basics cash retail business cash transactions -...

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Grade 10 Accounting Notes

SET 2:

Basics

Cash Retail Business

Cash Transactions

Name: ________________________

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Accounting Cycle

The Accounting cycle takes place over 12 months. We refer to this as the Financial Year or the Financial Period. The Accounting process takes place in the following steps:

1. Transactions - events that take place in the business

2. Source Documents - proof that the transaction

took place

3. Journals - recorded in daily total journals - new journal for every month

post to:

4. Ledger Accounts - balanced monthly

5. Trial Balance - drawn up at the end of month 6. Year End Procedures - Adjustments,

Closing transfers, 7. Financial Statements - Income Statement &

Balance Sheet 8. Analysis & Interpretation.

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CLASSIFYING THE ACCOUNTS

It is all very well, knowing which accounts to debit and credit, but we have to know which are our assets, liabilities, income and expense accounts.

LEARN !- this table, which classifies all the accounts into their correct groups.

ASSETS OWNERS EQUITY

LIABILITIES INCOME EXPENSES (not all

normal expenses have been shown)

Land and Buildings Sole Trader: Loan Sales Cost of Sales

Vehicles

Capital Mortgage Bond

Current Income

Debtors Allowances

Equipment

Drawings Creditors Control

Rent Income Rent Expense

Fixed Deposit

Bank Overdraft

Interest Income

Interest Expense

Trading Stock/ Inventory

Accrued Expenses

Interest on current account

Interest on Overdraft

Debtors Control Income Received in Advance

Interest on Fixed deposit

Interest on Loan

Bank Discount Received

Discount Allowed

Cash Float

Creditors for Wages/ Salary

Bad Debts Recovered

Bad Debts

Petty Cash

Pension Fund

Donations (received)

Donations (given)

Savings Account Medical Aid Provision for Bad Debts adjustment (if prov. decreases)

Provision for Bad Debts adjustment (if prov. increases)

Prepaid Expenses Unemployment insurance fund

Accrued Income SARS (PAYE)

Depreciation

Consumable Stores on Hand

Trading stock deficit

Negative Assets:

These have a negative effect

on assets they increase with a cr. and decrease with a dr.

Stationery; Packing Material; Consumable Stores ;

Accumulated Depreciation

Pension fund contributions

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EXERCISE 1. PRICES AND MARK-UPS IGNORE VAT IN THESE CALCULATIONS. 1. AB Stores uses a fixed mark-up % of 25% at all times. Calculate the cost price and the

gross profit made on articles marked at the following selling prices: A. R 250.00 B. R1 700.00 C. R 35.40

2. CD Stores uses a fixed mark-up % of 10% at all times. Calculate the cost price and the

gross profit made on articles marked at the following selling prices: A. R 220.00 B. R1 760.00 C. R 37.40

3. EF Stores uses a secret cost code WHITESUGAR where W= 0. Calculate the cost price

of articles marked at the following selling prices: A. R 330.00 - code IGA / WW B. R1 220.00 - code WAES / SW C. R 50.80 - code TR / TW

4. GH Stores uses a secret cost code PURCHASING where P=l. Calculate the cost price of

articles marked at the following selling prices: R 445.00 - code RPN / SG R3 650.00 - code UINR / GG R 90.30-code AA / HH

5. IJ Stores use the product code method. They issue the following cash slip. Calculate the

gross profit made on this transaction.

The cost prices are as follows: Code 0045054 = R28.00 Code 0056772 = R37.00 Code 0011224 = R 7.50

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BANK TRANSACTIONS: The business’s bank account is known as the CURRENT BANK ACCOUNT. Bank is a current asset, which increases on the debit and decreases on the credit.

BANK

The business records all cash received in the _______ and cash paid, in the ________. Cash is then deposited at the bank, and sometimes withdrawals are made too. Internet Banking Many private individuals and business people make use of internet banking facilities to make payments electronically. This is a safer and more effective means of making payments than cheques as the payment is effected almost immediately (or within one working day). Furthermore, traders are no longer restricted by banking hours as payments can be made after normal banking hours. For the use of this facility businesses need to subscribe to the service - a monthly internet banking fee is charged by the bank. An electronic payment or receipt is verified by referring to the bank statement which can be downloaded from the site. When a trader receives an electronic payment, e.g. the tenant pays his rent electronically; the source document is the bank statement and the transaction is recorded in the Cash Receipts Journal. Similarly, when the trader makes electronic payments, the source document is also the bank statement and an entry is made in the Cash Payments Journal. Bank statement A trader keeps a record of his deposits in the CRJ and his cheque payments are recorded in the CPJ. The bank statement is a copy of the trader’s current bank account in the books of the bank. At the end of the month the business receives a Bank Statement, showing how the Bank has recorded the business’ transactions. At month-end or more frequently, the trader compares his records with the bank statement. The bank statement shows the following:

Name and address of the business

Account number

Opening balance

Deposits (cash, cheques, credit card vouchers)

Withdrawals

Bank charges (service fees, credit card levies, cash deposit fees

Interest on overdraft (the charge levied by the bank if the account is overdrawn)

Dishonoured cheques (cheques which have not been honoured (paid out) by the bank usually due to insufficient funds in the drawer’s account)

Debit orders (usually for fixed payments, e.g. insurance which the bank pays on behalf of the accountholder)

Closing balance

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The Bank Statement is prepared by the Bank and therefore drawn up from their perspective ( their eyes). The business is seen as a creditor to the bank – when the business deposits money, the bank keeps it for the business, and therefore owe it to the business, (as it still belongs to the business). Therefore a deposit on the Bank Statement will appear as a credit, and a withdrawal as a debit.

BANK STATEMENT

Example of a Bank Statement:

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Exercise 2.

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Required: 1 What is your opinion on the safety of on-line banking?

2 What responsibility falls upon the banks’ clients?

3 Assume that, prior to the arrest of the perpetrator, you suspect that one of your close

friends is guilty of the offence explained above. What action would you take? What fears would you have?

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Exercise 3. A simplified bank statement is shown below. Study the bank statement and then answer the questions that follow:

Ned Bank East London Branch 28 February 2009 Home Traders PO Box 15221 Statement Number: 01 East London Account Number: 6019 923 301 5214

Required: 3.1 Explain the entry of R3 500 on the 1st. 3.2 Explain the entry on the 3rd. 3.3 Explain the entry on the 5th. 3.4 Why was the deposit entered on the credit side and the cheque on the debit side? 3.5 What can you say about the entries in the bank account in the general ledger of Home

Traders and on the bank statement? 3.6 Is the final balance as per the bank statement favourable or unfavourable?

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BANK CHARGES, INTEREST ON OVERDRAFT AND INTEREST ON CURRENT ACCOUNT TRANSACTIONS

BANK CHARGES Banks derive income from the fees that they charge their clients. A current / cheque account provides a convenient and efficient means of transferring funds. Banks also offer a wide variety of services to its clients, such as: withdrawals, deposits, current accounts, savings accounts, transferring of funds, debit and stop order facilities. .For this convenience, banks charge service fees, credit card levies and cash deposit fees. These charges are calculated by the bank and deducted from the client’s account. The amounts are reflected on the bank statement. In the above bank statement, the total charges amount to R75 + 29 + 57 = R161.

Services provided by the bank are not free of charge – the bank is a business too! Clients are charged for these services. These charges will appear on the client’s bank statement every month and will include Items such as: deposit fees, levies, cheque book costs, sundry debits, tax levy, service fee etc. These are collectively known as Bank Charges. Bank Charges are an additional expense to the business.

E.G. Received the Bank Statement from Absa Bank. It showed the following amounts

deducted from our account: Cheque book R12 Cash handling Fee R45 Deposit Fee R10 Service Fee R60

Source Document: __________

Journal: ________

A O L

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BANK OVERDRAFT (O/D) AND INTEREST ON OVERDRAFT An overdraft is a loan, which a trader negotiates with his bank. A trader who has an overdraft is able to pay out more than what he has in his account. Prior arrangement is made with the bank for use of the overdraft facility. The bank usually sets an overdraft limit. The amount of the overdraft allowed is usually dependent on the financial status of the business, its credit rating, etc.

If the business’s current account is in overdraft, it means the ________________ have exceeded the _____________. If the current account is in overdraft, it will have a ________ balance in the books of the business, and is therefore a ____________ ____________. Interest is charged on the overdraft. Interest is an important amount for businesses to know as it tells them the cost of borrowing. For this reason, it is not added to bank charges but is recorded in a separate account called Interest on overdraft (Concept of materiality). Interest on Overdraft is an expense to the business. E.G. Received the Bank Statement from Absa Bank and noticed our account had been

debited with: Interest R 105


Journal: ________

A O L

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Exercise 4. Supply the missing details in the bank statement. Indicate an overdraft in brackets.

Ned Bank East London Branch 28 February 2009 Astra Traders PO Box 10321 Statement Number: 01 East London Account Number: 6019 341 278 5214

4.1 Answer the following questions:

(a) Calculate the total bank charges for the month. (b) Give one possible reason why cheque no. 453 does not appear on the bank

statement. (c) Explain why the cheques do not appear in consecutive order. (d) In which journal/s are bank charges and interest on overdraft recorded? (e) State the source document for bank charges. (f) State the source document for interest on overdraft.

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(g) A bank statement can be downloaded from the internet by anyone. Is this statement true? Give reasons.

4.2 A tenant paid his rent electronically into the current bank account of a trader. (a) In which journal would the tenant record this transaction? (b) In which journal would the trader record this transaction? (c) State the source document applicable to the trader.

INTEREST ON CURRENT ACCOUNT If the business’s current account has a favourable balance, i.e. a debit in our books and a credit in the Bank’s books, then the business earns interest on their account. This is known as Interest on Current Account. This is an income to the business. E.G. Received the bank statement and noted that it was credited with interest of R75.


Journal: ________

A O L

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LOANS AND INTEREST TRANSACTIONS NEGOTIATING A LOAN When an owner finances a business, he must determine if he has enough private capital at his disposal. It often happens that he has to obtain a long-term loan to supplement his own capital invested in the business or to expand the business at a later stage. In such a case, the owner will have to apply for a loan from a financial institution. Providing the business can give proof to the bank that they can afford to pay the loan back together with interest and have the necessary collateral (security) they will be granted the loan. Possible examples of collateral (security) would be a bond on the property, surety and insurance policies. After a loan has been negotiated, an agreement stipulating the amount involved, the rate of interest to be paid per annum, as well as the terms of repayment of the loan is signed by both parties. On receipt of the loan, which in today’s day and age is generally via internet transfer. The loan is a long-term / non-current liability, and is usually repaid over a year or longer. Interest must also be paid on the capital amount of the loan (e.g. the amount owing). A loan is also known as a Mortgage Bond or Mortgage Loan.

Taking out a loan: E.G. Jan 1, 2009:

Super Store received a cheque from Absa Bank for R 40 000. The loan had been negotiated for 2 years, at an interest rate of 19% per annum, and is repayable annually in two equal instalments.


Journal: ________

A O L

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Interest on the loan: Interest is charged on the loan at a fixed rate of interest for the period of time that the loan exists, based on the amount outstanding. Example, if a loan of R12 000 is taken at an interest rate of 10% p.a. R1 200 interest will be paid each year or R100 per month. However, if the loan is reduced to R9 000 then the interest will be R900 per annum or R75 per month. Interest on loan is generally capitalised to the Loan account i.e. the amount of interest is added to the loan. In this case, Interest on Loan will be debited and the Loan account credited. However, if interest is not capitalised but paid separately then Interest on Loan will still be debited and Bank or Expenses Payable (if still owing) is credited. Interest on the loan: E.G. 30 June 2009: Issued a cheque to Absa Bank for the first 6 months interest,

R3 800.


Journal: ________

A O L

Repaying a loan The manner in which a loan is to be repaid is stipulated in the loan agreement. It can either be paid in full or it can be paid in instalments. When payments are made, the transaction is entered into the Cash Payments Journal with Bank being credited (asset is decreasing) and the Loan account debited (liability is also decreasing). If the interest had been capitalised, then the amount entered in the Cash Payments Journal would reflect one entry. If the interest is paid separately then two entries would appear in the Cash Payments Journal.

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Repaying a loan: (paying the instalments on the loan) E.G. 31 December 2009:

According to the agreement, the loan is to be repaid annually in two equal instalments. Issued cheque to Absa Bank for the first instalment on the loan, and interest for the past 6 months.


Journal: ________

A O L

Calculating Interest: I = interest P = principal (the amount invested) r = interest rate per annum t = time in years I = P x r x t I = 40 000 x 19 x 6 100 100 12 = 3 800

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FIXED DEPOSITS AND INTEREST TRANSACTIONS FIXED DEPOSIT In the modern business world, there are many investment opportunities. One way of investing (saving) money is in the form of a fixed deposit which can be made at any financial institution. The advantage of placing money in a fixed deposit as against an ordinary savings or current account is that the investor will earn a higher rate of interest. However, the money is invested (tied up) for a period of time e.g. 6 months, 5 years, etc and cannot be withdrawn during this period of time. It can only be withdrawn when the Fixed Deposit has matured (expired). Interest is earned on the Fixed Deposit and this interest can be capitalised i.e. added to the capital sum in which case the Fixed Deposit is debited and the Interest on Fixed Deposit (Income) is credited (Income is increasing). However, the investor can also request that the interest is paid out to them on a regular basis e.g. monthly, quarterly, etc. In this case, an entry will be made in the Cash Receipts Journal with Bank debited (asset is increasing) and interest on fixed deposit credited (income is increasing). Investing in a fixed deposit:

E.G. Jan 1, 2009:

Merri Traders invested R10 000 as a Fixed Deposit in Absa Bank for 1 year at 18% per annum.


Journal: ________

A O L

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Earning Interest on a fixed deposit: E.G. 30 June 2009:

Merri Trades receives the first 6 months interest on the fixed deposit, from Absa Bank.


Journal: ________

A O L

Fixed deposit matures: E.G. 31 December 2009:

Merri Trades receives R 10 900 from Absa Bank, being the repayment of the Fixed Deposit which matured today, together with interest at 18% per annum.


Journal: ________

A O L

Calculating Interest: I = interest P = principal (the amount invested) r = interest rate per annum t = time in years I = P x r x t I = 10 000 x 18 x 6 100 100 12 = 900

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CARRIAGE ON PURCHASES This is an expense which is incurred in purchasing stock and is charged directly to Trading stock. Such expenses increase the value of the trading stock. Examples of such expenses are carriage or any other transport costs incurred to buy the stock, railage, freight, customs duty, import duty. A distinction must be made between ‘buying’ expenses and ‘selling’ expenses.

E.G. 31 December 2009:

Merri Trades pays Speed Services R420 by cheque for the carriage on their latest puchases.


Journal: ________

A O L

CREDIT CARD SALES AND DEBIT CARD SALES Most businesses accept payment for goods and services by credit card or debit card. The majority of consumers use cards to make payments - it eliminates the need to carry large amounts of cash. At the pay point, the card is produced, the cashier swipes it and a voucher showing total purchases is produced. The customer keeps one copy. The trader retains the other copy. At the end of the day, the vouchers are added up and are deposited together with the cash and cheques received for the day. The money for the credit card sales will be transferred directly into the business’s account. From the business point of view, the following need to be noted:

Card sales are regarded as cash sales and are recorded in the Cash Receipts Journal.

The source document for card sales is the bank statement.

The bank charges a levy on each credit card transaction. This levy would appear on the trader’s bank statement and is treated as bank charges. For debit cards, the customer pays the costs.

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Grade 10 Accounting Worksheet 1 : Cash Transactions

Question 1. (35 marks) Required: Analyse the following transactions under the headings Journal, Account Debit,

Account Credit (in the General Ledger), and Amount & Effect on the accounting equation.

Transactions: Example: Paid by cheque for Stationery purchased, R140. 1. Sold goods for cash to G I Joe. Issued invoice no.123, R200 (business uses a 60%

mark-up on cost). 2. Owner withdrew a cheque for his own use, R360. 3. Bought stationery from Trade All Wholesalers, and paid by cheque, R750. 4. A debit entry reflected on our bank statement for interest, R106 5. Took out a loan at Green Bank for R16 000 at 19% interest p/a. payable half-yearly. 6. Bought a computer for cash from I & T Traders, R4 650. 7. Paid interest on the loan for the first six months (see no.6 above). 8. Purchased R1 080 worth of merchandise from CD Suppliers for cash. Issued cheque

R180 to Safe Travel for delivery of the goods. (Two entries). 9. The bank statement reflect service fees of R112, credit card levies of R80 and cash

deposit fee of R45. Question 2. (8 marks) Required: Calculate the total interest earned on the Fixed Deposit for the year

1 March to 28 February 2007. NOTE: Show all workings. Information: 2007, March 1 ......... Invested R60 000 in a Fixed Deposit at 15 % p/a. July 1 ............ Cashed in R12 000 of the fixed deposit.

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Grade 10 Accounting Worksheet 1 : Cash Transactions

Question 1. (35 marks)

No. Journal Account Debit

Account Credit

A O L

1

2

3

4

5

6

7

8

9 Question 2. (8 marks)

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GRADE 10 WORKSHEET 2: CASH TRANSACTIONS AND BASICS ACCOUNTING

QUESTION ONE Enter the correct source document next to the relevant journal in the space provided below: Source Document: Receipt Bank Statement Cheque Counterfoils Bank Statement Cash Register Roll Cash Slip

Source Document Journal

Cash Receipts Journal (CRJ)




Cash Payments Journal (CPJ)

Cash Payments Journal (CPJ)

QUESTION TWO Identify which journal each of the following transactions would be recorded in: Enter the relevant journal in the space provided.

Transaction Journal (write abbreviation eg CRJ etc)

Cash received, cash deposited Bank Charges, Stop orders, Interest on overdraft All payments Drawings of cash by owner Cash received for sales Investing in a Fixed Deposit Repaying a loan Paying for carriage on goods Payments of net wages, salaries and to the funds Receiving interest on a Fixed Deposit Paying interest on a loan The fixed deposit matures Taking out a loan QUESTION THREE Identify the account to be debited and the account to be credited in each of the following transactions. Enter your answer in the table below the transactions. The bank is favourable.

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Transactions: 1. The owner, G Whittles, deposited R 30 000 in to the bank account of the business,

Whittle Stop, as his capital contribution. 2. Purchased a computer from Koshan’s Computers for R7633 and paid by cheque. 3. Paid the monthly insurance premium, R190 to Mutual & Federal. 4. Received R510 from clients for services rendered. 5. Borrowed R50 000 from FNB for 5 years at interest of 10%p.a. 6. Purchased merchandise, R 1100, and stationery, R80, from Brown’s Wholesalers and

paid by cheque. 7. Repaid R1000 on the Loan from FNB. 8. Cash sales of merchandise totalled, R 820. (Cost price R 460). 9. The owner cashed a cheque for R250 for his personal use. 10. Insured building for R60 000, paid insurance premium of R 300 to Hawk Insurance

Brokers by cheque. 11. Received R50 commission income. 12. Invested R 15 000 at 16% p/a on Fixed Deposit at Sandveld Trust, by cheque. 13. Drew cheque R 5 500, for repayment on loan from FNB, R5 000 together with interest. 14. The bank debited Whittle Stop with:

Service fee R 23 Cheque Book Costs R12 Credit card levies R6

15. Paid SA Transport Services for carriage on goods, R85.

No. Account Debit Account Credit Amount

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

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GRADE 10 WORKSHEET 3: Journals and ledger: Justino Distributors

a) Write up the CRJ and CPJ of Justino Distributors for May 20.7. All their products are

marked at 100% on cost. Provide for the following additional columns in the CPJ: Trading stock; Wages; Consumables.

b) Post to the General Ledger.

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Justino Distributors Cash Receipts Journal for May 20.7 CRJ1

Doc no

D Details Fol Analysis

of receipts

Bank Sales Cost of sales

Sundry accounts

Amount Fol Details

Cash Payments Journal for May 20.7 CPJ1

Doc no

D Details Fol Bank Trading stock

Wages Consum-

ables

Sundry accounts

Amount Fol Details

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GENERAL LEDGER OF JUSTINO DISTRIBUTORS BALANCE SHEET ACCOUNTS SECTION

Dr CAPITAL B1 Cr

DRAWINGS B2

VEHICLES B3

EQUIPMENT B4

TRADING STOCK B5

BANK B6

NOMINAL ACCOUNTS SECTION SALES N1

COST OF SALES N2

RENT INCOME N3

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TELEPHONE N4

WATER AND ELECTRICITY N5

BANK CHARGES N6

INTEREST ON OVERDRAFT N7

REPAIRS N8

INSURANCE N9

WAGES N10

CONSUMABLES N11