies normally issue share capital by selling
shares to shareholders. There are four types of profit companies.
1. Private companies
Companies Act placed some restrictions that should be observed for a company to be incorporated as a
private company. The restrictions are listed below:
▪ Shareholders cannot sell or transfer their shares without offering them first to other shareholders
for purchase. This is called the right of pre-emption

▪ Shareholders cannot offer their shares to the general public over a stock exchange, and

▪ The number of shareholders cannot exceed a fixed figure decided by the company (commonly
50).

The name of private company should end with the words “(Proprietary) Limited usually abbreviated as “(Pty)
Ltd” e.g. Gobozana Enterprises (Pty) Ltd

2. Public companies
A public company can raise its capital by selling shares to the public without restrictions and their shares are
freely transferable without restriction. The characteristics are summarized below.

▪ Shareholders can freely exchange their shares without restrictions i.e. there is no right of pre-
emption.

▪ A public company may be listed on a stock exchange (the Johannesburg Securities

Exchange “JSE”) to make the shares more transferable.
▪ A public company is required to have at least seven shareholders and there is no limit.
The name of a public company should end with the words “Limited” abbreviated as “Ltd”. In some countries
it ends with words “public limited company” abbreviated “plc”. E.g. Gobozana Ltd or Gobozana plc .

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3. State - Owned Enterprises (Companies) SOEs

These are companies that are separate legal entities owned by arms of the government. The name of a state-
owned enterprise ends with the abbreviation “SOE”. E.g. Gobozana SOE.

4. Personal - Liability Companies

These companies are separate legal persons but the directors are personally, jointly and severally liable for
the debts of the company. That is to say they have unlimited liability. This type of companies is more popular
with professional practices like legal firm, accounting firms, consulting firms, medical firms. The name of a
personal - liability company ends with abbreviation “Inc” meaning it is an incorporated entity. E.g. Gobozana
Inc.

1.4. INFORMATION REQUIREMENTS FOR COMPANIES

The information that companies should report to external users is presented in documents called Annual
Financial Statements. The contents and format of financial statements of companies (for eternal users) are
prescribed by:

▪ Companies Act, No.71 of 2008

▪ International Accounting Standards (IASs) and International Financial Reporting Standards (IFRSs)
issued by the International Accounting Standards Board (IASB)

▪ South African Statements & Interpretations on Generally Accepted Accounting Practice (SA GAAP)
and South African Institute of Chartered Accountants (SAICA) guidelines. These are mainly for Small,
Medium and Micro Enterprises (SMMEs)

▪ Johannesburg Securities Exchange (JSE) listing requirements and reporting guidelines for companies
that are listed.

Financial statements of companies, except where permitted by the law, should be audited by registered
auditors who should write a report called the Auditors’ Report. This report expresses the opinion of the
auditors on the compliance of the financial statements to IFRSs and IASs. These statements should be
produced within six months from the date of the year end.

The Companies Act and “IAS 1: Preparation & Presentation of Financial Statements” stipulate that the
financial statements of a company should consist of:

▪ Statement of Profit or Loss & Other Comprehensive Income (SOPL-OCI)

▪ Statement of Financial Position (SOFP)
▪ Statement of Changes in Owners’ Equity (SOCE)
▪ Statement of Cash Flows (SOCF)
▪ The Auditors’ Report
▪ The Directors’ Report

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 ▪ Notes to the financial statements
The basic contents of these statements were dealt with in First year and again in Second first semester. This
topic will only give the specific formats that are required for presentation according to IAS1: Preparation &
Presentation of Financial Statements.

(Note: You will be required to prepare these statements in assessments, although in this chapter we will at
the preparation of the financial statements)

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1.4.1. FORMAT OF THE STATEMENT OF PROFIT OR LOSS & OTHER COMPREHENSIVE INCOME (SOPL-OCI)
(See overleaf)
GOBOZANA LIMITED STATEMENT OF PROFIT OR LOSS & OTHER COMPREHENSIVE INCOME FOR THE
PERIOD ENDED 31 JULY 2015
NOTE 31/7/2015 31/7/2014
R'000 R'000
Revenue 1 200,000 150,000

Cost of sales (100,000) (75,000)

Gross Profit 100,000 75,000
Other Income 20,000 30,000

(10,000) (10,000)
Distribution costs

Administrative expenses (30,000) (20,000)

Other expenses
(15,000) (10,000)

Finance costs 2 (5,000) (5,000)

Share of after-tax profit or loss of associates and joint ventures 3 5,000 3,000
Profit before tax 65,000 63,000

Income tax expense 4 (18,200) (17,640)

Profit for the year from continuing operations 46,800 45,360

Profit for the year from discontinued operations 5 - -

PROFIT FOR THE YEAR 46,800 45,360

Other Comprehensive Income

50,000 25,640
Revaluation of Property, Plant & Equipment

Reversal of prior year revaluation of property (15,000) (5,000)

Fair value adjustments 25,000 30,000

Income tax relating to components of other comprehensive income (16,800) (14,179)

Other comprehensive income for the year, net of tax 43,200 36,461
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 90,000 81,821

Profit attributable to: 35,100

Owners of the parent 34,020
Non-controlling interest 11,700 11,340

Total comprehensive income attributable to: 67,500

Owner of the parent 61,366
Non-controlling interests 22,500 20,455

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Notes should be provided for items that are compound or those that cannot be shown on the face of the SOPL-OCI.
The face of the statement should contain as few lines as possible. All the workings and reconciliations should be
shown as notes for the individual lines.
1.4.2. FORMAT OF THE STATEMENT OF FINANCIAL POSITION (SOFP)
GOBOZANA LIMITED STATEMENT OF FINANCIAL POSITION AS AT 31 JULY 2015+

SHARE CAPITAL SECTION OF THE BALANCE SHEET (SOFP)

This chapter is mainly dedicated to the formation of companies as well as capitalizing them so that they start
operating.

For a company to start operating, the owners should provide resources to the company. Resources directly
provided by the owners of companies are called share capital. These resources carry the ultimate risk in the
event that the company dies or get liquidated they are the last to receive their funds after all providers are
satisfied. In the event the company performs poorly, these resources get depleted and again in the event of
good performance these resources are rewarded after all others providers of resources are satisfied. The
residual is what the claim of the owners is.

You will notice that these resources therefore are a certain class of resources that will require a special type
of accounting treatment which is distinct from the ordinary accounting of operational transactions. In the next
chapter we will look at the accounting for share capital. However below I will give the format of the notes to
the Statement of Financial Position (SOFP) relating to share capital as well as notes for retained earnings.

1.4.3. NOTE ON SHARE CAPITAL

IAS 1: Preparation and Presentation of Financial Statements, paragraph 79 specifies that in respect of each
class of share capital, the following shall be disclosed:

▪ The number of shares authorized

▪ The number of shares issued and fully paid, and issued but not fully paid
▪ Par value of the shares or that the shares have no par value
▪ A reconciliation of the number of shares outstanding at the beginning and at the end of the year or
period

▪ The rights, preferences and restrictions attaching to that class, including restrictions on the
distribution of dividends and the repayment of capital

▪ Shares in the entity held by the entity or by subsidiaries or associates of the entity
▪ Shares reserved for issue under options and sales contracts, including the terms and amounts.

Illustrative example of a note on share capital

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NOTE 21: SHARE CAPITAL
(Note that number 21 is just illustrative and it is the note number of share capital on the SOFP illustration
format above. Any number can be used following the serial sequencing in the financial statements).

GOBOZANA LIMITED NOTES TO THE FINANCIAL STATEMENTS AT 31 JULY 2015

NOTE 21: ISSUED SHARE CAPITAL ATTRIBUTABLE TO THE OWNERS OF THE PARENT.

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There has been no change in the number of preference shares outstanding during the year. The non-
cumulative, non-redeemable preference shares bear interest at 10% per annum and are referent to ordinary
shares in the event of liquidation.

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Senior management holds options to acquire 250,000,000 ordinary shares at R0.50 each. The options are
exercisable by management at any time before 31 July 2015.
(Please note that this portion is examinable. Students are required to compose a note on share capital as well
as presenting the equity section of the balance sheet. Please refer to Semester 1 for preparation and
presentation of the SOFP).
1.4.4. FORMAT OF THE STATEMENT OF CHANGES IN OWNERS’ EQUITY (SOCE)
IAS 1: Preparation & Presentation of Financial Statements requires an entity to present a SOCE and disclose
the following:
▪ Total comprehensive income for the period, showing separately the total amounts attributable to the
owners of the parent and to non-controlling interest.
▪ For each component of equity, the effects of retrospective application or retrospective restatement
recognized in accordance with IAS 8- Accounting Policies, Changes in Accounting Estimates and
Errors
(Please note that students will be required to prepare and present SOCE in the prescribed format)

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GOBOZANA LIMITED
STATEMENT OF CHANGES IN OWNERS’ EQUITY FOR THE YEAR ENDED 31 JULY 2015
Attributable
to equity
holders of
the parent
Note Ordinary Preference Revaluation Share Retained Total Non- Total
share share surplus premium earnings controlling equity
capital capital interest
R'000 R'000 R'000 R'000 R'000 R'000 R'000 R'000
Balance at 34 - - 75,000 154,545
01/8/2013 375,000 13,634 463,634 618,179

Changes in - - - -
accounting - - - -
policy
Restated 375,000 - - 75,000 13,634 463,634 154,545 618,179
balance
Changes in -
equity for 2014
Ordinary - - - - - - -
dividends
Total - - - 20,455
comprehensive - 61,366 61,366 81,821
income for the
yr.
Issue of ordinary - - - -
shares - - - -

Issue of - - - -
preference - - - -
shares
Balance at 375,000 - - 75,000 75,000 525,000 175,000 700,000
31/7/2014
Repurchased - - - -
shares - - - -

Ordinary - - - - - - - -
dividends
Issue of ordinary - - - - 25,000 100,000
shares 75,000 75,000
Issues of - 37,500 - - - 37,500 12,500 50,000
preference
shares
Total - - - 22,500
comprehensive - 67,500 67,500 90,000
income for the
yr.
- - - - - - -

12
Transfers to
retained 450,000 142,500 705,000 940,000
earnings
Balance at
31/7/2015 37,500 - 75,000 235,000

1.4.5. DISCLOSURE OF DIVIDENDS AND DIVIDENDS PER SHARE

An entity is required to disclose in the SOCE or notes to the financial statements the amount of dividends
recognized as distributions to equity holders during the period and the related amount per share as per
paragraph 107 of IAS 1: Preparation and Presentation of Financial Statements.

In addition, an entity shall disclose in the notes to the financial statements according to paragraph 137:

• The amounts of dividends proposed or declared before the financial statements were authorized
for issue but not recognized as a distribution to owners during the period including the amount
per share. As well as any amounts of cumulative preference dividends not recognized.

The other important financial statement required by IAS1 is the Statement of Cash flows (SOCF). However,
for the purposes of this chapter we will not discuss it. You will meet it in the next levels of studies.

1.5. CONCLUSION
In this chapter we have looked at the foundations of companies from a period where founder members decide
to start a company, to the point when they register the company, requirements for registration. After the
birth of the company we also looked at the legal perspective of companies and the different types of
companies that can be formed.

It is imperative to know that companies are formed for various reasons. Some are formed for making more
money while other are formed to promote certain interests of the society other than making money.

For all the companies, there should be some persons providing funding in terms of either capital or
contributions (for non-profit companies).

After companies start operating, they are required to operate within certain parameters defined by the law
and the regulatory bodies. To this extend we have looked at various laws and bodies that regulate companies.
Since companies are by law legal persons they have their own rights and separate existence distinct from its
owners and management. Such a distinction necessitates that those acting on behalf of the company be
accountable to owners and other interested parties. One of the most common ways of accountability is
through periodic reporting of the operations of the company. This reporting is regulated by several bodies
and standards and we have looked mainly at IAS1: Preparation & Presentation of Financial Statements
under which we looked at formats of some of the financial statements required according to Companies Act,
No. 71 of 2008.

As we have highlighted earlier that for companies to start operating there are people who should provide
them with funding in form of money or other valuable resources that can be used by the companies in order
13
to fulfil the objectives for which they were formed. In the next chapter we will look at how this funding is
raised and how those transactions are recorded in the books of the companies.

REFERENCE TEXTBOOKS
1. Flynn, D. and Koornhof, C. (2014) Fundamental Accounting. 6th Ed. South Africa: Juta & Co.
2. Kew, J. and Watson, A. (2010) Financial Accounting: An introduction. 3rd Ed. South Africa: Oxford
University Press Southern Africa.

3. Stainbank, L., Oakes, D. & Razak, M. A Student’s Guide to International Financial Reporting,
6th Ed. South Africa: S & O Publishers

14
 TOPIC 2

SHARE CAPITAL ACCOUNTING

Learning Outcomes
At the end of the chapter, the learner should able to:
• record the accounting entries applicable to the issue of shares
• record the accounting entries applicable to the conversion of
shares
• record the issue of capitalisation shares
• calculate correctly the liability of the underwriter, the joint
underwriters and the sub-underwriters
• correctly record the declaration and payment of interim and final
dividends

2.1 INTRODUCTION
A company, being an artificial person, cannot generate its own capital which has necessarily to be collected
from several persons. These persons are known as shareholders and the amount contributed by them is called
share capital. Since the number of shareholders is very large, a separate capital account cannot be opened for
each one of them. Hence, innumerable streams of capital contribution merge their identities in a common capital
account called as ‘Share Capital Account’.

It is also worth stating that the directors of a company can only issue new shares if authorized by shareholders
at an AGM and such authorization should be disclosed in the financial statements of the company. The dates
and the terms of the new issue are usually determined by the board of directors.

2.1.1 CATEGORIES OF SHARE CAPITAL

From an accounting point of view, the share capital of the company can be classified as follows:
❖ AUTHORIZED SHARE CAPITAL
Authorized capital is the amount of share capital which a company is authorized to issue by its Memorandum
of Incorporation. The company cannot raise more capital than the amount of capital as specified in the
Memorandum of Incorporation. It is also called nominal or registered capital. The authorized capital can be
increased or decreased as per the procedure laid down in the Companies Act. It should be noted that the

15
company need not issue the entire authorized capital for public subscription at a time. Depending upon its
requirement, it may issue share capital but, in any case, it should not be more than the amount of authorized
capital.

❖ ISSUED CAPITAL

It is that part of the authorized capital which is actually issued to the public for subscription including the
shares allotted to vendors and the signatories to the company’s memorandum.

The authorized capital which is not offered for public subscription is known as ‘unissued capital’. Unissued
capital may be offered for public subscription at a later date.

❖ SUBSCRIBED CAPITAL:
It is that part of the issued capital which has been actually subscribed by the public. When the shares offered
for public subscription are subscribed fully by the public the issued capital and subscribed capital would be
the same. It may be noted that ultimately, the subscribed capital and issued capital are the same because if
the number of shares, subscribed is less than what is offered, the company allot only the number of shares
for which subscription has been received. This is called under subscription.

In case it is higher than what is offered, the allotment will be equal to the offer. In other words, the fact of
over subscription is not reflected in the books.

❖ CALLED UP CAPITAL
It is that part of the subscribed capital which has been called up on the shares. The company may decide to
call the entire amount or part of the face value of the shares. For example, if the face value (also called
nominal value) of a share allotted is R10 and the company has called up only R7 per share, in that scenario,
the called up capital is R7 per share. The remaining R3 may be collected from its shareholders as and when
needed.

❖ PAID UP CAPITAL
It is that portion of the called up capital which has been actually received from the shareholders. When the
shareholders have paid the entire call amount, the called up capital is the same to the paid up capital. If any
of the shareholders has not paid amount on calls, such an amount may be called as ‘calls in arrears’.
Therefore, paid up capital is equal to the called-up capital minus call in arrears.

❖ UNCALLED CAPITAL
It is that portion of the subscribed capital which has not yet been called up. As stated earlier, the company
may collect this amount any time when it needs further funds.

16
❖ RESERVE CAPITAL
A company may reserve a portion of its uncalled capital to be called only in the event of winding up of the
company. Such uncalled amount is called ‘Reserve Capital’ of the company. It is available only for the
creditors on winding up of the company.

2.1.2 ISSUE OF SHARES

A salient characteristic of the capital of a company is that the amount on its shares can be gradually collected
in easy instalments spread over a period of time depending upon its growing financial requirement. The first
instalment is collected along with application and is thus, known as application money, the second on
allotment (termed as allotment money), and the remaining instalments are termed as first call, second call
and so on. The word final is suffixed to the last instalment. However, this in no way prevents a company from
calling the full amount on shares right at the time of application.

There are two ways in which shares can be issued i.e. Rights issues and to the general public through a
prospectus.

RIGHTS ISSUE
A rights issue involves offering the new shares to existing shareholders in proportion to their existing
shareholdings. Usually the new shares are offered at a price lower than their market price as an incentive to
the existing shareholders.

PUBLIC ISSUE
When shares are issued to the public through a prospectus, the following procedures are followed:

1. ISSUE OF PROSPECTUS
A company first issues a prospectus to the public. A prospectus is an invitation to the public that a new
company has come into existence and it needs funds for doing business. It contains complete information
about the company and the manner in which the money is to be collected from the prospective investors.

2. RECEIPT OF APPLICATIONS
When prospectus is issued to the public, prospective investors intending to subscribe the share capital of the
company would make an application along with the application money and deposit the same with a scheduled
bank as specified in the prospectus. The company has to get minimum subscription within 120 days from the
date of the issue of the prospectus. If the company fails to receive the same within the said period, the
company might not proceed for the allotment of shares and application money should be returned within
130 days of the date of issue of prospectus.

3. ALLOTMENT OF SHARES
If minimum subscription has been received, the company may proceed for the allotment of shares after
fulfilling certain other legal formalities. Letters of allotment are sent to those whom the shares have been
allotted, and letters of regret to those to whom no allotment has been made.

17
When allotment is made, it results in a valid contract between the company and the applicants who now
became the shareholders of the company. The successful shareholders will be sent share certificates
confirming the shareholding in the company. An updated Shareholders register is maintained by the
company and can be viewed as the subsidiary ledger of the Share capital account in the General ledger.

In the event that an investor acquires shares by purchasing shares belonging to another such a transaction
will not affect the General ledger but will only involve transfer of shares in the Shareholders register from
one shareholder to the other.

2.2 ACCOUNTING FOR PAR VALUE SHARES

Companies Act, No. 61 of 1973 permitted companies to issue either par value shares or no par value shares
(NPV). Par value shares of a company may be issued at par, at a premium or at a discount.

▪ Shares are to be issued at par when their issue price is exactly equal to their nominal value according
to the terms and conditions of issue.

▪ When the shares of a company are issued more than its nominal value (face value), the excess amount
is called premium.

▪ When the shares are issued at a price less than the face value of the share, it is known as shares issued
at a discount.

Irrespective of the fact that shares are issued at par, premium or discount, the share capital of a company as
stated earlier, may be collected in instalments payable at different stages.

There is another class of shares called No Par Value Shares (NPV). These shares do not have a nominal value
and therefore cannot be issued at premium, discount or at par. They are issued at price determined to
appropriate by the directors of the company. Under the Companies act, 71 of 2008, only no par value shares
can be issued. (Flynn & Koornhof, Fundamental accounting, 6th Ed. P20-3).

2.3 ACCOUNTING TREATMENT OF SHARE ISSUES

2.3.1 ACCOUNTING TREATMENT ON APPLICATION
The amount of money paid with various instalments represents the contribution to share capital and should
ultimately be credited to share capital. However, for the sake of convenience, initially individual accounts are
opened for each instalment. All money received along with application is deposited with a scheduled bank in
a separate account opened for the purpose.

The journal entry is as follows:

DR Bank A/c XXXX
CR Share Application A/c XXXX
(Being amount received for on application for N shares @ Rx per share)
When minimum subscription has been received and certain legal formalities on the allotment of shares have
been duly compiled with, the directors of the company proceed to make the allotment of shares. The

18
allotment of shares implies a contract between the company and the applicant who now become the allot
tee and assume the status of shareholder or member.

2.3.2 ACCOUNTING FOR ALLOTMENT OF SHARES

The journal entries with regard to allotment of shares are as follows:
1) For Transfer of Application Money
DR Share application A/c XXXX
CR Share capital A/c XXXX
(Application money on N Shares allotted/ transferred to Share Capital)
2) For Money Refunded on Rejected Applications

DR Share application A/c XXXX

CR Bank A/c XXXX
(Application money returned on rejected application for N shares)
3) For amount due on allotment
DR Share allotment A/c XXXX
CR Share capital A/c XXXX
(Amount of money due on allotment of N shares)
4) For adjustment of excess application money

DR Share application A/c XXXX

CR Share allotment A/c XXXX
(Adjustment of excess application money to share allotment a/c)
5) For receipt of allotment money
DR Bank A/c XXXX
CR Share allotment A/c XXXX
(For receipt of allotment money due from members)
Sometimes a combined account for share application and share allotment called ‘Share Application and Allotment
Account’ is opened in the books of a company. The combined account is based on the reasoning that allotment
without application is impossible while application without allotment is meaningless. These two stages of share
capital are closely interrelated.
For us to best understand the above journals lets us look at the following examples:
Example 1
Gobozana Limited decided to issue 12,000 shares of R10 each payable at R3 on application, R4 on allotment,
R2 on first call and balance on second and final call. Applications were received for 15,000 shares. The
directors decided to reject application of 3,000 shares and their application money being refunded in full. The
allotment money was duly received on all the shares, and all sums due on calls are received except on 200
shares which defaulted on the final call.

REQUIRED:

19
Prepare the journal entries for the above example.
Solution
Journal for receipt of application money
DR Bank A/c 45,000
CR Share application A/c 45,000
(Being amount received for on application for 15,000 shares @ R3 per share)
Journal for rejection of application

DR Share application A/c 9,000

CR Bank A/c
9,000
(Application money returned on rejected application for 3000 shares)
Journal for the transfer of application money

DR Share application A/c 36,000

CR Share capital A/c 36,000

(Application money on 12,000 Shares allotted/ transferred to Share Capital)
Journal for allotment of shares

DR Share allotment A/c 48,000

CR Share capital A/c 48,000

(Amount of money due on allotment of 12,000 shares)
Journal for receipt of allotment money due

DR Bank A/c 48,000

CR Share allotment A/c 48,000
(For receipt of allotment money due from members for 12,000 shares)
Journal for first call

DR Share first call A/c 24,000

CR Share capital A/c 24,000

(Amount of money due on first call of 12,000 shares)
Journal for receipt of amount due on first call

DR Bank A/c 24,000

CR Share first call A/c 24,000

(For receipt of first call money due from members for 12,000 shares)
Journal for the final call
DR Share final call A/c
20
 12,000

CR Share capital A/c 12,000

(Amount of money due on final call of 12,000 shares)

Journal for receipt of amounts due on final call

DR Bank A/c 11,800

CR Share final call A/c 11,800

(For receipt of final call money due from members for 12,000 shares)

Example 2
Chai limited was formed with an authorized share capital of:
▪ 1,000,000 Ordinary shares with an issue price of R1.50 per share R1,500,000
▪ 500,000 Preference shares at no par value (10% interest per annum) R0
The founders of the company subscribed and paid for 200,000 ordinary shares at par. After six months, the
public is offered 500,000 ordinary shares at a premium of R0.25 and 500,000 preference shares (10% interest
p.a.) at no par value at R0.5.

There was an under subscription and only 300,000 ordinary shares were subscribed and 500,000 preference
shares were subscribed. All the shares subscribed for were allotted. Share issue expenses of R50,000 were
incurred and were written off against share premium account.

REQUIRED:
Record the journal entries for the issue of the shares.
Draft the SOFP of Chai Limited in each case to comply with the minimum disclosure requirements of the
Companies Act and IFRS.

SOLUTION
Journal entries
Journals for application & allotment of shares by founders

DR Bank 300,000

CR Share application & allotment A/c 300,000

(Being money received from share application & allotment of 200,000 shares)
Journal for transfer to share capital account

DR Share application & allotment A/c 300,000

21
 CR Ordinary share capital A/c 300,000
(Application money on 200,000 Shares allotted/ transferred to Share Capital)

Journal for ordinary shares issued at a premium of R0.25

DR Bank A/c 525,000

CR Share application & allotment A/c 525,000

(Being money received for application and allotment of 300,000 ordinary shares at a price R1.75 –
inclusive if a premium of R0.25)
Journal for transfer to share capital and share premium accounts

DR Share application & allotment A/c 525,000

CR Ordinary share capital A/c 450,000

CR Share premium A/c 75,000

(Being transfer to share capital account and share premium account for 300,000 ordinary shares issued
and allotted at R1.75)

Journal for application and allotment of preference shares

DR Bank A/c 250,000

CR Preference share application & allotment A/c 250,000

(Being money received in relation to application and allotment of 500,000 preference shares (10%
interest p.a.) at R0.50)

Journal for transfer to share capital account

DR Preference share application & allotment A/c 250,000

CR Preference share capital A/c 250,000

(Being transfer of balance from share application and allotment account to share capital account in
respect of 500,000 preference shares)

Journal for payment of share issue expenses

22
 DR Share issue expenses A/c 50,000

CR Bank A/c 50,000

(Being payment for share issue expenses in respect of share issues)

Journal for writing off the expenses against the share premium account

DR Share premium A/c 50,000

CR Share issue expenses A/c 50,000

(Being writing off the share issue expenses in respect of share issues)

Drafting the SOFP of Chai Limited

CHAI LIMITED
STATEMENT OF FINANCIAL POSITION AS AT…..

Notes 20…

ASSETS
Current assets

Cash & cash equivalents (300,000+525,000+250,000-50,000) 1,025,000

EQUITY & LIABILITIES 1,025,000

Ordinary share capital (300,000+450,000) 1 750,000

Preference share capital 250,000

Share premium (75,000-50,000) 25,000

NOTE 1: SHARE CAPITAL

Authorized share capital

1,000,000 Ordinary shares at R1.50 each 1,500,000

500,000 Preference shares (10% interest p.a.) at NPV
- Total authorized share capital 1,500,000

Issued share capital

23
 500,000 Ordinary shares at R1.50 750,000
500,000 Preference shares (10% interest p.a.) at NPV 250,000

Total issued share capital 1,000,00

CHAI LIMITED
STATEMENT OF CHANGES IN OWNERS’ EQUITY FOR THE YEAR ENDED…

2.4. UNDER SUBSCRIPTION AND OVER SUBSCRIPTION OF SHARE ISSUES

If fewer number of shares are subscribed for than the number of shares issued, this is called an under
subscription. If a greater number of shares are subscribed than the number of shares issued, this is called an
over subscription. It is virtually impossible that the subscription be equal to the number of shares issued, so
sometimes the company would need a certain amount of money to carry out certain operations.

If there is an under subscription, sometimes the company would fail to raise the minimum amount required to carry
out the operations and sometimes they will cancel off the issue and refund those people who had subscribed. This
create a corporate pitfall in that the company still meet expenses even if it aborts the new issue and that it will
create a negative image in the eyes of investors such that if the company tries another issue in future the investors
will not respond.
To avoid such scenarios, company appoint underwriters who will take the risk and provide the company with
assurance that in the event of an under subscription, the underwriters will fill in the unsubscribed shares at
the market price of the share. In order to do the underwriters will charge a commission which is an agreed
percentage of the total value of all the shares that they underwrite.

24
If there is an over subscription the guarantee from the underwriter will not need to be exercised but they still earn
their commission because they insured, the company against the perceived risk. The commission can be written off
against the share premium account.
2.5 ACCOUNTING IMPLICATIONS OF COMPANIES ACT, 71 OF 2008
It is worth noting that before Companies Act, No. 71 of 2008, the legislation that governed the registration
and regulation of companies before that was the Companies Act, No. 61 of 1973. In terms of the Companies
Act, No. 61 of 1973, companies were allowed to issue both par value shares and/or no par value shares (NPV).
But with the enactment of Companies Act, No. 71 of 2008, companies are no permitted to issue par value
shares but only no par value shares (NPV). In the eyes of law then, all companies that still have par value
shares in issue are non-compliant to Companies Act, No. 71 of 2008 and as such they need to regularize that.

This means that all par value shares need to be converted to no par value shares to comply with the new
legislation.

The Companies Act, 71 of 2008 requires that companies should transfer credit balances on the ordinary share capital
account and share premium account to stated capital account.
The companies have an option of transferring all the balances in the share premium account or part thereof
contributed by the type of shares being transferred.

SELF-TEST EXERCISE
(For assistance, please conduct your lecturer)
(For the guide as to how to solve the exercise refer to Flynn, D., & Koornhof, C., Fundamental Accounting, 6th Ed,
2014, 20-7 to 20-10)
Chai Limited has the following balances in their books as at 30 June 2015
Details Debit Credit

Ordinary share capital

750,000
500,000 ordinary shares @R1.50
Share premium

Ordinary shares (300,000 shares at R0.25 premium) 75,000

Preference shares (500,000 shares at R0.10 premium) 50,000

Preference share capital
500,000 Preference shares (10% interest p.a. at R0.50)
250,000

Retained earnings
50,000

Share issue expenses 50,000

25
 Non-current assets
725,000

Current assets 400,000

1,175,000 1,175,000
ADDITIONAL INFORMATION
a) On 1 December 2014, at the annual general meeting (AGM), the directors were authorized to issue
the unissued shares of the company until the next AGM.

b) On 31 December 2014, at the meeting of the board of directors it was decided:

1. To issue a further 500,000 ordinary shares to the public at a premium of R0.50 per share on
28/2/2015.

• Share issue expenses amounted to R60,000

• The entire issue was underwritten by Msibi Underwriters Ltd for a commission of 5%
• Applications were received for 400,000 shares.
2. To convert the authorized and issued ordinary share capital to no par value shares with effect from
31/3/2015. Only ordinary share premium should be transferred to the Stated capital account.

c) Share premium expenses are written off to profits

d) The authorized share capital consists of:

1,000,000 ordinary shares at R1.50 each 1,500,000

500,000 redeemable preference (10% interest p.a.) at R0.50 each 250,000

Total 1,750,000

REQUIRED
A) Prepare journal entries to record the transaction described above.
B) Draft Statement of Financial Position (SOFP) and the Statement of Changes in Owners’ equity (SOCE)

2.6 BONUS SHARES OR CAPITALIZATION SHARES

Bonus shares are issued to existing shareholders pro rata to their existing shareholdings in the company. As the
name suggests they are issued as bonus to already existing shares and they don’t pay (or work) for them. This is
done to increase the number of shares in the market therefore lowering their market price so that they become
cheap and more marketable. Capitalization shares can be issued from either of the three: Retained profits; share
premium or capital redemption reserve fund (CRRF).
EXAMPLE
The trial balance of Chai Limited included the following balances as at 31 June 2015

26
 Details Debit Credit

Ordinary share capital

500,000 ordinary shares at R1.50 each 750,000

Share premium 25,000

Non-distributable reserves

Capital redemption reserve fund 125,000

Distributable Reserve

90,000
Returned Earnings

Net Other Assets 990,000 990,000

At the meeting of the board of directors that was held on the 04th of January 2015 it was decided to issue on 31
January 2015 capitalization shares in the ratio of one share to every four held. This must be organized to shield
distributable reserves such as retained earnings.
REQUIRED
Prepare journal entries to represent this transaction in the books of Chai Limited
SOLUTION

General journal of Chai Limited

Date Details Debit Credit

27
 31-Jan-15 Capital redemption reserve fund account 125,000

Share premium account

25,000

Retained earnings account 37,500

Share capital account 187,500
(Being bonus shares issue of one for every four already held)

Workings:

Number of shares to be issued (500,000/4) 125,000

Value of the shares to be issued (125,000XR1.50) 187,500

The balances on reserves and share premium account should be depleted first before retained earnings can
be used as preferred by the directors of the company.

2.7 REDEMPTION OF PREFERENCE SHARES AND SHARE BUY BACK

2.7.1 REDEMPTION OF PREFERENCE SHARES
Redemption of preference shares means paying back the investors their principal amounts which they paid
when they acquired the preference shares. In addition to principal amounts, the investors can also be paid
premium on redemption, preferred dividends up to the date of redemption still due and owing to them.
Please note that the preference shares should be bought as redeemable at the time of their purchase.

It is also worth noting that preference shares unlike ordinary shares receive a fixed portion of payment
regardless of the level of profits and they should be paid out first before payment is made to holders of
ordinary shares through ordinary dividends.

2.7.2 ACCOUNTING FOR REDEMPTION OF PREFERENCE SHARES

Companies Act, No. 71 of 2008 requires that the premium on redemption be established at a date prior to
the allotment date of the preference shares and that the terms of redemption be stipulated in the articles
of the Memorandum of Incorporation (MOI) of the company.

Dividends can be provided for out of current or retained earnings available for distribution. If the preference
shares are cumulative, the full backlog of dividends should be provided for (Flynn & Koornhof, 2014)

The funding and therefore replacement of redeemed shares can be done through:
▪ Issuing new shares
▪ Depleting retained earnings
▪ New share issue and retained earnings
▪ A new issue of no par value shares
EXAMPLE
28
The trial balance of Chai Limited showed the following balances as at 31 March 2015

Authorized share capital

1,000,000 ordinary shares at R1.50 1,500,000

500,000 preference shares (10% interest p.a.) at R0.50 250,000

Total 1,750,000

The directors of the company decided in the board meeting held on 24 February 2015 to issue 200,000
ordinary shares at a premium of R0.30 per share so as to redeem 400,000 redeemable preference shares on
31 March 2015. The redeemable shares are redeemed at R0.20 premiums per share.

The share premium account has a credit balance of R45,000 and was included on the trial balance under
ordinary share capital balance.

REQUIRED
a. Prepare the journal entries to implement the directors’ decisions.
b. Prepare SOFP.

29
SOLUTION
CHAI LIMITED

GENERAL JOURNALS
Journal for application and allotment of new ordinary shares

DR Bank A/c 360,000

CR Application & allotment A/c 360,000
(Being money received for application and allotment of 200,000 ordinary shares at R1.80)
Journal for transfer of balances to share capital account
DR Application & allotment A/c 360,000
CR Ordinary share capital A/c 300,000
CR Share premium A/c 60,000

(Being transfer of balance from application & allotment to capital/premium accounts)

Journal for Redemption of preference shares
DR Preference share capital (400,000XR0.50) 200,000
DR Premium payable on redemption (400,000XR0.20) 80,000
CR Preference shareholders 280,000
(Redemption of 10% interest p.a. preference shares at premium R0.20 each)
Journal for payment of preference shareholders

DR Preference shareholders A/c 280,000

CR Bank A/c 280,000

(Being payment of preference shareholders for 400,000 preference shares at a premium of R0.20
each)
Journal for writing off premium payable on redemption
DR Share premium A/c 80,000
CR Premium payable on redemption 80,000
(Being writing off premium payable on redemption against share premium account)

30
CHAI LIMITED STATEMENT OF FINANCIAL POSITION FOR THE PERIOD ENDING 31 MARCH 2015

Date Note 31/3/2015

Current assets
Cash & cash equivalents (400,000+360,000-280,000) 480,000
Other assets 945,000
Total 1,425,000

Equity & liabilities 2

Ordinary share capital (750,000+300,000) 1,425,000
1,050,000
Share premium (45,000+60,000-80,000) 25,000
Preference share capital (250,000-200,000) 50,000
Retained earnings 300,000

NOTE 2: SHARE CAPITAL

Authorized share capital

1,000,000 ordinary shares at R1.50 1,500,000
500,000 preference shares (10% interest p.a.) at R0.50 250,000
Total 1,750,000

Issued share capital

700,000 ordinary shares at R1.50 each 1,050,000
100,000 preference shares (10% interest p.a.) at R0.50 each 50,000
1,100,000

Reconciliation of number of shares

Ordinary shares at R1.50 par value

Opening balance 500,000
New issues 200,000
Disposals -
Closing balance 700,000

31
 Preference shares
Opening balance 500,000
New issues -
Disposals (400,000)
Closing balance 100,000

Self-test exercise II
Repeat the example above using a scenario where the redemption of
the shares is done through retained earnings as opposed to new share
issue.

Writing Activity Do the journals for the redemption as well as drafting concise SOFP.

(For the guide as to how to solve the exercise refer to Flynn, D., & Koornhof, C., Fundamental Accounting,
6th Ed, 2014, 20-16 to 20-17)
2.8 ACQUISITION OF COMPANY’S OWN SHARES
Companies Act, 71 of 2008 allows a company to buy back its own shares and it provide that if a company
wishes to buy its own shares:

▪ It must pass a special resolution by the board

▪ It must be authorized by its Memorandum of Incorporation (MOI) to do so
▪ The payment should not limit the ability of the company to settle its obligations (liquidity test)
▪ The payment should not cause the liabilities of a company to exceed its assets (solvency test)

A company can buy its own shares from shareholders at a market price agreed by both parties. If the shares being
bought back are par value shares, then the capital balances in the general ledger are decreased by the par value of
the shares bought back. The premium on those shares is written off against any of the following as decided by the
directors:
▪ Capital redemption reserve fund
▪ Share premium
▪ Retained earnings.
If the shares bought back are no par value shares, then the Stated share capital should be decreased by the
average value of the shares bought back. Average price of the shares is found by dividing the value of all the
shares by the total number of shares.

When the company paid more than the average price, the so-called premium can be written off to:

▪ Capital redemption reserve fund

▪ Share premium
▪ Retained earnings.

32
EXAMPLE
Chai Limited has the following share capital balances

Authorized share capital

1,000,000 ordinary share capital at R1.50 1,500,000
500,000 preference shares @NPV (10% interest p.a.) -
500,000 redeemable preference shares( fixed annual -
dividend of R0.19 per share)
Issued share capital
700,000 ordinary shares at R1.50 1,050,000
Stated capital
500,000 preference shares(10% interest p.a.) at NPV 750,000
Share premium 500,000
Capital redemption reserve fund (CRRF) 150,000

The directors of Chai Limited decided at their board meeting to purchase the company’s shares either by
one of any two ways below:

A) Buy 200,000 ordinary shares at R2.50

B) 100,000 preference shares at R2.00 (10% interest p.a.)
The directors agreed that that the premium of the bought shares should be written off in a manner that
least affects retained earnings.

REQUIRED
Record the journal entries for the issue of shares in each case.
A) SOLUTION

DR Ordinary share capital 300,000

DR Capital redemption reserve fund (CRRF) 150,000

DR Share premium 50,000

CR Bank 500,000

33
 Workings
Amount paid to shareholders = 200,000XR2.50
500,000
Amount that should reduce share capital = 200,000XR1.50 300,000
The remaining R200,000 is premium on share buyback 200,000
Writing off to:
Capital redemption reserve fund (depleted) Share 150,000
premium 50,000

B) SOLUTION
DR Stated share capital 150,000
DR Capital redemption reserve fund (CRRF) 50,000
CR Bank 200,000

Workings
Average price = 750,000/500,000 1.50
Value of shares bought back (100,000XR1.50) 150,000 The re maining R50,00 0 is
premium on share buy back 50,000
Written off to:
Capital redemption reserve fund (CRRF) (sufficient balance) 50,000

REFERENCE TEXTBOOKS
1. Flynn, D. and Koornhof, C. (2014) Fundamental Accounting. 6th Ed. South Africa: Juta & Co.
2. Kew, J. and Watson, A. (2010) Financial Accounting: An introduction. 3rd Ed. South Africa: Oxford
University Press Southern Africa.

3. Stainbank, L., Oakes, D. & Razak, M. A Student’s Guide to International Financial Reporting, 6th Ed.
South Africa: S & O Publishers

34
 TOPIC 3

CONSIGNMENTS

LEARNING OUTCOMES

After studying this topic, you should be able to:

List and explain the relevant concepts

Explain the accounting entries

3.1. RELEVANT CONCEPTS

• Goods on consignment. The goods on consignment are the goods that were dispatched by the
consignor to an agent.
• Consignor / dispatcher/ owner. The consignor/ dispatcher / owner is the person who owns the
goods on consignment. The consignor also determines the pro forma invoice price.
• Consignee/agent. An agent is the person who accepts the responsibility to sell the goods on
consignment at the best possible price, but not at less than
• the pro forma invoice right price and who will receive commission for services rendered.
• Commission. Commission is usually calculated as a percentage of the sales done by the agent. It is
payable by the consignor to the agent as remuneration for sales services rendered. In practice, the
agent will deduct his commission from the proceeds to the consignor.
• Del credére commission. When an agent sells goods on credit, the possibility exists that not all of
trade debtors will pay their accounts. The taking into account of these bad debts can be done
according two methods.

35
Method 1
The agent stands guarantee for the payment of the debts of his clients. Therefore, the agent will have to
finance the bad debts from his personal resources. Increased responsibility is thus accepted by the agent.
The consignor and the agent therefore usually agree upon an additional commission payable to the agent,
called del credére commission. The amount of del credére commission payable to the agent can be
considered as the maximum amount which the consignor is prepared to sacrifice in respect of bad debts
actually occur or not.
Method 2
The consignor bears the debts arising from the agent’s credit sales in full. In such cases no Del credére
commission is paid to the agent, because the agent did not take on any responsibility for these bad debts.
• Pro forma invoice and the pro forma invoice price.
The control of inventories on consignment is of the utmost importance; the consignor must keep track of the
quantity and the particulars of the goods which are dispatched. Therefore, the goods on consignment to the
agent must include a voucher with these particulars. The reason why a voucher and not an invoice is issued, is
because the goods stay the property of the consignor until the date of sale by the agent and the selling price of
the goods are usually not determined beforehand. Thus, the requirements to issue an invoice are not met. As
mentioned earlier, the agent sells the goods at the best possible price, but not less than the minimum price
indicated in the voucher.
The voucher issued is a called a pro forma invoice and the minimum selling price indicated on this invoice, the pro
forma invoice price. This voucher is also important to the agent, as an inventory count can be made when the goods
are received to confirm that the details of the voucher are correct and to confirm the minimum selling price of the
goods. The minimum selling price of the goods is not the cost price thereof, as the consignor is entitled to add a
profit to the cost price. As the pro forma invoice is a voucher and not an invoice in the true sense of the word, the
information disclosed is not regarded as information which must be accounted for. No journal entry can therefore
be made from the completed pro forma invoice.
• Sales statement.
As sales statement is a report which is drawn up by the agent and which provides the consignor with information
about the goods received, the sales figures, the balance – if any – of the unsold goods, the selling expenses
incurred by the agent, the commission deducted etc. Sales statements can be issued at intervals mutually agreed
upon by the consignor and the agent. When a sales statement is drawn up, the agent usually deducts his
commission and selling expenses from the proceeds of the sales. The amount owing is then forwarded to the
consignor.
• The cost price of unsold goods on consignment.
The prices of the goods on consignment are determined in the same way as what the cost price for inventory is
determined by a trading concerned. Thus the cost to acquire a consignment and to locate and store it in such a
manner that it can be readily sold, determines the cost price. Typical costs that will be included in this calculation
are: the purchase price, railage expenses (i.e. railage on purchases- including the railage expenses incurred to
dispatch the goods to the agent) insurance paid in respect of the railage on purchases, import duties and storage
and storage fees.
To calculate the value of the unsold inventory, these expenses should be taken account proportionally. This implies
that the cost price of the unsold goods by the total number (units) of unsold goods by the total number of the
goods dispatched. This fraction is then multiplied by the cost price of the goods on consignment. For example, if 50

36
units were purchased at a cost price of R150, and 10 units were not sold, the cost price of the unsold goods would
be: R150 x 10/50 = R30.
The accounting entries relating to consignments can be summarized as follows:
Information from the records of the consignor, such as
• The cost of goods forwarded to the consignee (agent)
• The expenses incurred by the consignor on consignment of the goods
• The recording of the information disclosed in the sales statement of the agent.
• Information from the consignee as it appears in the sales statement:
• The expenses incurred by the consignee on the receipt of the good, and the handling and the storing
of the goods
• The remuneration of the consignee – commission
• The settlement of the amount due to the consignor
3.2. ACCOUNTING ENTRIES IN THE BOOKS OF THE CONSIGNOR
Recording the cost of goods forwarded to an agent (s)
A consignor can purchase goods for immediate dispatch to a specific consignee. In such a case the
consignment to agent account must be debited with the cost price or either the bank or the applicable
creditors account credited with this amount.
If the inventory was not purchased for a specific consignment and already recorded in the books and entered
into the inventory, the accounting entries will be as follows:
If a periodic inventory system is applied:
Credit the purchases account and debit the consignment to agent account.
If a perpetual inventory system is applied:
Credit the inventory account and debit the goods on consignment account.
Recording the expenses incurred by the consignor in respect of the consignment the expenses are recorded
in a similar way as any other business concern. The consignment to agent account will be debited with these
expenses and either the bank or applicable credit accounts will be credited.
3.3. ACCOUNTING ENTRIES IN THE BOOKS OF THE AGENT
The agent records only the transactions related to the consignment. This can be analysed as follows:
• No entries are made of the cost of the goods when they are received. According to common law
the goods do not belong to the agent. The agent only has control over them.
• Entries are made only for transactions incurred. These would, for example, be for payments
(transport, storage, etc.) made in respect of the consignment and for receipts in respect of sales.
Only one account in the name of the consigner
is necessary in addition to the accounts which are usually used in a bookkeeping system. For study purposes,
you are not required to draw up entries in the books of the consignee (agent).

37
3.4. FINANCING CONSIGNMENTS BY MEANS OF BILLS
A bill can be drawn on the agent by the consigner in order to recover a part of the proceeds of the goods on
consignment as soon as possible. Consignments to overseas agents are usually financed by means of bills.
The agent needs to provide a certain degree of security to the consignor.
Accepting the bill does this. Should the agent refuse to do so, he may not take possession of the goods? As
far as the consignment is concerned, no additional accounts are necessary. In the books of the consignor
the account of the agent (Agent …..) will have an additional credit entry which must be shown against the
contra account: “Bills receivable”.
In the books of the agent the account of the consignor will have an additional credit entry which must be
shown against the contra account: “Bills payable”. Should a consignor who drew a bill on an agent, discount
such a bill at the bank and pay a discount charge (interest), the discount charge will not be included in the
calculation of the cost price of the goods because it is regarded as a finance cost.

REVIEW QUESTIONS

Ben of Cape Town consigns goods costing R4 000 to his agent, L Lou of Greytown, for sale on
his behalf. These goods were invoiced pro forma at R8 000. L Lou is entitled to a 5% commission and a
2% del credere commission. B Ben draws a bill for R5 000, 14 days after sight, on L Lou and pays
expenses of R380 in respect of the consignment. The bill is accepted and Ben discounts the bill with
his bank for R4 980.

Lou pays the following expenses:

1.
Transport R250
2.
Storage R100
3.
Advertising R50

Lou sells the bulk of the goods for R6 600 cash, and some on credit for R1 400. The liquidators inform
him that one of his debtors, C Cat, who owes R200, is insolvent and that he will receive 80 cents in
the rand. L Lou pays B Ben the balance due.

Required
Show the consignment account and the personal account of L Lou in the ledger of B Ben.

38
 TOPIC 4

JOINT VENTURES

LEARNING OUTCOMES

After studying this topic, you should be able to:

Understand the appropriation of profit and compensation of
partners for the contribution
Understand the interim determination of profit and mutual
settlements of debts

4.1. INTRODUCTION
A joint venture is a temporary partnership, not bearing a special name, between two or more persons, limited
to a particular set of transaction, in which each party to the venture contributes towards the capital outlay.
The profit or loss arising from the venture is shared between the parties on a basis agreed upon. As the
temporary partnership is automatically dissolved on conclusion of the trading operations, there is no need
to open a separate banking account for the venture or to open a separate set of books. It is more satisfactory
and easier for each of the parties concerned to open special accounts in his own books to record transactions.
4.2. APPROPRIATION OF PROFIT AND COMPENSATION OF PARTNERS FOR THEIR CONTRIBUTIONS
Where the partners in a joint venture are to make dissimilar contributions to the venture, e.g. where one
partner is to contribute personal technical know-how and manual skill for processing certain materials
while another is to contribute the capital required to finance the project, or where they are investing
different capital amounts for various periods of time, it is customary that they agree that each should
receive a fair compensation for his contribution to the venture, out of overall profits before the balance of
the profits (or even loss) is to be shared in a given ratio, e.g. equally. What information will be of interest
to the partners of a joint venture at the closing of the undertaking?
They will be interested in the following:
• What profits were realised by the venture prior to any compensation to the partners for their
contributions?
• What was the extent of their claims on the profits of the venture prior to the determination of
the profits to be distributed?
• What is the ultimate amount to be distributed according to the profit-sharing ratio?
• What amount do the partners receive in total, i.e. from compensation for services rendered,
as well as from their profit share from the venture?

39
4.3. INTERIM DETERMINATION ON PROFIT AND MUTUAL SETTLEMENT OF DEBTS
On closing of a fiscal or a financial year, prior to the finalization of a joint venture, the need usually arises
for an interim determination of profit. The partners can also agree to have, for example, a monthly profit
and loss statement, and settlement of their mutual debts. Although it is not essential, an interim settlement
of debts between the partners usually calls for an interim determination and distribution of profit. An
interim determination of profit entails the matching of amounts of income and expenditure, which are
causally related to one another, to the specific period under review. As a rule, this entails the carrying
forward of expenditure already incurred, to the following income period. The value of unsold merchandise
on hand must therefore be matched with the proceeds from the sale thereof, during the ensuing
accounting period. To attain this, it is necessary that expenses in respect of unsold merchandise stock, as
well as the remaining value of vehicles and other equipment are provided for in the interim profit and loss
account.
In the memorandum joint statement, (or income and expenditure statement), the accounting treatment
of the above does not present us with great difficulties)
The joint venture account
In order to determine which entries must be made into the joint venture account, you can regard this
account as similar to a combination of a trading account and a profit and loss account of a business entity.
Examples of entries into this account are as follows:
• Purchases inventories on behalf of the joint venture, such as goods, felling rights and vacant
stands.
Journal entry: Credit the joint venture account, and debit either the bank or creditors.
• Sales of inventories.
Journals entry: Credit the joint venture account, and debit either the bank or debtors.
• Expenses incurred on behalf of the joint venture.
Journal entry: Debit the joint venture account, and debit either bank or the creditors account.
• Taking over the inventories.
Journal entry: Credit the joint venture account, and debit either the purchases (Or inventory)
or the drawings account.
• Taking over the property, plant and equipment.
Journal entry: Credit the joint venture account, and debit either the applicable asset account or the
drawings account.
• Taking into account the profit share of the venture.
Journal entry: Debit the joint venture account, and credit the profit and loss account
• Taking into account the loss shares of the venture.
Journal entry: Credit the joint venture account, and debit the profit and loss account Payments
received from a venture in the joint venture.
Journal entry: Credit the joint venture account, and debit the bank account.

40
 • Payments made to a venture in the joint venture.
Journal entry: Debit the joint venture account and credit the bank account.
Example
On 1 June 20.2 B Harris and W Croft agreed to enter into a joint venture for the purpose of buying 500
tons of wrought iron for R1 200. Harris paid the amount by EFT. Profit and loses will be shared equally.
The following is a summary of the transactions with regard to the venture:
June: R
2 Harris received an EFT payment from Croft for his half-share 600
3 Sundry selling expenses paid by Harris 500
4 Harris sold 200 tons for cash 510
7 Harris sold 100 tons and received a bill, payable 1 m/d (1 month after date) 260
7 The bill was discounted for 259
10 Croft sold the balance for cash and retained the money in his own bank account 490
10 Sundry selling expenses incurred by Croft and paid in cash 600
10 Harris paid Croft for the balance due

Required
(1) The applicable ledger accounts in the books of W Croft
(2) The applicable ledger accounts in the books of B Harris.
(3) The income statement of the joint venture for the period 1 June 20.2 to 10 June 20.2.
Solution
BOOK OF W Croft
GENERAL LEDGER
20.2 R 20.2 R 490
June Bank: ½ share paid for Jun Bank
2 purchases 10 Sales
Bank: Expenses 600
Profit and loss account: 6
½ share of profit *
10

24
10

* Refer to the income statement of the joint venture that follows for the profit of
R24 is determined.
At this stage there is a debit balance of R140 on the account which indicates that Harris is a debtor for
that amount. The account will balance and close off on receipt of the remittance from Harris. (1)
BOOK OF W CROFT GENRAL LEDGER

41
 Dr Joint venture account with B Harris Cr
20.2 R 20.2 Jun R
Jun Bank: ½ share Paid for 10 Bank: Sales 490
2 purchases Bank: Settlement 140
expenses 600
Profit and loss account: 6
10 ½ share of profit
10
24
630 630

Dr Bank Cr
20.2 Jun Joint venture with R 20.2 Joint venture with Harris: ½ R
10 Harris 490 Jun share of purchases Joint 600
Joint venture 2 venture with Harris: Expenses
Harris:
Settlement 140
10 6

Dr Profit and loss account Cr

20.2 R
Jun Joint venture with
10 Harris : Net profit
24

BOOKS OF B HARRIS GENERAL LEDGER

Dr Joint venture account with W Croft Cr

20.2 R 20.2 R
Jun Bank: Purchases 1 200 Jun 2 Bank: Croft 600
1 Bank: Expenses 5 4 Bank: Sales 510
3 Bank: Discount charge 1 7 Bills receivable 260
Profit and loss: ½ net
profit
Bank: balance paid to 24
7 Croft 140
10 1 370

1 370

42
 Dr Bank Cr
20.2 R 20.2 R
Jun Joint venture with Croft: Jun
2 ½ share of purchases 1 Joint venture with Croft:
Purchases 1 200
Joint venture with Croft: 600 Joint venture with Croft:
Sales 3 Expenses
4 Joint venture with Croft: 5
Joint venture with Croft:
510 Discount charge Joint
7 venture with Croft:
7 1
Bills receivable Balance paid
260
10 140

Dr Bills receivable Cr
R R
20.2 Joint venture 20.2
June 7 with Croft 260 June 7 Bank: Bill discounted 260

Dr Profit and loss account Cr

R 24
20.2 Joint venture with
June 10 Croft

(3) JOINT VENTURE OF W CROFT AND B HARRIS

INCOME STATEMENT FOR THE PERIOD 1 JUNE 20.2 TO 10 JUNE 20.2
R
Revenue R (770 + 490) 1 260
Less: Cost of sales R (600 + 600) 1 200

43
Gross profit 60
Less: Selling, administrative and general expenses 12
Sundry expenses R (6 + 5) 11 1
Discount charge

48
Net profit for the period

REVIEW QUESTIONS

A Bird of Durban and B Loco of Pretoria agreed to finance a certain shipment of goods from Liverpool
in England jointly and to share profits and losses equally. They each undertook to sell as many of the
goods as possible at a commission of 5% on gross sales.
2001 The goods arrived in Durban.
Jan Bird sent R20 000 to Liverpool in payment for the goods. He also paid R650 in respect of
10 landing
Charges and harbour fees.
Bird received an EFT payment for R12 500 from B Loco

13
Bird railed half of the shipment to B Loco and paid R1 050 in customs and warehouse
charges.
14
18 Bird sold part of the goods for R8 000 cash.
Feb 1 Loco informed Bird that he had sold all of the goods forwarded to him for R15 000 cash
and that he had paid R2 300 for railage and storage.

14 Bird sold the remainder of the goods for R6 200 cash.

Bird sent a detailed statement of his transactions to Loco together with his confirmation
of payment by internet transfer for the amount due.
20

Required:
Show the following:
1. The joint venture account in the books of A Bird.
2. The joint venture account in the books of B Loco.
3. The memorandum joint venture account.

44
 TOPIC 5

NON-PROFIT ORGANISATIONS

LEARNING OUTCOMES

After studying this topic, you should be able to:

Understand the receipt and payment statement
Understand the income and expenditure statements

5.1 INTRODUCTION

Since organisations such as clubs, associations, hospitals, colleges, the practices of professional persons, etc.,
are not actually connected with trade, that is, they do not buy or sell goods with the aim of earning profits;
it follows that the financial statements of such accounting entities will differ from those of trading concerns.
Each of these institutions usually adopts a system, which is best suited to the requirements of the
organisation or person for whom the financial statements are drafted.
5.2 RECEIPTS AND PAYMENTS STATEMENT

A receipts and payments statement is an analysed and classified summary of the cash transactions as
contained in the cashbook. It is, therefore, the most elementary version of a statement for a club or
association. It can thus be derived from the definition that this statement consists of the actual cash
received on the debit side, and the actual cash paid out on the credit side. Since this statement is merely
a summary of the cashbook, the opening balance of the statement represents the opening balance of cash
on hand, and the closing balance of the statement represents cash on hand at the end of the period. All
receipts and payments, whether of revenue or a capital nature, are included. It will also be apparent that
there cannot be a profit or a loss or surplus or deficit in this statement.
5.3 INCOME AND EXPENDITURE STATEMENT

An income and expenditure statement is intended to show the surplus (net income or profit) or shortage
(loss) for a certain period. This statement is very similar to an income statement drawn up by a trading
concern. The difference between the income (credits) and expenses (debits) represents the surplus (or
deficit) and this is transferred to the Accumulated Fund Account (which represents the capital account of
a non-trading organisation).
5.4 SPECIAL FUNDS

Institutions such as hospitals, clubs, educational and sports bodies often receive capital sums as gifts or
legacies, with stipulations that income derived from the capital is to be applied for a specific purpose. This
implies that the capital amount is to be invested in a sound security. This capital amount must remain

45
untouched, for the period prescribed by the conditions of the legacy, and must appear under the title
“Funds” on the equity side of the balance sheet. The investments relating to these funds must be shown
as separate items on the asset side of the balance sheet.
5.5 ENTRANCE FEES

Entrance fees are payable by a prospective member, when making application for membership of the
club. The entrance fees are entered on the debit side of the receipts and payments statement, and
credited to the entrance fees account. These fees, being non-recurrent, are added directly to the
accumulated fund in the balance sheet and are not shown in the income statement as normal income.
Exercises and Solutions
The following information relates to the Green Golf Club:
1. Balances at 31 December 20.4 R
Green fees and caddy fees received 1600
Bank (debit balance) 550
Crockery and linen at cost – 31 December 20.3 700
Sundry debtors 210
Sundry creditors 1600
Sundry expenses 660
Dining room:
• Purchases 1450
• Wages 1000
• Sales 3000
• Inventory – 31 December 20.3 100
Building at cost 16000
Land and improvements at cost 52000
Implements and tools:
• At cost 2100

• Accumulated depreciation – 31 December 20.3 1100

Maintenance expenses 1090
Entrance fees received 1050

Bar:
• Purchases 5000
• Wages 1200
• Sales 10000
• Inventory -31 December 20.3 300

Membership fees Furniture: 8400

• At cost 2500

• Accumulated depreciation – 31 December 20.3 600

46
Accumulated fund - 32 December 20.3 15000
Interest expense (paid on mortgage loan to 30 June 20.4) 3750
Salaries and wages 3500

47
 Stationary consumed 200
15% Mortgage loan 50000
Insurance prepaid – 31 December 20.3 40

2. Additional information
1. At 31 December 20.4, dining room inventory was not counted, but it can be assumed that the
usual gross profit margin of 50% on turnover was realized.
2. At 31 December 20.4, crockery and linen was valued at R500.
3. Implements and tools must be depreciated at 20% pa, using the diminishing balance method.
4. Furniture must be depreciated by R100.
5. Insurance premiums paid during the year, amounting to R160 were debited to the sundry
expenses account. Half of this amount is to be regarded as insurance prepaid.
6. The balance of the membership fees account was compiled as follows:
An amount of R180 in respect of prepaid membership fees at 31December 20.3 And cash
received during the year, R8 220. The balance must still be adjusted for the membership fees in
arrears to the amount of R100 and prepaid membership fees to the amount of R210 for the year
31 December 20.4.
7. A new member’s register which is in use was designed and printed at a quoted price of R10. This
transaction must still be recorded in the books.
8. The c l u b secretary went on leave before Christmas and was paid his January 20.5 salary of R120
in advance. This amount forms part of the balance of the salaries and wages account (R3 500).
9. On 29 December 20.4 a club member deposited an amount of R50 in the club’s bank account as
a donation. This donation was only discovered when the bank balance was compared with the
balance of the bank statement and must still be taken into account.
10. The mortgage loan is secured by a first mortgage over fixed property.
Required
The following statements for Green Golf Club:
1. The income and expenditure statement for the year ended 31 December 20.4 (NB: Show the
calculations of the gross profit for the bar and dining room separately).
2. The balance sheet at 31 December 20.4

SOLUTION: EXERCISE 1

1. GREEN GOLF CLUB

Income and Expenditure Statement for the Year Ended 31 December 20.4:

48
 R R R
Income 14 190
Membership fees received (180 + 8 220 – 210
+100) (a)
Green fees and caddy fees received 8 290
Gross profit on bar sales (b) 1 600
Less: Wages
Gross profit on dining room (c) Less: Wages 4 950
1 200 3 750
Donation received
1 500
Less Expenses
1 000 500
Salaries and wages R (3 500 – 120) 50
Interest on mortgage loan (15% X R50 000)
Maintenance
Sundry expenses R (660 – 160)
Stationery (200 + 10) 13 300
3 380
Insurance (160 + 40 – 80) 7 500
Depreciation 1 090
Implements and tools (20 % X R1 000) 500
Furniture 210
Crockery and linen R(700 - 500) 120
500
Surplus for the year 200
100
200

890

GREEN GOLF CLUB

Balance Sheet at 31 December 20.4 R

49
ASSETS
Note
Non- current assets 71 100
Property, plant and equipment 1

Current assets 1 410

Inventory (refreshments) 300
Prepayments R (80 + 120) 200
Trade and other receivables R (210 + 100) 310
Cash and cash equivalents 600

Total assets 72 510

FUNDS AND LIABILITIES

Funds
62 940
Accumulated fund (d)
16 940
Non –current liabilities
50 000
Interest bearing borrowing - 15% mortgage loan
(Secured by first mortgage over fixed property)
50 000
Current liabilities
Trade and other payables
R [1 610 + 3 750 (e) + 210] 5 570
Total funds and liabilities 5 570

72 510

50
Note 1

Property, plant Land, building and Crockery Implements Furniture Total

and equipment improvement and linen and tools
Carrying amount: 68 000 700 1 000 1 900 71 600
Beginning of year
Cost 68 000 700 2 100 2 500 73 300
Accumulated (-) (-) (1 100) (600) (1 700)
depreciation
Depreciation - - (200) (100) (300)
Revaluation - (200) - - (200)
Carrying amount: 68 000 500 800 1 800 73 300
End of year
Cost 68 000 700 2 100 2 500 75 500
Accumulated (-) (200) (1 300) (700) (2 200)
depreciation

Calculations:

(a)
Dr Membership fees Cr
in R in R

Income received 210 Income received 180

advance Income 8 290 advance 8 220
and expenditure Bank 100
Accrued income
8 500
8 500

(b) Bar gross profit

R R
Sales 10 000
Less: Cost of sales 5 050
Opening inventory 300
Purchases 5 000
5 300
Less: Closing inventory 250
Gross profit 4 950

Less: Closing inventory 50

Gross profit 1 500

(d) Accumulated fund R

51
(c) Dining room gross profit
Sales 3 000
Less: Cost of sales 1 500

Opening inventory 100

Purchases 1 450
1 550
Balance (28 February 20.1) 15 000
Add: Surplus for the year 890
Entrance fees

(e) Interest payable R

15% of R50 000 7 500
Less: Paid
Due

REVIEW QUESTIONS

52
The following information relates to the Mountview Tapestry Club:
Mount view Tapestry Club
Income and Expenditure Account for the year ended 31 December 2001
R R
Water and electricity (R550 + 50) 600 Subscriptions (R6 000 – 500 prepaid
+ 350 accrued
– 150 refunded)
5 700
Donations 2 500

Sewing materials consumed

(R3 000 – 400) 2 600
Stationery (R500 – 110) 390
Honorarium 520
Refreshments (R1 800 – 150) 1 650

Lectures and talks 450

Depreciation 250
Surplus 1 740
8 200 8 200

Additional information
During the financial year new equipment to the value of R750 was purchased for cash and
damaged frames were sold for R100 cash.
The balance on the receipts and payments statement should be maintained at R1 500. All
surplus money should be deposited in the club’s special savings account.
The balance on the receipts and payments statement at 1 January 2001 is R1 500.
All purchases and expenditure were for cash.

Required
Draw up the receipts and payments statement for the year ended 31 December 2001.

53
 TOPIC 6

BUDGETS

LERNING OUTCOMES

After studying this topic, you should be able to:

Explain the advantages of budgeting
Explain types of budgets

6.1. INTRODUCTION
Budgets are widely used, both by individuals in their private lives and by businesses.
From a business perspective, the main purpose of a budget is to enable the management of an entity to
determine the most efficient way of operating a profitable business. The budget is therefore regarded as a
financial plan of action to achieve specific performance goals over a specified time period.
Budgeting and budgetary controls, forms an integral part of the functions of management for businesses as
well as non-profit organisations, and are implicit in the managerial functions of:
• Planning,
• Organizing,
• Motivating, and
• Controlling.
Budgetary and budgetary control can be described as a systematic and formalized approach to executing
aspects of management’s functions of planning and controlling. These aspects are:
• The development and application of broad, long-term objectives for the entity;

• Determining the goals of the entity;

• Developing broad, long-term profit plans;
• Designing specific, short-term operational plans with assigned responsibilities for each division,
product, project, market segment, etc.; Establishing performance reporting procedures; and
• Implementing follow-up and re-planning procedures
6.2. THE ADVANTAGES OF BUDGETING

54
The advantages of a good budgeting system are:
The entity’s policies, procedures and structures are clearly defined.
• All stakeholders are motivated to work together towards achieving a common objective.
• The activities of all divisions, sections and units are properly coordinated, with specific areas of
responsibility.
• There is an increased awareness of the importance of cost considerations in the operations of the
entity.
• Standards can be set for the key elements of cost, so that any deviation from the standard can be
promptly controlled.
• Problem areas are easily identified and corrective action can be taken.
6.3. TYPES OF BUDGETS
The following will be discussed here:
• The sales budget,
• The production budget,
• The cash budget.
6.3.1. The Sales Budget
The sales budget is prepared after the sales forecast for the year has been made.
In most entities, the sales budget is the point of departure for the other budgets – the basis on which the
other budgets are prepared. It is therefore imperative that the figures used in the sales budget are
accurate. Some of the factors taken into consideration when preparing the sales forecast to be included in
the sales budget are:
• Competition within the industry;
• General economic conditions;
• Previous sales volumes;
• Influence of planned price increases on sales; and
• Market share.
The sales budget indicates the anticipated sales of each type of product expressed in quantities and in
monetary values. Some entities prepare a total sales budget for the year and supplement it with subsidiary
sales budget, classified into geographical areas, product lines or categories of customers (for example,
wholesale, retail, export, etc.)
6.3.2. The Production Budget
An entity’s sales budget determines how much will need to be produced by an entity, in order to meet the
sales targets. The production budget sets out these details.
6.3.3. The Cash Budget

55
Cash budgets are prepared after all the subsidiary budgets in the master budget have been prepared. The
cash budget shows the planned sources of cash during the planning period, and the planned uses of the
cash generated. A properly planned budget must make provision for: All receipts of cash, indicating when
money will be received; and
• All payments of cash, indicating when the payments will be made.
In order to achieve the foregoing, the following aspects must be considered:
• The entity’s cash and credit transactions;
• The entity’s policy on the settlement of trade payables; The entity’s policy on the collection
of trade receivables; and The settlement of short- and long-term financial obligations.
Non-cash transactions (for example, depreciation, accruals and deferred payments) do not form part of
cash budgets.
Cash budgets are usually prepared on a monthly basis in order to reflect the cash position at the end of
each month of the planning period. The advantage of this approach is that, where a deficit is projected
for specific months, management will be able to raise funds to cover the deficit/shortfall, thereby
ensuring that the entity remains liquid at all times.

EXAMPLE
The following information relates to Abakar CC, an entity which manufactures small electrical coolers;
1. On 1 April 20.6 the favourable bank balance amounted to R22 500

Month Sales Cost of Materials Manufacturing Labour costs

(purchases) overhead
expenses
20.6 R R R R
Actual Amounts:
January 67 500 36 000 5 775 10 500
February 63 000 34 500 6 600 12 000
March 72 000 39 000 7 425 13 500

Budgeted Amounts:
April 90 000 45 000 7 755
May 99 000 54 000 14 100
7 920
June 87 000 46 500 14 400
8 662 15 750

2. Approximately 50% of the goods are sold on credit. This percentage must be used to calculate the
budgeted credit sales.
3. It was decided to budget for the cash receipts from the debtors according to the following analysis of
the payments which were previously made by the debtors:
During the month of sale 5%
During the first month after the month of sale 50%
During the second month after the sale 30%
56
 During the third month after the sale 10%
Irrecoverable 5%
4. The rental income for the financial year amounts to R750 per month, and is receivable before the fifth
of every month
5. Expense items in the above mentioned table will be paid as follows:
- Materials and manufacturing overhead expenses -during the month after the month in
which these expenses incur.
- Labour costs – during the month in which these expenses incur
6. Distribution and administrative expenses must be calculated at 5% of the total sales for a month, and
must be paid during the next month
7. It is envisaged that a distribution of total comprehensive income to the amount of R8
500 will be paid to the members during May 20.6
8. The purchase of machinery to the amount of R46 500 is planned for April
20.6 And it will be paid in full on 15 may 20.6
9. A long- term loan of R15 000 was granted to the close corporation during
20.2. Interest at 15% per annum on the capital amount is payable during 20.8

Required
Prepare the cash budgets of Abakar CC for the months: April, May and June 20.6
Solution
Cash budget for April, May, June 20.6
DETAILS APRIL R MAY JUNE
R R
Bank balances at beginning of month 22 500 37 200 (280)
Cash receipts 78 825 89 175 88 275
Cash sales (1) 45 000 49 500 43 500
Receipts from debtors (2) Rent 33 075 38 925 44 025
750 750 750
Cash available during the month
Cash payments 101 325 126 375 87 995
Materials (64 125) (126 655) (83 745)
Manufacturing overhead expenses Labour 39 000 45 000 54 000
costs 7 425 7 755 7 920
Distribution and administrative expenses (3) 14 100 14 400 15 750
Distribution to members 3 600 4 500 4 950
Machinery _ 8 500 _
Interest(R15 000 X 15 % X 6/2) Bank balance _ 46 500 _
at end of month _ _ 1 125
37200 (280) 4 250

Carried forward from the budgeted bank balance at the end of the previous month. Calculations:
(1) Sales
January R February R March R April R May R June R

57
 Cash (50%) 33 750 31 500 36 000 45 000 49 500 43 500
Credit (50%) Totals 33 750 31 500 36 000 45 000 49 500 43 500
67 500 63 000 72 000 90 000 99 000 87 000
(2) Receipts from debtors
In order to determine the cash receivable from debtors for a budget period, the credit sales that took
place during each month that affects the budget period, must first be calculated (refer to calculation
(1)

Thereafter, the debtors payments which are receivable during the budget period must be determined
according to the analysis of the expected payments by the debtors (refer to paragraph 4 of the given
information). For example, budgeted cash receivable in respect of the January credit sales can be analysed
as follows:
The credit sales that took place during January amounted to R33 750. According to the analysis, 5% of the
credit sales expected to be received during the month of the credit sale. In other words, 5% of the January
credit sales will be received in January. The analysis further indicates that 50% is expected to be received
during the first month after the month during which the credit sales took place, in respect of the January
credit sales of R33 750, 50% thereof is thus expected to be received during February. Likewise, 30% is
expected to be received during March and 10% during April.

REVIEW QUESTIONS

Dawn Ltd manufactures and sells two products, Latex and Spandex. The following information relates
to the two products for the financial year ended 31 December 2000:
Latex Spandex
Sales forecast for 2000 (in units) 15 000 20 000
Selling price per unit R25 R28
Opening inventory 3 100 2 500
Closing inventory 2 000 2 500
Cost of production per unit:
Raw material R5,25 R6,00
Direct labour R7,75 R8,50
Manufacturing overheads R3,00 R3,50

Required
Prepare the total sales budget.
Prepare the production budget.

58
 TOPIC 7

RATIOS

LEARNING OUTCOMES

After studying this topic, you should be able to explain

the capital structure ratios, profitability ratios and
liquidity ratios.

7.0 INTRODUCTION
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
All the ratios to be discussed in these categories are based on amounts reported in the balance sheet and
income statement.
7.1. 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.
7.1.1. 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.
7.1.2. 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

59
7.1.3. 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.
7.2. 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).
7.2.1. 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.
7.2.2. 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 recognise that it arises not only from the profit margin on revenue, but also from the effective
use of capital.
7.2.3. 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:
• Net profit for the period ÷ Total equity (capital and reserves)
7.2.4. 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.
7.3. 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
7.3.1 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

60
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).
7.3.2 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 – prepaid expenses) ÷ 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 a 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.
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)

REVIEW QUESTIONS

61
Pamela Traders has supplied you with the following information:
Pamela Traders
Income Statement for the year ended 31 December 2001
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
Pamela Traders
Balance Sheet as at 31 December 2001

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

62
Required:
Calculate the following ratios:
Gross profit as a percentage of sales
Net profit as a percentage of sales
Current ratio
Quick ratio (acid-test ratio)
Debtors turnover
Debtors collection period in days

63
 TOPIC 8

ADDENDUM 622 (A): ADDITIONAL QUESTIONS

QUESTION ONE (42 MARKS)

QUESTION TWO (31 MARKS)

Riaz Sugar Factory of Multan, consigned to Mr. Shahid of Lahore 400 bags of sugar at R25 per bag. They
also paid cartage, freight, etc. R250. The consignor drew on consignee as an advance against the
consignment at 3 months for R6 000 which they discounted at their bank at 5 percent. The consignee sold
off the goods and rendered an account sales showing that the goods realized R12 000, out of which he
deducted his charges amounting to R80 and his commission at 5 percent.

REQUIRED:

Record journal entries in respect of the above transactions in the books of consignor as well as the
consignee.

QUESTION THREE (27 MARKS)

The following information pertains to the Dolphins Diving Club:

Extract from list of balances at 31 March 20.13:

R
Bar purchases 60 000
Bar inventory – 1 April 20.12 5000
Bar sales 100 000
Bar wages 15 000
Crockery and linen at cost – 1 April 20.12 10 000
Furniture at cost price – 1 April 20.12 30 000
General expenses 8 200
Diving fees received 33 900
Equipment at cost 24 000
Vehicles at cost 35 000
Accumulated depreciation – 1 April 20.12:
Furniture 9 000
Equipment 4 800
Vehicles 5 000
Insurance in arrears – 1 April 20.12. 600
Maintenance 20 100

64
 Salaries and wages 48 000
Stationery consumed 6 000
Membership fees received 101 000
Membership fees in arrears – 1 April 20.12 15 000
Membership fees prepaid – 1 April 20.12 20 000
Donation received 2 000

Additional information:
(a) Bar inventory on 31 March 20.13, R 10 000.
(b) At 31 March 20.13 the crockery and linen was valued at R 3 000.
(c) Furniture with a cost price of R 5 000 and accumulated depreciation of R 1 500 on 1 April 20.12 was
sold for R 3 000 on 30 June 20.12. This transaction must still be recorded. (d) Depreciation must be
provided for as follows:
Furniture - 10% per annum on the cost price
Equipment - 20% per annum on the diminishing-balance method
Vehicles - 25% per annum on the diminishing-balance method
(e) Insurance premiums to the amount of R 2 600 was paid during the year and debited to the
general expenses account. An amount of R 1 000 thereof was prepaid insurance premiums. (f)
The club had 190 members during the current financial year. Membership fees amounts to R500
per member per annum. All of the members paid their membership fees for the current year. R 7
500 of the membership fees in arrears on 1 April 20.12 must be written off as irrecoverable.
(g) During the current year 20 new members joined the club. Each paid their entrance fees of R50.
These amounts were erroneously included in the membership fees received, and must be
capitalised.
(h) The salary, R 1 500, of the club secretary for March 20.13 is still due and must be provided for.

REQUIRED:

Prepare the following for Dolphins Diving Club:

3.1 The membership fees account for the year ended 31 March 20.13, properly balanced. (7)

3.2 The income and expenditure statement for the year ended 31 March 20.13. (Show a separate
calculation for the gross profit of the bar.) (20)

QUESTION FOUR: CONSIGNMENTS (15 MARKS)

On 1 March 2001 Murdoch consigned 150 boxes of goods, costing R260 per box, to Face to be sold by him
at a sales commission of 10% and a del credere commission of 5%. The goods were pro forma invoiced at
R300 per box.

65
 Murdoch pays by EFT for the following:
1. Railage R7, 50 per box
2. Insurance R360
3. Packaging R450

He draws a 60-days bill for R25 000 on Face, which he discounts for R24 600. On 31 March Face sends
the following account of sales to Murdoch:

1. Sales:
50 boxes at R380 each for cash
50 boxes at R400 each on credit to Hannibal Limited.
2. Expenses paid:
Printing cost of pamphlets for advertising goods R585
Distribution of pamphlets R240 Delivery cost of
goods sold R225 Commission R?
The end of Murdoch financial year is 31 March.

Required:
1. Show the consignment to Face’s account and Face’s account in the ledger of Murdoch.
2. Show Murdoch’s account in the ledger of Face.

QUESTION FIVE: JOINT VENTURES (25 MARKS)

Jock of Dundee and Pete of Durban enter into a joint venture speculating in sheep. They are to share
profits equally.

2001
June 1 Jock purchased 1 000 sheep and paid R84 000 cash.
16 Pete paid transport charges of R4 000 on receipt of the sheep in Durban.
25 Pete sold 880 sheep for R120 cash each.
He rented grazing land for R400 cash for the remaining sheep.
30 Pete sent Jock an EFT payment for R90 000.
July 8 Jock purchased a further 45 sheep for R90 each and paid for them by EFT.

12 Jock railed the sheep to Durban and paid R1 600 for this by EFT.
15 Pete received the sheep in Durban and transported them to the grazing land at a cost of R700.

27 Pete sold 420 sheep for R45 000 cash.

30 Pete sold the rest of the sheep for cash at R104 each.
Jock and Pete closed the joint venture with a payment by EFT.

66
 Required:
Show the following:
1. The joint venture account in the ledger of Pete.
2. The joint venture account in the ledger of Jock.
3. The memorandum joint venture account/statement.

QUESTION SIX: NON-PROFIT ORGANISATIONS (20 MARKS)

The following information of Wimbledon Tennis Club was made available to you on 30 June 2001:
1. Favourable bank balance at 1 July 2000 amounted to R7 192.
2. The club maintained a constant membership of 130 members. The annual membership fee amounted
to R60 per member. All membership fees were received.
3. Ten tennis courts are hired by the club at R52 per tennis court per month. Due to the Christmas season
the tennis courts are not hired during December.
4. Wages of maintenance staff: R70 per month.
5. R3 000 was received during the year by the club in respect of donations.
6. The annual end of the year dance generated a net income of R1 900.
7. The following expenses were paid during the year:
Telephone R310
Stationery used R74
Sundry expenses R136
Affiliation fees R79
8. An amount of R5 000 was invested in a fixed deposit account at Norway Bank on 30 June 2001 at an
interest rate of 11% per annum.

Required:
Prepare the receipts and payments statement of Wimbledon Tennis Club for the year ended 30 June 2001.

QUESTION SEVEN: BUDGETS (40 MARKS)

FM Manufacturing unglazed plates that are sold in boxes of 50 to restaurants. (1unit = 1 box containing 50
plates)
The material and direct labour used to manufacture 1 unit are as follows:
• Material A 4 kg
• Direct labour 1, 5 hours
The material and direct labour costs are:
• Material A R2, 00 per kg
• Direct labour R8, 00 per hour
Overheads are recovered on a direct labour basis at the rate of R2, 00 per direct labour hour. Expected
sales are as follows:
January 2002 - 500 units
February 2002 - 600 units
March 2002 - 550 units
April 2002 - 600 units

67
The expected selling price is R30, 00 per unit. Closing stock levels should
be retained as follows:
Finished goods: 10% of the following months expected sales
Raw materials: 200 kg

Required:
Prepare the following budgets (by month) for the period January 2002 to March sales:
1. Sales
2. Production
3. Direct labour
4. Labour
5. Factory overheads

QUESTION EIGHT: RATIOS (15 MARKS)

Fifa used vehicles opened a showroom on 1 March 2000 on the corner of Fa and Fi streets
in Fifaland.

A gross profit percentage of 37 ½ % on sales price was maintained. All purchases and sales were on
credit. The perpetual inventory system was in use. Extracts from the accounting records in respect of
the ended 28 February 2001:
R
Sales 120 000
Purchases 90 000
Receipts from debtors 80 000
Creditors 11 000

Required:
Calculate the following in respect of the year ended 28 February 2001:
1. Debtors collection period (in months)
2. Inventory turnover rate (number of times per annum)
3. Creditors' payment period (in days).

68
 TOPIC 9

ADDENDUM 622 (B): TYPICAL TEST QUESTIONS

RICHFIELD

FACULTY OF LEADERSHIP AND BUSINESS ADMINISTRATION

ACCOUNTING 622

2ND SEMESTER NATIONAL FINAL EXAMINATION

This paper consists of 3 questions and 7 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 learner 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 sheet 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) You are required to answer all questions. Rule off after each question.

69
 SUGGESTED TIME REQUIRED TO ANSWER THIS QUESTION PAPER

Number Questions Marks Time In Minutes

20 2
1 Question One 5
55 6
2 Question Two
5
25 3
3 Question Three

Question One (20 Marks)

The following information was obtained from the accounting records of F Fox and J Jackal at 31

March 2009, who are trading as equal partners?

Capital : F Fox 50 000

Capital : J Jackal 60 000

Current account: F Fox (Dr) 2 000

Current account : J Jackal (Cr) 5 000

Interest on long-term loan 4 800

Operating profit before interest 40 430

70
Additional information

Partnership agreement provides for:

• Interest on capital at 9% p.a.
• Interest on current accounts (opening balances) at 7% p.a.
• A managerial salary of R6000 p.a. to J Jackal
• A bonus to F Fox equal to 10% of the distributable profit after the above has been taken into account.

Required:

1.1 Prepare the statement of Comprehensive Income and clearly showing appropriation of income and profit
sharing.

71
The following information was taken from the books of Tyt-pc Ltd on 28 February 2006 after the

Question Two (55 Marks)

Trading account was prepared.

Trial balance on 28 February 2006:
Balance sheet accounts section Debit (R) Credit (R)

Ordinary share capital 700 000

Ordinary share premium 50 000
Retained Income 48 000
Land and buildings 680 000
Equipment 77 000
Motor vehicles 320 000
Accumulated depreciation on equipment 24 000
Accumulated depreciation on motor vehicles 68 800
Mortgage loan: Sevens Bank at 12% p.a. 180 000
Inventory 126 200
Debtors control 55 730
Creditors control 62 000

SARS: PAYE 3 000

SARS: Income tax 40 900
Pension fund 1 800
Provision for bad debts 2 300
Bank 8 600
Cash float 1 000
Petty cash 1 200
Nominal Accounts Section
Commission income 43 700
Salaries and wages (including contributions) 124 700

Rent income 40 200

Discount allowed 2 700
Discount Received 3 200
Profit on sale of asset 600
Insurance 14 000

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 Advertising 22 800
Interest on mortgage loan 16 320
Interest on current account 220
Bad debts 2 600
Stationery 17 480
Other operating expenses 96 240
Dividends on ordinary shares 56 000
Gross Profit 435 550
1 663 370 1 663 370
Adjustments and Additional Information:

1 A debtor, G. Getaway was declared insolvent. A EFT for R860 presenting 40 cents in the rand was
received from his insolvent estate and recorded correctly in the CRJ for February
2006. The balance of his account must be written off.
2 Provide for the outstanding interest on the mortgage loan.
Note: The company renegotiated a new repayment plan on the mortgage loan with the bank.
Effective from March 2006, the mortgage loan will be repaid in monthly instalments of R2 200.

3 Included in the advertising is an amount of R3 000 that was paid to the local newspaper for
advertisement that will appear during March 2006.
4 The profit on sale of asset reflected above is in respect of an old delivery van that was sold on 1 March
2005. The details are as follows:
Cost price R56 000
Selling price R10 000

5 On 31 January 2006 the company undertook general repairs and maintenance of all its equipment at
a cost of R7 000. The amount was paid by EFT but was posted to the Equipment account. Correct the
error.

6 Depreciation is provided on tangible assets as follows:

Equipment: R10 500 for the current financial year
Vehicles: 20% p.a. on the diminishing balance method.

7 The water and electricity account of R790 for February 2006 was only paid on 7 March 2006.
Water and electricity is included in Other operating expenses.
8 The bank statement for February 2006 was only received on 4 March 2006 and the following must be
taken into account:
interest on current account, R300
Bank charges (included in Other operating expenses), R250
An EFT payment received was reversed for R950. This payment was received from a debtor in
settlement of his account less 5% discount.
A debit order for insurance of R1260. This was for insurance for the period 1 February 2006 to 30
April 2006.

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 9 The tenant has occupied part of the buildings since 1 March 2005 at a monthly rental of R3000.
The rent increases by 10% on 1 December each year. Adjust rent income accordingly.

10 According to stock taking on 26 February 2006

Trading Stock to the value of R125 800 was on hand
Stationery of R16 000 was used during the financial year

NOTE: the following transactions took place on 27 and 28 February 2006 after stock taking:
▪ Credit purchases, R12 000
▪ Cash sales R14 000 (cost price R10 200)
▪ Unsatisfactory goods returned to suppliers, R500
These transactions were recorded correctly in the subsidiary journals and posted, but not brought into
account in the stock taking.

11 The directors declared a final dividend of 30 cents per share on 28 February 2006.
12 The total income tax for the year amounted to R45 360.
Required:

2.1 Prepare the Income statement for the year ended, 28 February 2006.

Commence with the Gross Profit for the year. (40)

2.2 Prepare PPE (Tangible assets) note as at 28 February 2006. (15)

NB: Show all necessary workings

Question Three (25 Marks)

FINANCIAL INDICATORS 2006 2005

Current ratio 3.4 : 1 2.3 : 1
Acid test ratio 1.6 : 1 1.1 : 1

Stock turnover 6.8 times 5.3 times

Debt equity ratio 0.49 : 1 0.39 : 1

Return on capital employed 24% 32%

Interest rate on loan is between 11% - 15%
Earnings per share 55 cents 58 cents
Dividends per share 44 cents 38 cents
Return on shareholders’ equity 21% 30%

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Required:

3.1 Comment on the above financial indicators/ratios.

3.2 Debtors are allowed credit terms of 30 days. For the past three years the company has been
experiencing problems with collections. Mentions 5 strategies that the directors could implement
to improve collection from debtors.

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