Chapter 4

Objective test 2 On 20 June 20x3 an entity pays R500 in advance for repairs on its vehicle. The supplier first had to order the spare part that needs to be replaced, so the repairs would be done later. On 5 July 20x3 the supplier informed the entity that the spare part had arrived. The entity took the vehicle in for repairs on 6 July 20x3 and the work was completed on the same day. With reference to the concept of Accrual accounting, explain on which date the repair expense will be recognised.(6 marks)

The accounting equation 3 ASSETS = EQUITY + LIABILITIES INCOME (+) EXPENSES (-)

The accounting equation 4 Assets=Equity+Liabilities DRCRDRCRDRCR

The accounting equation 5 Assets=Equity+Liabilities DRCRDRCRDRCR Income CR Expenses DR

The accounting process 6 Transaction/ event Journal (prime entry) General ledger (accounts) Trial balance & adjustments AFS (Annual financial statements) of: -Profit and loss (P&L) -Statement of financial position (SFP) -Statement of changes in Equity (SCE) -Cash flow statement (C/F) -Notes & policies

T-Account 7 Page 83 -Date, -Name of contra account, -Amount

Journal entry 8 Page 96 -Date, -Account debited (+ F/S) -Account credited (+ F/S), -Amounts -Reason for journal (journal narration/description)

Exercise 9 Indicate the effect (DR and CR) on the accounting equation of the following transactions: 1)Owner contributes R as capital cash. 2)Purchase inventory for R2 000 cash. 3)Pay rent expense R5 000 cash. 4)Obtain loan from Bank for R )Pay water & electricity R1 000 cash.

Owner contributes R as capital cash 10 Assets=Equity+Liabilities DRCRDRCRDRCR (Equity classification: Capital) DR CR Dr Bank (SFP) Cr Capital (SCE)10 000

Purchase inventory for R2 000 cash 11 Assets=Equity+Liabilities DRCRDRCRDRCR DR CR Dr Trade inventories (SFP)2 000 Cr Bank (SFP) 2 000

Pay rent expense R5 000 cash 12 Assets=Equity+Liabilities DRCRDRCRDRCR (Equity classification: Expense) DR CR Dr Rent expense (P&L) Cr Bank (SFP) 2 000

Obtain loan from Bank for R Assets=Equity+Liabilities DRCRDRCRDRCR DR CR Dr Bank (SFP) Cr Loan: Bank (SFP)20 000

Pay water & electricity R1 000 cash 14 Assets=Equity+Liabilities DRCRDRCRDRCR (Equity classification: Expense) DR CR Dr Water and electricity (P&L)1 000 Cr Bank (SFP)1 000

The accounting process 15 Transaction/ event Journal (prime entry) General ledger (accounts) Trial balance & adjustments AFS (Annual financial statements) of: -Profit and loss (P&L) -Statement of financial position (SFP) -Statement of changes in Equity (SCE) -Cash flow statement (C/F) -Notes & policies

Account (Ledger/GL) 16 Bank Tx1 Capital Tx2 Trade inventories Tx3 Rent expense Tx4 Loan: Bank Tx5 Water & electricity Balance cf Balance bd

Example 4.5 – nr 1 17 On 2 January 20.7, the owner made the property that AC Entity utilises available for the exclusive use of the entity. The property was registered in the owner’s name a few days before 2 January The purchase price of the property was R (R for the land and R for the buildings).

Example 4.5 – nr DrCr 2 JanLand (SFP) Buildings (SFP) Capital (SFP) Recognise capital contribution by owner Assets=Liabilities+EquityClassification = Capital

Example 4.5 – nr 2 19 On 2 January 20.7, the owner opened a cheque account for the entity and deposited R in the account.

Example 4.5 – nr DrCr 2 Jan Bank (SFP) Capital (SFP) Recognise capital contribution by the owner Assets= Liabilitie s +EquityClassification =0+ Capital

Example 4.5 – nr 3 21 On 2 January 20.7, furniture and equipment to the amount of R was ordered. The supplier, Payable K, delivered the furniture and equipment on 5 January 20.7 to AC Entity’s premises. The invoice price is R and it was agreed with Payable K to pay the outstanding amount on 30 January 20.7.

Example 4.5 – nr DrCr 5 JanFurniture and equipment (SFP) Payable K (SFP) Recognise furniture and equipment received together with accompanying liability Assets=Liabilities+EquityClassification = + 0

Example 4.5 – nr 4 23 Trade inventories to the amount of R was ordered on 7 January 20.7 and it was agreed with Payable L that the outstanding amount will be paid 30 days after delivery. On 25 January 20.7, Payable L delivered the trade inventories to AC Entity’s premises. The invoice price is R and the invoice reflects that the amount is payable on 24 February 20.7.

Example 4.5 – nr DrCr 25 Jan Trade inventories (SFP) Payable L (SFP) Recognise trade inventories received together with accompanying liability Assets=Liabilities+EquityClassification = + 0

Example 4.5 – nr 5 25 On 30 January 20.7, the amount due to Payable K was paid.

Example 4.5 – nr DrCr 30 JanPayable K (SFP) Bank (SFP) Derecognise Payable K due to settlement of debt Assets=Liabilities+EquityClassification = + 0

Homework 27 -Prepare T-accounts for Example 4.5