question 4 - pratiksha's student resource site -...

Accounting 1 A Question Solutions Learning Unit 4

© EDGE Learning Media CC – 3

Question 4.3

(i) & (ii) involves collecting, completing and sorting similar source documents that can be summarised in

the appropriate subsidiary journal.

The following documents should have been batched together and entered into the cashbook receipts:



The following documents should have been batched together and entered into the cashbook payments:

Note: with respect to RCS 5 above, the reversal for cost of sales will be done in the general journal

once the replacement computer has been received from the manufacturer.

The following documents should have been batched together and entered into the debtors journal:



The following documents should have been batched together and entered into the debtors allowances journal:



The following documents should have been batched together and entered into the creditors journal:



The following documents should have been batched together and entered into the creditors allowances journal:



The following documents should have been batched together and entered into the petty cash journal:

The following documents should have been batched together and entered into the general journal:



(iii)

Day Doc. no. Original/ Duplicate

Journal Account (s)

debited Account(s) credited A = O + L

3 CI622 Original CJ Trading inventory (stock)

Creditors control + 32 320.00 +36 844.80

Input VAT + 4 524.80

4 CN22 Original CAJ Creditors control Trading inventory (stock)

- 80.00 - 91.20

Output VAT + 11.20

9 PCV17 Original PCJ Stationery Petty cash - 172.14 - 151.00

Input VAT + 21.14

12 (a) T130 Duplicate DJ Debtors control Sales + 45 600.00 + 40 000.00

Output VAT + 5 600.00

12 (b) T130 Duplicate DJ Cost of sales Trading inventory (stock)

- 25 000.00 - 25 000.00

* 13 RX3 Duplicate DAJ Sales returns Debtors control - 4 560.00 - 4 000.00

Input VAT + 560.00

14 OU12 Original CJ Stationery Creditors control - 190.00 + 216.60

Input VAT + 26.60

15 OC4 Original CAJ Creditors control Stationery + 30.00 - 34.20

Output VAT + 4.20

16 GJ13 Original GJ Debtors control Interest income (a)

+ 456.16 + 456.16 0.00

17 (a) T131 Duplicate DJ Debtors control Sales + 34 656.00 +30 400.00




Day Doc. no. Original/ Duplicate

Journal Account (s)

debited Account(s) credited A = O + L


- 20 000.00 - 20 000.00

19 (a) RX4 Duplicate DAJ Sales returns Debtors control - 8 664.00 - 7 600.00


19 (b) RX4 Duplicate DAJ Trading inventory (stock)

Cost of sales + 5 000.00 + 5 000.00

20 216 Counterfoil CBP Trading inventory (stock)

Bank + 5 000.00

& - 5 700.00

Input VAT + 700.00

22 R246 Duplicate CBR Bank Debtors control +/- 3 000.00

24 (a) 27 Duplicate CBR Bank Sales + 25 080.00 + 22 000.00


^24 (b) 27 Duplicate CBR Cost of sales Trading inventory (stock)

- 15 277.77 - 15 277.77

25 GJ14 Original GJ Drawings Trading inventory (stock)

- 1 000.00 - 1 140.00

Output VAT + 140.00

26 (a) RC 55 Duplicate CBP Sales returns Bank - 12 540.00 - 11 000.00


26 (b) “ “ GJ Trading inventory (stock)

Cost of sales + 7 638.89 + 7 638.89

26 (b) above will only be entered in the general journal once the replacement computer from the manufacturer has arrived.

27 (a) T132 Duplicate DJ Debtors control Sales + 26 676.00 + 23 400.00



- 15 000.00 - 15 000.00

28 D001 Duplicate DJ Debtors control Sales + 342.00 + 300.00

Output VAT + 42.00

29 GJ15 Original GJ Stationery Office equipment - 500.00 - 500.00

* There will be no entry involving cost of sales on day 13, since there was no movement of inventory

(stock).

^ Due to possible rounding differences, an amount of R 15 277.78 will also be accepted.

(a)

R 30 000 x 18.5 % x 30

/365 = R 456.16

Note: In practice, interest is always charged to the nearest day, using the number of days in the year

as a denominator (note that a leap year has 366 days). However, during examinations, you may not

be provided with the exact number of days. For example, you may be provided with information that

reads as follows: ‘charged interest on the overdue account of Josslyn Peters @ 18½ % p.a. for

one month’. The calculations would then be done as follows: R 30 000 x 18.5 % x 1/12 = R 462.50.



Question 4.4

There could be a number of reasons why a company would keep large amounts of petty cash on hand.

Some reasons are legitimate, others are questionable. As facilitator, you need to help learners realise

that the questionable reasons could quite easily outweigh the legitimate ones. Many suppliers prefer to

be paid in hard cash, rather than by means of EFT or cheque, since the latter leaves an audit trail via a

current bank account. In simple terms, if a supplier receives hard cash and uses the cash to buy assets

or pay for expenses (instead of depositing the money in the bank account) – then SARS will have no

record of the cash being received. Such suppliers often offer a cash discount for paying in hard cash

(their argument is that it is better to forfeit 10 % of income by means of a trade discount, rather than to

pay 29 % in taxes). Such businesses often choose not to declare income received from sales when

hard cash is offered as payment. Unfortunately this could be a futile exercise, since the buyer will

normally request a valid tax invoice from the supplier (on which Input VAT may be claimed). SARS can

check whether the supplier has declared the corresponding Output VAT by referring to the original tax

invoice retained by the buyer.

There are legitimate reasons too. Bank charges on cheques can be astronomical. A cheque payment is

also not an immediate means of payment. At most banks a ‘hold’ of seven working days applies to any

cheque banked by the payee. One has to wonder if the security risks involved in keeping large amounts

of cash outweigh the perceived benefits.

Question 4.5

Solutions pertaining to the cashbook receipts:

(i) In layman’s terms the analysis of receipts column can be defined as the ‘till’ or ‘cash register’

column. The purpose of this column is to show that various forms of cash (i.e. hard cash and

cheques) are collected in the cash register first, before these funds are periodically (sometimes

daily) deposited into the bank account. We will therefore refer to the dates and amounts provided

on the bank deposit slips (refer to the end of the given information in Example 4.1). The date will

tell us when the money was deposited. The amount will tell us how much was deposited on this

day.

(ii) The reason why we need an analysis of receipts column is quite simply to make bank

reconciliation possible. Refer to the duplicate bank deposit slip on 5 March 20.7. The R 56 872 is

made up of cash and cheques received on days 4 and 5, including the cheque for R 11 400

received on day 4. Remember that all cash and cheques will be shown on one deposit slip at the

bank, and the bank will only record the total deposit of R 56 872 on day 5. The individual amount

of R 11 400 for the transaction on day 4 will therefore not be displayed separately on the bank

statement. When doing a bank reconciliation (this will be discussed later in the course) we will

compare the amounts in the bank column (not the amounts in the analysis of receipts column)

with the deposits displayed on the bank statement.



(iii) For reasons stated in (ii) above, the amount will not be entered into the analysis of receipts

column. The money did not pass through the cash register first before it was banked – the funds

were deposited directly into the bank account, and there would be a separate bank deposit slip

solely for this deposit (see duplicates of bank deposit slips).

(iv) The main column of the cashbook receipts is the bank column. The main column of any journal is

the column into which the VAT inclusive price of the transaction will be entered. The main column

also represents either all the debits OR all the credits of the particular journal. In the cashbook

receipts, the bank column represents all the debits, because with every transaction that causes

an increase in the balance of the bank account, we will debit the bank account, and credit one or

more other accounts. The accounts to be credited can be numerous, but there will always just be

the one account to be debited: Bank – this is why we call it the ‘main’ column.

When using a perpetual inventory (stock) system, we will make use of a cost of sales account

every time trading inventory (stock) is sold. The reason why this column has been separated from

the rest of the journal is so that you do not get confused with the double entry as displayed in the

CBR. Each column in the cashbook receipts represents a single, not a double, entry, i.e. bank is

debited, services rendered is credited, sales is credited and Output VAT is credited. The

individual accounts listed in the details of sundries will also be credited. The cost of sales column

works differently, though. This column in itself represents a double entry. Cost of sales is debited

AND trading inventory (stock) is credited with the total of this column.

(v) A receipt is not a valid tax invoice, i.e. it does not display VAT. Invoices are only issued when

goods are sold or services are rendered, on which Output VAT must be charged. Capital

contributions, in the form of cash, do not attract VAT. A business would issue a receipt to show

the receipt of cash in cases where there are no VAT implications.

(vi) Yes, it would be possible for the business to use only cash invoices or cash slips. It might not be

that feasible, though. On day 4, for example, the business went to the customer’s premises to

install cupboards. It would not be feasible to take a cash register along; they would rather take an

invoice book along to the designated site. Likewise, for in-store sales it might be easier to record

cash sales by means of a cash register.

(vii) Yes, in cases where cash sales of amounts over R 3 000 take place, a full VAT invoice is

required. In such instances it might be best to issue a cash invoice which displays the VAT

number and address of the recipient of the invoice as well.

(viii) Since the customer has already paid in full we need not keep a record of whom the customer is.



Solutions pertaining to the cashbook payments:

(i) Letsema Furnishers is a furniture retailer. It was clearly stated that the furniture purchased was

for resale purposes. As soon as an item is purchased with the intention of re-selling it as a regular

part of the business, it must be treated as trading inventory (stock). Had the business purchased

the furniture to use it in its reception area, they would have debited furniture, not inventory

(stock). The account that will be used depends on the purpose of the items bought in the

particular business.

(ii) After an EFT has been made via internet banking, there will be a prompt on the website that will

provide the opportunity to print out a slip as proof of payment. It is important to note that such a

document is not a VAT invoice. The original invoice is needed from the supplier to validate an

Input VAT claim. Best practice is to attach the proof of payment to the original invoice and to file

these documents, preferably according to supplier name.

(iii) No, the printer cartridge will generally be used up within the business within one year. In essence,

it is therefore not an asset, but an expense. The business should debit stationery instead with

future purchases of printer cartridges.

(iv) No Input VAT will be claimable if the delivery vehicle is a double cab or a passenger vehicle.

(v) The name of payee is the person or entity the cheque was issued to. Albeit that the cheque was

for drawings, the cheque was not issued in favour of the owner. It was issued in favour of the

entity the owner wanted to pay in his personal capacity.

(vi) VAT is not levied on the rent charged by a lessor to a lessee for the supply of a dwelling under a

lease agreement. This rule also applies to employee housing supplied by an employer, whether a

rental is charged or not. A ‘dwelling’ is basically defined as a building or a part of a building which

is used, or intended to be used, as the residence of a natural person, and includes any fixtures

and fittings enjoyed with the supply of the dwelling. The definition excludes the supply of

‘commercial accommodation’. Where a number of residential dwelling units are let to a person

who in turn sub-lets them to other persons, as long as the nature of the supply under both the

main lease and the sub-leases constitutes the supply of a ‘dwelling’ (or dwellings), the exemption

in terms of section 12(c) of the Act will apply. However, if the nature of the supply under the sub-

lease is different from the main lease, for example if one of the dwellings is let as office premises,

the exemption will not apply and VAT must be levied in respect of the office premises.

This answer is therefore not that clear-cut. Theoretically speaking, the entry would have been

different. SARS would only allow a proportional claim for Input VAT – relative to the floor space

which is used for business purposes. Assume the rental amounted to R 5 000, but that the owner

used only his study in his primary residence to run his business from. To calculate the Input VAT

that may be claimed, the following will be done:



Let’s say the total floor space of the house = 400 m2

Further, let’s assume the total floor space of the study = 40 m2

Then, SARS would only allow an Input VAT claim on 10 % of R 5 000; i.e. the Input VAT

attributable to this rental payment can be calculated as follows:

R 500 x 14/114 = R 61.40

Under this scenario, the required entry in the cashbook payments will be:

Cr Bank with R 5 000

Dr Input VAT R 61.40

Dr Rent expense with R 438.60

Dr Drawings with R 4 500 (R 5 000 – 10 %)

Of course, the problem is that the owner will probably have been charged no VAT in the first

place, since the landlord may have been informed that the house was rented for private use only.

According to the stipulations of the Act, the owner should actually inform the landlord to charge

VAT on the commercial portion of the rental charge, which should result in the entry as shown

above.

(vii) The petty cash imprest amount is the start-up amount for the petty cash box. In this example the

business uses an imprest amount of R 2 000. During March 20.7 a total of R 1 618.62 was taken

from the petty cash box to buy small or ‘petty’ items. To start April with the same amount of

R 2 000, the ‘imprest’ had to be restored by drawing a cheque equal to the total petty cash

outflows for the month of March. To restore the imprest amount, we basically put back into the

box what has been taken out, i.e. R 1 618.62.

(viii) Assessment rates are VAT exempt because it is a tax already. The same applies to the

government levy (see bank charges). The amount debited to rates and taxes would have been

calculated as follows:

Option 1:

Calculate the Input VAT amount: (R 345.45 + R 50.52 + R 482.63) x 14/114 = R 107.90. Then: Bank – Input VAT = Rates and taxes (R 1 156.55 – R 107.90) = R 1 048.65

Option 2:

Add together VAT exclusive amounts:

R 277.95 + 345.45/1.14 + 50.52/1.14 + 482.63/1.14 = R 1 048.65



Solutions pertaining to the petty cash journal:

(i) The details column of the PCJ is used to record exactly what was bought. The reason why the

exact details are required is to prevent petty cash fraud from taking place. If you are responsible

for petty cash, and you take cash from petty cash and pay Thomas Pule’s wages (see day 22),

rather write down his name, so that no recourse can be taken against you should the transaction

ever be queried.

(ii) No. The petty cash voucher itself is NOT a valid VAT invoice. The cash slip (the supporting

document) that displays the supplier’s VAT number should be attached to the petty cash voucher.

General practice is to staple these two documents together. When SARS does a VAT audit, the

petty cash voucher will not be accepted as proof that Input VAT could be claimed. They will

request the actual cash slip.

(iii) The cooldrinks have been bought for entertainment purposes, and according to the VAT Act, no

Input VAT may be claimed on such purchases.

(iv) No, albeit that petrol, diesel and illuminating paraffin are all zero-rated, oil is a standard-rated

supply.

(v) The cellphone itself can be sold for cash. It is not used up within the business within a year and

has a retained value. The pay-as-you go recharge vouchers that will be purchased, will be

debited to the telephone account (an expense) though, since these charges are costs that cannot

be recovered. When a cellphone is purchased on a contract basis, it is slightly more complicated,

since the cost of the actual handset is recovered over a set period (normally two years).

Theoretically speaking, the cash price of the handset should be debited to the equipment account

and a credit should be passed against creditors. As the monthly subscription is paid, the creditors

account should be written off over the two year period. However, since the cost implications of

such an arduous process are negligible, most businesses will merely debit telephone and credit

bank with the monthly payment (which includes the subscription and the call charges). This is the

recommended process to be followed in this course when cellphone charges are paid,

irrespective of whether it is a pay-as-you go or a contract phone (i.e. only the handset in a pay-

as-you-go scenario must be debited to the equipment account). When year-end reporting takes

place, management will have to assess whether the exclusion of any handsets from assets were

material to the disclosure of the business’s fair asset value. If the exclusion was material, the

handsets would have to be disclosed as assets, and any required impairments or depreciation

would have to be entered into the books. This is one of the express requirements of IFRS

(International Financial Reporting Standards) and will be discussed in more detail during Part 3 of

this four part series of courses towards becoming a professional bookkeeper.



(vi) One of the stipulations of the cost concept in accounting is that all costs incurred in getting an

asset into the state ready for what it was intended, must be included in the amount debited to the

asset account. For example, should a business purchase a machine for R 50 000 but incur a

further R 2 000 to install and prime this machine to make it ready for use; then the machinery

account will be debited with R 52 000 not R 50 000. The same applies to inventory (stock). The

purchase price, carriage/railage inwards, import tariffs, customs duties etc. will all be added to the

debit side of the trading inventory (stock) account, and these costs will all end up as cost of sales

when the inventory (stock) is sold.

Solutions pertaining to general questions:

(i) The customer is ‘king’ and should always receive the best copy. The customer should therefore

always receive the original copy of any source document. The vendor/supplier will issue the

original and retain the duplicate, from which entries will be made. Sometimes a bookkeeper will

make entries from a duplicate source document and sometimes he/she will make the entries from

an original – it all depends on whether the business is the vendor or the customer for the

particular transaction.

(ii) When there is no column for the account to be credited.

(iii) When there is no column for the account to be debited.

(iv) The mark-up percentage was given at the start of the question, namely 50 % (mark-up on cost).

This can be verified by comparing the total of the cost of sales column with the total of the sales

column in the CBR. I.e. R 56 411.81 + 50 % = R 84 617.72. The gross margin is the gross profit

divided by the sales revenue. Thus (84 617.72 – 56 411.81) / 84 617.72 x 100/1 = 33 1/3 %. Or:

50/150 x

100/1 = 33

1/3 %

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