Ann Botha

CAPS
3-in-1
CLASS TEXT & STUDY GUIDE
GRADE
Accounting
11
Accounting 3-in-1 Ann Botha

11
CAPS
GRADE 8 - 12
ALL MAJOR SUBJECTS IN Stand a chance to
ENGLISH & AFRIKAANS
WIN
an Apple iPad!
WWW.THEANSWER.CO. ZA www.theanswer.co.za/win
Terms & Conditions apply
Grade 11 Accounting 3-in-1 CAPS
CLASS TEXT & STUDY GUIDE

This Grade 11 Accounting 3-in-1 study guide is the complete, simple solution to the Grade 11 CAPS curriculum. It mentors
you through the course material with comprehensive notes, questions, answers and full exams, allowing you to boost
your understanding and hone your exam technique.

Key features:

• Step-by-step, methodical approach

• Comprehensive notes with worked examples per topic

• Graded questions and answers per topic

• Exam papers and answers with handy hints

The combination of detailed notes, worked examples, clear solutions, tips and focused advice make this book an invaluable
study aid no matter your level of confidence.
 11
GRADE

Accounting
CAPS Ann Botha

3-in-1

THIS CLASS TEXT & STUDY GUIDE INCLUDES

1 Notes per Topic

2 Comprehensive Questions per Topic

3 Suggested Answers per Topic E-Book

available

Plus bonus exam papers and suggested answers

2017 publication | 2019 edition | ISBN: 978-1-920558-33-8  17092021 | TAS

TERM BY TERM OVERVIEW
Unit 3: Reconciliations
Term 1 Unit 4: Tangible/Fixed Assets
Unit 5: Partnerships Unit 1: Ethics
Unit 6: Analysis and Interpretation of Financial Statements & Unit 2: Internal Control
Term 2
Unit 7: Clubs (Non-profit Organisations) - no longer examinable for DBE are continuously incorporated
Unit 8: Cost Accounting in the other units
Term 3 Unit 9: Budgeting (as specified in the CAPS curriculum).
Unit 10: Inventory Systems

Term 4 Unit 11: Value Added Tax (VAT)

CONTENTS
How to do calculations ...................................................................................... i UNIT 2: INTERNAL CONTROL AND INTERNAL AUDIT
Internal control ................................................................................................... 6
NOTES Internal audit ...................................................................................................... 9

UNIT 1: QUICK REVISION OF BASIC CONCEPTS,

GAAP AND ETHICS UNIT 3: RECONCILIATIONS

Five basic concepts you need to know ............................................................. 1 Bank Reconciliation............................................................................................ 10

The purpose of Accounting ............................................................................... 2 Creditor's Reconciliation..................................................................................... 16

The General Ledger
The basic rule of Accounting
The Subsidiary Ledgers UNIT 4: TANGIBLE/FIXED ASSETS
The Subsidiary Journals Revision of Grade 10 ......................................................................................... 18
The Accounting Cycle ....................................................................................... 3 Two ways of calculating Depreciation ................................................................ 19
Transactions and Documents Asset Disposal ................................................................................................... 22
Generally Accepted Accounting Practice (GAAP) ............................................. 4 The Tangible Asset Note.................................................................................... 28
Ethics ................................................................................................................ 5
UNIT 5: PARTNERSHIPS UNIT 10: INVENTORY SYSTEMS
What you need to know ..................................................................................... 30 Perpetual Stock System .................................................................................... 62
Equity accounts in a Partnership Periodic Stock System
What's new in the Financial Statements?.......................................................... 37
Revision of Grade 10......................................................................................... 38
UNIT 11: VALUE ADDED TAX (VAT)
Revision of Grade 10 ........................................................................................ 67
UNIT 6: ANALYSIS AND INTERPRETATION OF
The difference between Invoice based and Receipts based VAT ..................... 68
FINANCIAL STATEMENTS
How to do all the entries for VAT ...................................................................... 69
Revision of Grade 10 Formulae ........................................................................ 42
New Formulae for Grade 11 .............................................................................. 44
Formulae used by Partnerships only ................................................................. 45
QUESTIONS
UNIT 7: CLUBS (NON-PROFIT ORGANISATIONS)
What you need to know ..................................................................................... 46 TOPICS
The Cash Book.................................................................................................. 48 Details of Questions ......................................................................................... 70
No longer
A Statement of Receipts and Payments Topics Questions .............................................................................................. 71
examinable
Ledger Accounts ...............................................................................................
for DBE. 49
Refreshments/Ties/Rugby Jerseys, etc. ............................................................ 50
EXAM QUESTIONS
The Financial Statements of a Club .................................................................. 51
Exam Paper Structure ...................................................................................... 176

Exam questions................................................................................................. 177

UNIT 8: COST ACCOUNTING
Revision of Grade 10......................................................................................... 52
The Break-even Point........................................................................................ 53 Terminology ...................................................................................................... 195

Acceptable Abbreviations.................................................................................. 200

UNIT 9: BUDGETING Alternative Terminology .................................................................................... 201

What you need to know ..................................................................................... 56 Grade 11 Formula Sheet ................................................................................... 201
The Projected Income Statement
A Cash Budget .................................................................................................. 58
Debtors' Collection Schedule ............................................................................ 60 SUGGESTED ANSWERS
Creditors' Payments Schedule .......................................................................... 61 ARE SUPPLIED IN SEPARATE BOOKLET
 UNIT 5: PARTNERSHIPS

WHAT YOU NEED TO KNOW EQUITY ACCOUNTS IN A PARTNERSHIP

What is a partnership? Capital: name of partner (OE+)
A partnership is an agreement between at least 2 people who carry Each partner has his or her own capital account. The balance on this account remains
on business with the aim of making a profit and sharing it. fixed unless the partners agree to an increase in contribution or a withdrawal of some of
Each partner must contribute capital in the form of cash or other it. There are two reasons for this is. Firstly, the partners may have agreed to share profits
assets e.g. vehicles, equipment. in the ratio of their capital balances and any change to capital would change the amount
of profit each would receive. Secondly, any change to the capital, especially a withdrawal,
may change liquidity – the ability of the business to pay its debts.
How is a partnership formed?
Capital always has a credit balance. When a partnership terminates because one of
It is legal to agree to form a partnership orally, but definitely not advisable. It would be
the partners leaves, retires or dies, the business has to pay the capital back.
preferable to go to a lawyer and have him/her draw up a written contract detailing all
aspects which are important and which could give rise to problems later. Drawings: name of partner (OE-)
Each partner has his or her own drawings account. This account reflects everything
What are the advantages of forming a partnership? the partner has taken out of the firm for personal use during the year and always has
In other words - what are the disadvantages of being a sole proprietor? a debit balance as it shows how much money the partner owes the firm.
Up to now the only form of ownership we have been concerned with in Accounting is a
sole proprietor/trader. One person provided all the capital, took all the risks of A new equity account
entrepreneurship and all profit or loss belonged to him or her. However, this business
was limited by the owner's capital, experience and ability to make decisions. Current account: name of partner (OE+ or – if partner naughty!)
Because the capital accounts do not change, a new account called a current account
The advantage of a partnership is that the additional capital that partners provide can
is opened for each partner. This account will ultimately show how much the business
help the business to expand. Responsibilities can be shared and the additional owes the partner i.e. his or her earnings, and how much the partner owes the business,
expertise, experience and opportunity to discuss problems before making decisions i.e. his or her drawings.
should mean that it will be well managed and generate greater profits, even though
they have to be shared. The account should have a credit balance i.e. the business should owe the partner
money. This would mean that the partner has not withdrawn all his or her earnings.
What are the disadvantages of forming a partnership? If the account has a debit (Negative) balance, the partner has drawn more out of the
business than he or she is entitled to. (= Naughty partner!) This amount should be paid
Although decisions should be discussed, each partner is an agent of the business and back as soon as possible as the equity (value) of the business has decreased. It may
can, on his own, make a decision which is legally binding on the partnership and which also cause the business to have liquidity (cash flow) problems as the profit has been
could get it into financial difficulties. taken out in cash.
If the partnership cannot pay its debts i.e. is insolvent, partners are jointly and severally VERY IMPORTANT
liable for them. This means a creditor can sue all the partners together (jointly) or can Whatever a partner takes out of the business during the year, it does not matter whether
sue just one partner separately (severally). In the latter case this partner would have to it is a cheque or petty cash to pay personal expenses; trading stock/stationery/etc.;
pay the debt in full and then recover each partner's share according to their agreement. old equipment or a vehicle (asset disposal); a cheque for his or her monthly salary
If one of the others cannot pay, there is nothing the partner who paid the debt can do
ALWAYS DEBIT DRAWINGS
about it.
Copyright © The Answer Series: Photocopying of this material is illegal 30 NOTES – UNIT 5: Partnerships
A new final account The following accounts are only used at the end of the year to record the
APPROPRIATE appropriation of profit to the partners :
Appropriation account to share
Salary: name of partner (distribution of profit I-)
The net profit is calculated in the Profit and loss account in exactly the same way as it If all partners work in the business, they will receive salaries. There will be a separate
is for a sole proprietor. It is then transferred to an Appropriation account so that it can salary account for each partner as they could earn different amounts.
be distributed/shared between the partners according to the agreement.
At the end of the accounting period each salary account is debited with the amount
Four ways of appropriating the net profit agreed upon for the year and the Current account is credited. The salary account is
It is possible that the partners do not contribute the same amount of capital or take on immediately closed to the Appropriation account.
the same responsibility or work for the same number of hours in the partnership. They
have to be rewarded for the contribution they did make or for the work done. This entry would be made even if the partnership had made a net loss.

Once the net profit for the year has been calculated, in exactly the same way as it It is very important to remember that even if you are told that the partner draws a salary
would be for a sole proprietor, it will be shared according to the every month, he is just drawing cash. Debit his Drawings account and credit Bank.
partnership agreement. This agreement could provide for a PRIMARY
PRIMARY DISTRIBUTION in the following three ways: first
Interest on capital distribution of profit I-)
1. Salaries – to remunerate (pay) partners who work in the business. There is only one account for this as all partners earn the same rate of interest on
2. Interest on capital – to reward all partners for investing in the business on the basis that their investment.
if they had invested their money in a bank they would have earned interest.
At the end of the accounting period this account is debited with the amount calculated
3. Bonus – to reward a partner for exceptional work done during the year. and each partner's current account is credited. The interest on capital account is
immediately closed to the Appropriation account.
The FINAL DISTRIBUTION will be the:
This entry would be made even if the partnership had made a net loss.
4. Share of the remaining profits to reward all partners for taking the risk of
entrepreneurship.
You will always be told how the remaining profit is to be shared. It may be any Bonus to partners (distribution of profit I-)
ratio they agree on e.g. 6 : 1 or it could be according to the ratio of capital invested, If a partner does exceptional work for the business, that is, over and above what is
e.g. A invests R250 000 and B invests R125 000. The profits will be shared in the normal, that partner may be awarded a bonus.
ratio 2: 1.
For example, if he or she was instrumental in concluding a new contract on behalf of
How to do this the partnership, the partners may agree to award a bonus. If the partner has worked in
 Cross off the noughts that are common to both figures 250 000 : 125 000. the business full time and caused sales to improve, a percentage of the net profit
You now have 250 : 125. You could divide the bigger number by the smaller may be awarded as a bonus. This entry would NOT be made if there is no profit left
and if your answer is a whole number - that's it! 250/125 = 2. The ratio is after distributing the salaries and the interest on capital.
2 : 1 because 250 000 is twice as big as 125 000.
The account is debited with the amount of the bonus and the
 If you do not get a whole number e.g. 150 000 : 100 000 = 15/10 = 1,5 bring the Current account of the partner is credited. The Partner's bonus
15 and the 10 down to their lowest common denominator. Both can be divided by account is then closed to the Appropriation account.
5. This gives 3 : 2. Divide the profit by 5 (because 3 + 2 = 5) and then multiply by
3 and then by 2 to get the two answers. Make sure they equal the total profit
available to be shared.
Copyright © The Answer Series: Photocopying of this material is illegal 31 NOTES – UNIT 5: Partnerships
WORKED EXAMPLE 1 WORKED EXAMPLE 2 – What happens after the net profit
Capital contributions has been calculated at year-end

A Alpha and B Beta entered into a partnership agreement on 1 January 2017. 1. Sharing the profit – salaries
The agreement states that: Delta Deli made a profit of R592 000 for the year ended 31 December 2017.
The partnership agreement also states that both partners are entitled to a salary
1. A Alpha will transfer R200 000 directly into the bank as her capital investment.
of R180 000 per annum.
B Beta will transfer R50 000 into the bank and his delivery vehicle, valued at
R150 000 into the partnership's name, as his capital investment.
GENERAL JOURNAL OF DELTA DELI – DECEMBER 2017 GJ12
2. Profits/losses will be shared pro rata to capital (which in this case means equally). 31 Salary: A Alpha (G-) N30 180 000
Salary: B Beta (G-) N31 180 000
CASH RECEIPTS JOURNAL OF DELTA DELI – JANUARY 2017 CRJ1 Current account: A Alpha (OE+) B3 180 000
SUNDRIES Current account: B Beta (OE+) B4 180 000
DOC DAY DETAILS BANK
AMOUNT FOL DETAILS
salaries for year
1 1 A Alpha 200 000 200 000 B1 Capital: A Alpha
31 Appropriation (G-) N34 360 000
2 B Beta 50 000 50 000 B2 Capital: B Beta
Salary: A Alpha (G-) - B3 180 000

GENERAL JOURNAL OF DELTA DELI – JANUARY 2017 GJ1 Salary: B Beta (G-) - B4 180 000
closing transfers
1 Vehicles (A+) B.. 150 000
Capital: Beta (OE+) B2 150 000 GENERAL LEDGER OF DELTA DELI
delivery van introduced as capital
– CURRENT ACCOUNT: A ALPHA (OE) + B3
2017
GENERAL LEDGER OF DELTA DELI Dec 31 Salary: Alpha GJ12 180 000

– CAPITAL: A ALPHA (OE) + B1 – CURRENT ACCOUNT: B BETA (OE) + B4

2017 2017
Jan 1 Bank CRJ1 200 000 Dec 31 Salary: Beta GJ12 180 000

– CAPITAL: B BETA (OE) + B2 + SALARY: A ALPHA (G-) – N30

2017 2017 Current account: 2017
Jan 1 Bank CRJ1 50 000 Dec 31 Alpha GJ12 180 000 Dec 31 Appropriation GJ12 180 000

Vehicles GJ1 150 000 + SALARY: B BETA (G-) – N31

2017 Current account: 2017
NOTE : Their capital contributions are the same so they will share profits in the ratio Dec 31 Beta GJ12 180 000 Dec 31 Appropriation GJ12 180 000
of 1 : 1, that is, equally. + APPROPRIATION (G) – N34
No additional capital may be invested or any existing capital withdrawn 2017 2017
without the agreement of the other partner as it would change this ratio. Dec 31 Salary: Alpha GJ12 180 000 Dec 31 Profit and loss
Salary: Beta GJ12 180 000 (net profit) 592 000

Copyright © The Answer Series: Photocopying of this material is illegal 32 NOTES – UNIT 5: Partnerships
2. Sharing the profit – interest on capital 3. Sharing the profit – bonus to partner/s
The partnership agreement also states that partners are entitled to interest on The partnership agreement stated that B Beta will be entitled to a bonus of 10%
capital at 8% p.a. of the net profit after salaries and interest have been deducted as he is responsible
for the marketing of the business. (If there is no profit left, this entry will fall away.)
GENERAL JOURNAL OF DELTA DELI – DECEMBER 2017 GJ12
CALCULATION :
31 Interest on capital (G-) N32 32 000
The net profit is R592 000
Current account: A Alpha (OE+) B3 16 000 Out of this we have distributed Salaries totalling R 360 000
Current account: B Beta (OE+) B4 16 000 and Interest on capital R 32 000 392 000
interest on capital calculated at 8% p.a. which leaves 200 000
31 Appropriation (G-) N34 32 000 The bonus will be 10% of R200 000 = R20 000.
Interest on capital (G-) - N32 32 000
closing transfer GENERAL JOURNAL OF DELTA DELI – DECEMBER 2017 GJ12
31 Partner's bonus (G-) N33 20 000
GENERAL LEDGER OF DELTA DELI Current account: B Beta (OE+) B4 20 000
bonus to Beta at 10% of remaining profit
– CURRENT ACCOUNT: A ALPHA (OE) + B3
2017 31 Appropriation (G-) N34 20 000
Dec 31 . . . . . . . . . . . . . . GJ12 Partner's bonus (G-) - B3 20 000
Interest on capital GJ12 16 000 closing transfer

– CURRENT ACCOUNT: B BETA (OE) + B4

GENERAL LEDGER OF DELTA DELI
2017
Dec 31 . . . . . . . . . . . . . . GJ12 – CURRENT ACCOUNT: B BETA (OE) + B4
Interest on capital GJ12 16 000 2017
Dec 31 . . . . . . . . . . . . . .
+ INTEREST ON CAPITAL (G-) – N32 ..............
2017 2017 Partner's bonus GJ12 20 000
Dec 31 Current account: Dec 31 Appropriation 32 000
Alpha GJ12 16 000 + PARTNER'S BONUS (G-) – N33
Current account: 2017 Current account: 2017
Dec 31 Beta GJ12 20 000 Dec 31 Appropriation GJ12 20 000
Beta GJ12 16 000
+ APPROPRIATION (G) – N34
+ APPROPRIATION (G) – N34 2017 2017
2017 2017 Dec 31 . . . . . . . . . . . . . . Dec 31 Profit and loss
Dec 31 . . . . . . . . . . . . . . Dec 31 Profit and loss
.............. (net profit) 592 000
.............. (net profit) 592 000
..............
Interest on capital GJ12 32 000
Partner's bonus GJ12 20 000

Copyright © The Answer Series: Photocopying of this material is illegal 33 NOTES – UNIT 5: Partnerships
4. Share of the remaining profit WORKED EXAMPLE 3 – The last entry for the year:
The remainder of the net profit must be shared according to the agreement. close Drawings to Current accounts
CALCULATION :
The following equity accounts are still in the ledger :
The net profit is R592 000. Out of this we have distributed :
Salaries R 360 000 + Interest on capital R32 000 + Bonus R20 000 = R412 000 + DRAWINGS: A ALPHA (OE-) – B5
which leaves R180 000 to be share equally. (See 2. on page 32) 2017 2017
Dec 1 Total b/f 280 800 Dec 31 Current account:
GENERAL JOURNAL OF DELTA DELI – DECEMBER 2017 GJ12 Dec 31 Bank CPJ12 18 000 Alpha GJ12 306 000
31 Appropriation (G-) N34 180 000 Petty cash PCJ12 1 000
Current account: A Alpha (OE+) B3 90 000 Trading stock GJ12 6 200
Current account: B Beta (OE+) B4 90 000 306 000 306 000
remaining profit shared equally
+ DRAWINGS: B BETA (OE-) – B6
GENERAL LEDGER OF DELTA DELI 2017 2017
Dec 1 Total b/f 125 500 Dec 31 Current account:
– CURRENT ACCOUNT: A ALPHA (OE) + B3
Dec 31 Bank CPJ12 42 500 Beta GJ12 180 000
2017
Dec 31 Salary: Alpha GJ12 180 000 Petty cash PCJ12 5 000
Interest on capital GJ12 16 000 Trading stock GJ12 11 500
Appropriation GJ12 90 000 180 000 180 000

– CURRENT ACCOUNT: B BETA (OE) + B4

2017
These accounts must be closed to the Current accounts by means of a journal entry.
Dec 31 Salary: Beta GJ12 180 000
Interest on capital GJ12 16 000 GENERAL JOURNAL OF DELTA DELI – DECEMBER 2017 GJ12
Partner's bonus GJ12 20 000 31 Current account: A Alpha (OE-) B3 306 000
Appropriation GJ12 90 000 Current account: B Beta (OE-) B4 180 000
Drawings: A Alpha (OE+) 306 000
+ APPROPRIATION (G) – N35
Drawings: B Beta (OE+) 180 000
2017 2017
Dec 31 Salary: A Alpha GJ12 180 000 Dec 31 Profit and loss transfer of balances
Salary: B Beta GJ12 180 000 (net profit) 592 000
Interest on capital GJ12 32 000

δelta δeli
Partner's bonus GJ12 20 000
Current a/c: Alpha GJ12 90 000
Current a/c: Beta GJ12 90 000
592 000 592 000

Copyright © The Answer Series: Photocopying of this material is illegal 34 NOTES – UNIT 5: Partnerships
The Current accounts Comment on the Current Accounts
You will notice that Alpha has a debit balance on her Current account and Beta has a
The Current accounts look this this after Drawings has been closed off: credit balance on his.

GENERAL LEDGER OF DELTA DELI Beta is a 'model' partner as he has only withdrawn the equivalent of his salary.
He could have taken more. His R126 000 credit balance means he has provided the
– CURRENT ACCOUNT: A ALPHA (OE) + B3
partnership with more funds to work with in the future.
2017 2017
Dec 31 Drawings: Alpha GJ12 306 000 Dec 31 Salary: Alpha GJ12 180 000
A current account should have a credit balance which means that the partner has not
Interest on withdrawn all earnings for the year. A nil balance would perhaps be acceptable as it
capital GJ12 16 000 would mean the partner withdrew all that he or she earned, but no more.
Appropriation (S) GJ12 90 000
Balance c/d 20 000
Alpha's debit balance is unacceptable. She earned R286 000 this year, but withdrew
R306 000 which means she is financing some of her personal household expenditure
306 000 306 000 from Delta Deli's money.
2018
Jan 1 Balance b/d 20 000 She should pay the R20 000 back as soon as possible or draw R20 000 less on her
January 2018 salary.
– CURRENT ACCOUNT: B BETA (OE) + B4
2017 2017
Dec 31 Drawings: Beta GJ12 180 000 Dec 31 Salary: Beta GJ12 180 000 Effect of year-end entries on the Accounting Equation
Balance c/d 126 000 Interest on
capital GJ12 16 000 Account debited Account credited A OE L

Partner's Bonus GJ12 20 000 Salary: A Alpha Current account: A Alpha 0 +/- 0
Appropriation (S) GJ12 90 000 Interest on capital Current account: A Alpha 0 +/- 0
306 000 306 000 Appropriation Current account: A Alpha 0 +/- 0
2018
Jan 1 Balance b/d 126 000 Drawings: A Alpha Bank / Trading stock/ etc. - - 0

It is easy to remember if you think of partnerships as the 'S I B S' section.

Now do QUESTION 31 on page 97.
All one needs to remember is how to share the profit.
The main purpose of this question is to remember that the accounts for Capital and
Salaries +
Drawings, Current account and Salary must always have ':name of partner '.
Interest on capital +
partner's Bonus +
Then do QUESTION 32 on page 98, to make sure that you have understood the only
Share of remaining profit (i.e. appropriate)
entries which make a partnership different to a sole trader.
(the share of profit will be called Current account in the Appropriation
account and Appropriation in the Current account)

Copyright © The Answer Series: Photocopying of this material is illegal 35 NOTES – UNIT 5: Partnerships
How to do the Ledger accounts – Step by Step SALARIES
Read the question carefully: is the salary for one year or one month?
Use the information below taken from the accounting records of Kong's salary is monthly so multiply by 12 = R138 400. ALWAYS ENTER THE
King Kong & Co, with partners M King and P Kong, to draw up and balance or close SALARY FOR 12 MONTHS. It does not matter whether it has been paid or not –
the accounts given on 31 December 2017. the Drawings account will take care of it.

INFORMATION
1. Capital (31 December 2017): M King, R416 000; P Kong, R208 000. INTEREST ON CAPITAL
If the capital or the interest rate was changed during the year you will have to do
2. The partnership agreement makes provision for the following: 2 calculations for one or both of the partners.
2.1 Salaries are to be provided for as follows: M King 138 400 p.a. and In this case Kong's capital changed. At end of year it is R208 000 (see date) so it
P Kong R13 500 p.m. His December salary has not been paid. must have been R150 000 at the beginning (208 000 - 58 000 increase).
Capital (beginning): 150 000 % 12% % ½ = 9 000
2.2 Interest must be calculated on capital at 12% p.a.
Capital (end) 208 000 % 12% % ½ = 12 480 21 480
Kong had increased his capital by R58 000 on 1 July 2017. Capital King 416 000 % 12% = 49 920
2.3 Kong is to receive a bonus of 12% of the net profit after salaries and interest R71 400
have been deducted.
2.4 The remaining profit is to be shared in proportion to capital at end of year. PARTNER'S BONUS
The bonus is often given, but this one is more interesting.
GENERAL LEDGER OF KING KONG & CO
Follow the instructions:
– CURRENT ACCOUNT: P KONG (OE) + 521 800 – 371 800 (138 400 + 162 000 S + 71 400 I) = 150 000.
Balance b/d 16 864 Salary: P Kong Now calculate 12% of this i.e. R18 000.
Drawings: Kong 190 882 Interest on capital
Balance c/d 87 654 Partner's Bonus
SHARE OF REMAINING PROFIT
Appropriation (S) The first/primary distribution of profit has been made,
295 400 295 400 i.e. salaries + interest on capital adding up to R371 800.
Balance b/d 87 654 + Bonus of R 18 000 = R389 800
Subtract this from the net profit of R521 800
– APPROPRIATION (I/G) + The remaining profit to be shared is R132 000
Salary: M King Profit and loss 521 800 Now find the instruction on how to share profits. (It is always given – sometimes in
the first sentence!) If it is according to capital bring these balances down to their
Salary: P Kong
lowest common denominator:
Interest on capital 416 000 : 208 000 = 2 : 1. (cancel three 0's & divide 416 by 208 = 2)
Partner's Bonus A ratio of 2 : 1 means you must divide the remaining profit by 3.
Current a/c: M King (S 1/3) One partner will get ⅓ % 132 000 and the other ⅔ % 132 000.

Current a/c: P Kong (S 1/3)

521 800 521 800 NB: When you have finished the Appropriation a/c it closes. The Current a/c must be balanced.

You must finish the Appropriation account before you can finish the Current account. Now do QUESTIONS 33 to 35 on pages 99 to 101.
Copyright © The Answer Series: Photocopying of this material is illegal 36 NOTES – UNIT 5: Partnerships
 WHAT'S NEW IN THE FINANCIAL STATEMENTS? STRAWBERRY SUPERMARKET
NOTES TO FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2017
The Notes to the Financial Statements are almost the same – except that after the CAPITAL S STRAW B BERRY TOTAL
Note for Capital is a Note for Current accounts.
Balance at beginning of year 4 170 000 110 000 280 000
The Balance Sheet or Statement of Financial Position, as is it now called, is the
Additional capital introduced [1] 3 40 000 40 000
same as that of a sole proprietor, except under Equity there are two items :
Capital and Current accounts. Decrease in capital [1] 2 (20 000) (20 000)
Balance at end of year 1 150 000 150 000 300 000
New Equity Notes to Financial Statements
CURRENT ACCOUNTS S STRAW B BERRY TOTAL
This information was taken from the books of Strawberry Supermarket on Net profit per Statement of
30 June 2017, the last day of the financial period. The partners are S Straw and Comprehensive Income  10 219 400 222 200 441 600
B Berry. Use this to complete the Equity Notes to the Financial Statements. Partners' salaries (S) 5 160 000 184 000 344 000

INFORMATION Interest on capital (I) 6 12 400 11 200 23 600

1. On 1 October 2016 S Straw had decreased his capital by R20 000 Partner's bonus (B) 7 20 000 20 000
and B Berry had increased his capital by R40 000. Primary distribution of profit 8 192 400 195 200 387 600

2. Partners' Current accounts extracted from the ledger: Final distribution of profit (S) 9 27 000 27 000 54 000

GENERAL LEDGER OF STRAWBERRY SUPERMARKET Drawings for year 11  (170 000) (190 000) (360 000)
CURRENT ACCOUNT: S STRAW Retained income for year 12  49 400 32 200 81 600
2016 2017
Jul 1 Balance b/d 5 000 Jun 30 Salary: S Straw 160 000 Balance at beginning of year 13  (5 000) (7 000) (12 000)
2017 Interest on Capital 12 400 Balance at end of year 14  44 400 25 200 69 600
Jun 30 Drawings: S Straw 170 000 Partner's bonus 20 000
Balance c/d 44 400 Appropriation (S) 27 000
HOW TO DO THESE NOTES
219 400 219 400
Jul 1 Balance b/d 44 400 1. Complete the Capital Note first. The balances have been entered, but
be careful – they are the end figures. Use information no 1 and work
CURRENT ACCOUNT: B BERRY backwards to find the opening balances i.e. 1 + 2 - 3 = 4
2016 2017 2. Follow the words and the numbers to complete the Current account note.
July 1 Balance b/d 7 000 June 30 Salary: B Berry 184 000 5 + 6 + 7 = 8 and 8 + 9 = 10 and 10 – 11 = 12 and 12 + 13 = 14
2017 Interest on Capital 11 200
Jun 30 Drawings: B Berry 190 000 Appropriation (S) 27 000 3. Be sure that each time you sub-total (add i.e. lines 8, 10, 12, 14)
Balance c/d 25 200 Straw's column + Berry's column = Total column
222 200 222 200 Now LEARN THE WORDING – it does not change.
Jul 1 Balance b/d 25 200

The Income Statement is now called

HINT: All the 'd' words are negative – debit balance on current account
Statement of Comprehensive Income in practice, decrease in capital and drawings
but it may be called either in these notes.
Now do QUESTIONS 36 to 38 on pages 102 to 104.
Copyright © The Answer Series: Photocopying of this material is illegal 37 NOTES – UNIT 5: Partnerships
 UNIT 6: ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS
Having learnt how to prepare financial statements, we now come to the reason why It is important that :
we did everything as accurately as possible. We are going to interpret the financial  the profit made by the business provides each owner with a reasonable return on
statements to determine whether the business is solvent, profitable and liquid. the capital they invested. This return must be greater than the interest they would
have earned if they had invested their money in a financial institution. They are
Although certain conclusions can be made by studying these statements, meaningful
taking the risk of entrepreneurship and must be rewarded for this.
information is only obtained by comparing them with the financial statements of
previous years and, if possible, with the financial statements of similar businesses.  some of this profit is retained in the business so that:
 it can cope with changing circumstances and assets can be replaced when they wear
The Financial Statements are of interest to: out. This will enable the business to be sustainable and even grow its market share.
 the partners who want to know how much they have earned on their  it always has sufficient cash available to pay its debts on time, take advantage of
investment and whether it is worthwhile continuing in this special business opportunities and still be competitive. If the partners take all the
business profit out in cash the business may not be able to maintain its good reputation and
position in the market.
 the bank manager who wants to be sure that the overdraft or loan is secure
 the loan holder to ensure that it will get its money back This analysis and interpretation must be done every year so that any warning signs of
things going wrong can be identified and the necessary steps can be taken as soon as
 the trade union which wants to ensure that adequate wages are being paid to possible to manage the business more effectively.
the employees
 the taxman who works out how much personal tax the partners must pay on REVISION OF GRADE 10 FORMULAE
their earnings
Solvency
 anyone interested in becoming a partner in the business or lending it
money
1. solvency ratio = total assets : total liabilities

The analysis tests three aspects of the business This shows whether the total assets of the business are able to pay all its debts.
Solvency The answer will be a ratio and must, of course, be at least 1 : 1. (Some of us might like
the answer to be 1000 000 : 1, that is, if we want to be millionaires!)
Determines whether the business can pay all its debts by showing that the total of all
the assets is greater than the total of all the liabilities. Anything less than 1 : 1 would mean the partnership is insolvent. It could be liquidated
which means all the assets will be converted into cash i.e. sold.
Profitability Any debts not paid from the proceeds of this sale will have to be paid by the partners
Measures whether the business was successful in making a profit and controlling its personally as they are jointly and severally liable for the debts. A creditor can sue
expenses in this financial period. both of them together (jointly) or choose the richer one and sue him or her only
(severally). This partner would then sue the other partner for his share of the debt.
Liquidity If the poorer partner cannot repay, the richer partner loses out. This is a serious
Shows the ability of the business to pay its current/short-term liabilities using its disadvantage of forming a partnership.
current/short-term assets.
In Grade 12 you will learn that it is safer to form a company.
Copyright © The Answer Series: Photocopying of this material is illegal 42 NOTES – UNIT 6: Analysis and Interpretation of Financial Statements
Profitability 6. operating profit on sales =
operating profit × 100
sales
gross profit × 100
2. gross profit on cost of sales = This shows what percentage of the selling price is retained as operating profit.
cost of sales
Compare it to last year to see the trend. It is a useful indicator of efficiency as it does
This answer should be the percentage mark-up used. For example, it is the policy of not take interest income and interest expense into consideration.
the business to use a mark-up of 50% on cost. If this calculation at the year-end gives
an answer of 49,2%, the partners know that the mark-up has not been achieved and
must investigate the problem.
Liquidity

When will the mark-up not be achieved? 7. current ratio = current assets : current liabilities
The partners know that the mark-up will not be achieved if :
 the business has a sale and marks down certain prices This answer will be in the form of a ratio e.g. x,x : 1. Always read the question to find
 the business advertises that it will meet the price of any competitor out whether to calculate the answer to one decimal place or two.
 a special discount is allowed – the business allows a customer to pay less than the It shows whether the business is able to pay its current debts. The prudent approach is
marked price. to maintain a ratio of 2 : 1, i.e. if current assets total R20 000, liabilities should only total
BUT R10 000. There are a few big businesses in practice that do not use this approach as
they have quick and easy access to borrowing money on a short term basis. However,
The partners will not know that the mark-up is not being achieved when:
we are going to keep to this ratio especially after the financial trouble that so many
 it was incorrectly calculated or businesses are in because of not adhering to prudent principles.
 the selling price was incorrectly marked on the goods and they were sold at this
incorrect price. The interesting thing is that the answer must be 2 : 1 or a bit over.
NOT 1,5 : 1 and certainly NOT 4 : 1!
gross profit × 100 Let's go through the logic keeping it very simple i.e. not worrying about any prepaid and
3. gross profit on sales =
sales accrued amounts.
This answer shows the percentage gross profit earned every time the business sells What would cause the current ratio to be 4 : 1?
stock. For example, if this percentage is 50% and sales/turnover is R1 000, the gross 1. Too much inventory
profit must be R500. This percentage has to be high as the profit earned, the R500,
must be big enough to cover all the operating expenses incurred in selling that item. Is it a good idea to have a lot of trading stock? Definitely not!
The reasons
net profit × 100  Not all stock will be sold. Anyone dealing in clothing, televisions, CDs,
4. net profit on sales = cell phones etc. knows that these go out of fashion or out of date or become
sales
obsolete as technology changes. In certain fields this can happen very quickly.
This shows what percentage of the selling price is retained as net profit after all operating  The greater the quantity of stock on the shelves and in the
expenses, interest income and interest expense have been taken into account. storeroom, the greater is the risk of theft. This means
extra insurance has to be paid.
operating expenses × 100
5. operating expenses on sales =  More storage space and more staff to control and handle the
sales
extra items may be needed. This causes an increase in costs.
This shows what percentage of the selling price is used to cover expenses.  It is actually the partners' capital that is sitting on the shelves. It is not earning any
Compare this to last year to see whether expenses are being efficiently controlled. profit while there. Instead it is costing money.
Copyright © The Answer Series: Photocopying of this material is illegal 43 NOTES – UNIT 6: Analysis and Interpretation of Financial Statements
2. A large amount owing by debtors
NEW FORMULAE FOR GRADE 11
Is this not good for business? Do we not want as many debtors as possible?
No, because: Liquidity (continued)
 an increase in the number of debtors' accounts may require the number
of staff to be increased to cope with all the administration (telephone
calls, stationery) and accounting which would increase costs 9. stock turnover rate = cost of sales
average inventory
 the greater the number of debtors or the amount that they owe, the greater is the average inventory = ½ (last year's closing stock + this year's closing stock)
risk of bad debts and increased legal fees
 the business's money is then sitting in the debtors' bank accounts, which means This answer will be quoted as x,x times per year. Always read the question to find out
the partners may need to invest more capital to replenish stock. whether to calculate the answer to one decimal place or two.

The answer should be as high as possible, but will depend on what type of stock the
3. Too much cash
business trades in. For example, if it is a cake shop we would hope it would be
Can anyone have too much money in the bank? 365 times a year (or very close to it) minus the days the shop is closed. If it sells tinned
Yes! We have to remember that this is idle money. goods, the turnover rate may be 4 times a year as the product is not perishable. If it
It earns little or no interest. If the partners want a good return on their capital, the sells Ferrari's it may be 2,5 times a year as expensive, luxury items are not sold very
business cannot afford to have assets that are not working to make a profit. often. Do notice if the question tells you what is being sold.

If the same shop is selling cakes and tinned goods, the rate of turnover may be 3,2 but
8. acid test ratio = current assets - inventories : current liabilities this means nothing except when compared to last year. The answer must always be as
high as or, ideally, higher than last year.
This answer will be in the form of a ratio e.g. x,x : 1. Always read the question to find
out whether to calculate the answer to one decimal place or two.
average inventory × 12 or 365
It shows whether the business can pay its current commitments without having to sell 10. stock holding period =
cost of sales
any inventory. The answer should be in the region of 1 : 1; not higher and not too much (period for which there is enough stock on hand)
lower without good reason.
This answer will be quoted as x,x months or days. Always read the question to find
Why is trading stock left out? We have learnt that on the last day of the financial year
out whether to multiply by 12 or 365.
the business must take stock (count all the items and value them at cost price). Apart
from what was said above about the stock being unsaleable, this figure is very easy to This answer should be as low as possible, but will depend on the type of business and
manipulate. Honest mistakes could be made when counting the stock or working out its its ability to replace stock quickly, etc.
value, but it is also possible that some unethical decisions could be made in order to
make the Statement of Financial Position 'look better'. This answer is inversely related to no. 9, i.e. it works the opposite way round.
If the turnover rate is 365 times, the business would have 1 day's stock on hand.
We are assuming that trading stock will be sold for cash and on credit to debtors, AND
If the turnover rate is 4 times a year, the business will
that these debtors will pay their accounts before the creditors have to be paid. If there
have 3 month's stock on hand.
is an economic depression and the business is having difficulty selling its stock, and, if
debtors who buy from it do not have the money to pay promptly, this ratio will show
how much difficulty the business is in.
We want the ratio to be 1 : 1 which means that the cash in the bank now, plus the cash
we will receive from debtors soon, is enough to pay all creditors, even if we do not sell
any more stock.

Copyright © The Answer Series: Photocopying of this material is illegal 44 NOTES – UNIT 6: Analysis and Interpretation of Financial Statements
11. average debtors' collection period =
average debtors × 365 FORMULAE USED BY
credit sales
PARTNERSHIPS ONLY
This answer will be quoted as x,x days. Ideally this should be +/- 30 days or
as close as possible to this. Return on equity
The business wants debtors to pay as quickly as possible so that the money
received from them can be used to pay creditors and buy more stock. net profit × 100
14. return on partners' equity =
average owners' equity (all partners together)
A very good internal control policy needs to be developed to manage debtors
and ensure that the business receives its money quickly. The credit policy will state the = net profit for year (according to Profit and loss/Income Statement ,) % 100
terms e.g. 30 days, 45 days, etc. The longer the debtors are given to pay the more risk ½ (capital + current accounts beginning and end for BOTH partners)
there is of bad debts. Administrative expenses incurred, e.g. phone calls, legal fees,
, now called Statement of Comprehensive Income
etc. in trying to get the money out of the debtors will increase.
= xx,x%
average creditors × 365 Compare this percentage with:
12. average creditors' payment period =
credit purchases
 last year's return – this year's should be higher
This answer will be quoted as x,x days and should be as many days as  the latest interest rate on bank investments e.g. fixed deposits. It must
the creditors will let the business get away with e.g. 90 days or more. be higher otherwise they might as well invest their capital in the bank and retire!
It is important to keep creditors waiting until the money has been received  the inflation rate - it must be higher otherwise the partners are not earning enough
from debtors in order to be liquid. However, the business must ensure that to compensate for the increase in prices
it never loses its creditworthiness as this means that suppliers will not sell to
it on credit at all. It must also consider the discounts it may receive for early settlement and
and interest it may be charged on overdue accounts.  the return made by similar businesses, if possible.

Gearing partner A's earnings × 100

15. partner's earnings =
A's average owners' equity
13. debt-equity ratio = non-current liabilities : owners' equity
This calculation will determine whether it is worthwhile for each individual partner to
The gearing ratio shows what portion of the assets has been financed by loans and continue in the business because earnings contribute to his personal wealth.
what portion by the partners. This answer will be a ratio e.g. x,x : 1. It should be as
low as possible with 0,5 : 1 being the upper limit. It must be compared to last year and Partner's earnings = Salary + Interest on capital + Bonus + Share of remaining profit.
to the debt-equity ratios of similar businesses if possible. A's average equity = ½ (Capital: A begin + end) + (Current account: A begin + end).
If the business is highly geared i.e. it has borrowed a lot of money, costs increase
because it has to pay interest on the loans. It runs the risk of not being able to pay this The same comparisons must be made as mentioned in 14 for the same reasons.
interest or the instalment on the loans when times are tough and, unless the partners
can find more capital to invest, the business could be liquidated. You can now do ALL THE QUESTIONS (pages 114
to 124) in this unit.
If the business is already highly geared, it will not be able to borrow money from any
other financial institution because the debt-equity ratio is unfavourable. This also
means it may not be able to borrow money to expand the business when the
economy improves.
Copyright © The Answer Series: Photocopying of this material is illegal 45 NOTES – UNIT 6: Analysis and Interpretation of Financial Statements