CHAPTER 2

Companies
Final accounts, Post-closing Trial Balance, IFRS and GAAP
 Progression

 Grade 10: Preparation of final accounts of sole traders

 Grade 11: Preparation of final accounts of partnerships

and clubs

 Grade 12: Preparation of final accounts of companies

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Accounting cycle for a company
The accounting cycle for a company is as follows :
Prepare a PRE-ADJUSTMENT TRIAL BALANCE
DAILY

Record transactions on SOURCE DOCUMENTS

(invoices, cheques, receipts, debit notes, credit notes etc.)

ANNUALLY (at the end of the accounting period)

Do the necessary YEAR-END ADJUSTMENTS

Record transaction in SUBSIDIARY JOURNALS

CRJ, CPJ, DJ, CJ, PCJ, DAJ, CAJ, GJ
Prepare a POST-ADJUSTMENT TRIAL BALANCE
MONTHLY

Post the journals to the LEDGERS Prepare FINANCIAL STATEMENTS

General Ledger, Debtors Ledger, Creditors Ledger

CLOSING TRANSFERS & FINAL ACCOUNTS

Trading , Profit & Loss and Appropriation account
Prepare a TRIAL BALANCE

Prepare a POST-CLOSING TRIAL BALANCE

Accounting period
 A business needs to keep accounts in such a manner that the results are known at
frequent intervals.

 Companies use a 12-month period for measuring the income/profit of the company.

1 March 2017 Accounting period 28 February 2018

 This time interval is called an accounting period.

 At the end of each accounting period :

 all nominal accounts are closed off to the Trading and Profit and Loss accounts …

 in order to calculate the net profit for that accounting period .

 This way, the results (profit) of one accounting period can be compared to the next.

 The Companies Act requires every company to have a financial year end.

 This date must be specified in the company’s Notice of Incorporation .

 Where the financial year end falls on a Saturday, Sunday or public holiday,
the financial year end will fall on the next business day.
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IFRS and GAAP
 The objective of preparing financial statements is to provide information about a business ,
which a variety of users use to make financial decisions .

 These users include:

E.g. existing investors (shareholders), potential new investors, SARS, banks and creditors
 external users,
E.g. the owners and the management of the business
 and internal users.

 These users rely on this financial information in their decision making.

 Thus it is critically important that financial statements are :

 accurate, reliable, relevant and comparable , and

 that they present a fair representation of the state of affairs of the business.

 In order to meet these requirements, financial statements must be prepared according

to specific rules and regulations , known as accounting standards.

 We will discuss two commonly used accounting standards :

 Generally Accepted Accounting Practice (GAAP) , and

 International Financial Reporting Standards (IFRS) .

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Generally Accepted Accounting Practice (GAAP)
 Generally Accepted Accounting Practice (GAAP) is :

 a collection of published principles, rules, procedures and guidelines …

 that govern how the financial events of a business …

 are recognised, measured and reported.

 Collectively, these documents are referred to as the Statements of GAAP.

 Historically, most countries have developed their own Statements of GAAP.

 The version of GAAP developed for South Africa was simply called :

 the South African Statements of GAAP or SA GAAP

 Similarly, the version of GAAP produced for the United States of America is called :

 US GAAP

 SA GAAP contains numerous accounting statements known as the AC 100 series.

 These statement have been issued and approved by an independent national

standard-setting body known as the Accounting Practices Board (APB) .

 Until fairly recently, all companies in South Africa were required, by law, to prepare
their annual financial statements in compliance with SA GAAP.
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International Financial Reporting Standards (IFRS)
 The International Accounting Standards Board (IASB) was established in 2001.

 The primary objective of the IASB was:

 to formulate a single set of high-quality financial reporting standards …

 that could be used by all countries.

These standards are known as the International Financial Reporting Standards (IFRS). I F RS


 IFRS is fast becoming the global standard for the preparation of public company
financial statements.

 The use of IFRS in many countries around the world has enhanced the comparability of
financial statements worldwide.

 Prior to the formation of the IASB, the International Accounting Standards Committee (IASC)
issued several accounting standards known as the International Accounting Standards (IAS).

 When the IASB took over from the IASC in April 2001, it decided to adopt the existing IAS as
part of IFRS.

 Over the past decade in South Africa, there has been steady phasing-out of SA GAAP and a
move towards the adoption of IFRS as the prescribed accounting standard.
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Adoption and application of IFRS in South Africa

The adoption and application of IFRS in South Africa over the past decade, is shown below :

The APB took a decision to align SA GAAP with IFRS by

In February 2004
including the contents of IFRS as part of SA GAAP.

All companies listed on the JSE were

From 1 January 2005
required to prepare financial statements in compliance with IFRS.

All public companies were required to prepare financial statements in

From 1 May 2011
compliance with IFRS (as per the new Companies Act).

At an APB meeting It was decided that SA GAAP will be withdrawn and will cease to apply in
on 28 February 2012 respect of financial years commencing on or after 1 December 2012.

This means that IFRS should now be applied by all companies, as well as any other entities that were
previously required to apply SA GAAP, when preparing financial statements

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Fundamental GAAP principles
 Both SA GAAP and IFRS contain detailed statements covering specific areas of financial reporting .

 These statements are based on the following core fundamental GAAP principles, which provide the
framework for good accounting practice :

GAAP principle Description Example

Entity rule The financial affairs of the owners should be The business has its own bank account and the owners
kept separate from those of the business – each have their own bank accounts.
they are two separate entities.

Historical cost Assets should be entered at their historical Land and buildings purchased for R500 000 will be entered
concept cost; that is, the amount that was originally at that amount in the books, even if the business can
paid for them. received a lot more for it after a couple of years.

Going concern The financial statements of a business are Unused stationery printed in the name of the business is
concept prepared with the assumption that the recorded as a current asset at the end the financial period.
business will continue operating in the However, if the business will be closing down in the next
foreseeable future. financial period, this stationery will have no value.

Matching Income and expenses must be accounted for The telephone account for February 2015 has to be taken
concept in the correct time period (the one in which into account in the financial year ending 28 February 2015,
they were incurred). even if the account will only being paid in March.
Prudence Financial results must be reflected in a If the business expects to make a profit of R100 000 on the
concept conservative manner; assets and income sale of part of the building, this profit will not be entered in
must not be overstated and liabilities and the books of the business until the transfer of the land has
expenses must not be understated. been concluded.
Concept of Information is material when its omission While consumable costs may be included in the Sundry
materiality or misstatement can influence the Expenses account, interest on overdraft must be shown in
economic decisions of users who rely on the a specific account, as it is material to know what the
financial statements. finance cost on the overdraft is.
Final accounts of a company
Final accounts and the closing transfer process of a
company at the end of the financial year: Debtors Allowances

Cost of Sales Trading account Sales

GROSS PROFIT

All Expenses Profit and Loss account All Income

NET PROFIT

Income Tax Appropriation account Dividends

Profit retained by the company

Retained Income

Note:
 All the information needed to prepare the final accounts can be found in the Post-adjustment Trial Balance.
 After the closing transfers have been processed, a Post-closing Trial Balance is drawn up.
 The Post-closing Trial Balance contains only Balance Sheet accounts, since all nominal accounts have been closed off.
Year- end adjustments
 In Grades 10 and 11, we leant about various year- end adjustments relating to
sole proprietors and partnerships.

 These adjustments also apply to companies.

 We will briefly revise the following adjustments covered in previous grades :

 Trading stock deficit  Accrued income (income receivable)

 Trading stock surplus  Income received in advance (deferred income)

 Consumable stores on hand  Expenses prepaid

 Depreciation on cost price  Accrued expenses (expenses payable)

 Depreciation on diminishing balance  Provision for bad debts (income)

 Bad debts  Provision for bad debts (expense)

 Bad debts recovered  Interest capitalised

 Correction of errors

 Omissions
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Adjustment: TRADING STOCK DEFICIT

Example:
According to the Pre-adjustment Trial Balance the balance of the Trading Stock account is R52 300
on 28 February 2019, the last day of the financial year.
A physical stock take on 28 February 2019 revealed that trading stock worth R49 800 is on hand.

Calculations and explanation of adjustment

 Trading stock deficit = R52 300 – 49 800 = R2 500
 We want our financial statements to be as accurate as possible.
 If we keep the Trading Stock account at R52 300 we will be overstating an asset.
Prudence
 Thus we need to apply GAAP’s prudence principle.
 We therefore need to adjust the Trading Stock account so that the amount in our books is the same as the physical stock.
 So we need to deduct R2 500 from our Trading Stock account.

Entry in the General Journal

Details Debit Credit

Trading stock deficit 2 500

Trading stock 2 500

Accounting equation

Assets Owner’s equity Liabilities

Effect Reason Effect Reason Effect Reason

– 2 500 Trading stock decreases – 2 500 Trading stock deficit is an expense

Adjustment: TRADING STOCK SURPLUS

Example:
According to the Pre-adjustment Trial Balance the balance of the Trading Stock account is R52 300
on 28 February 2019, the last day of the financial year.
A physical stock take on 28 February 2019 revealed that trading stock worth R53 100 is on hand.

Calculations and explanation of adjustment

 Trading stock surplus = R53 100 – R52 300 = R800

 The physical stock-take count is more than the balance of the Trading Stock account in our books.
 This could be due to a mistake that was made in the books, or an invoice omitted from the books.
 The amount in the books must be the same as the physical stock take.
 We must therefore add R800 to the Trading Stock account.

Entry in the General Journal

Details Debit Credit

Trading stock 800

Trading stock surplus 800

Accounting equation

Assets Owner’s equity Liabilities

Effect Reason Effect Reason Effect Reason

+ 800 Trading stock increases + 800 Trading stock surplus is an income

Adjustment: CONSUMABLE STORES ON HAND

Example:
Stationery of R3 100 was purchased during the financial year.
At the end of the financial year, stationery of R600 was not used, according to a physical count.

Calculations and explanation of adjustment

 Stationery expense = R3 100 – R600 = R2 500

 The stationery on hand (worth R600) will only be used in the next financial year.
 It is therefore not an expense for the current financial year.
 It was, however, entered in the Stationery account upon purchase and is thus included in the R3 100.
 The stationery expense for the current financial year should only be R2 500, the value the stationery actually used.
 We therefore need to apply GAAP’s matching principle and deduct R600 from the Stationery account. Matching

Entry in the General Journal

Details Debit Credit

Consumable stores on hand 600

Stationery 600

Accounting equation

Assets Owner’s equity Liabilities

Effect Reason Effect Reason Effect Reason

+ 600 Consumable stores on hand is an asset + 600 Stationery is an expense that decreases
Adjustment: DEPRECIATION ON COST PRICE

Example:
 Equipment R56 000
 Accumulated depreciation on equipment R22 470
Write off depreciation on equipment at 10% p.a. on the cost price.

Calculations and explanation of adjustment

 Depreciation = R56 000 × 10% = R5 600
 The R5 600 can be seen as the wear and tear on the equipment for the financial year.
 It can also be seen as the cost of using the equipment for the year.
Matching
 Depreciation is an imputed expense and by writing off depreciation we apply GAAP’s matching principle.
 Accumulated depreciation is a negative asset as it shows how much the value of the equipment decreased in total.
 However, the accumulated depreciation cannot be entered in the Equipment account as we need to apply
GAAP’s historical cost principle and only enter the cost price of the equipment in the Equipment account. Historical cost

Entry in the General Journal

Details Debit Credit

Depreciation 5 600

Accumulated depreciation on equipment 5 600

Accounting equation

Assets Owner’s equity Liabilities

Effect Reason Effect Reason Effect Reason

– 5 600 The value of equipment decreases – 5 600 Depreciation is an expense

Adjustment: DEPRECIATION ON DIMINISHING BALANCE

Example:
 Vehicles R120 000
 Accumulated depreciation on vehicles R33 500
Depreciation on vehicles should be calculated at 15% p.a. on the diminishing balance.

Calculations and explanation of adjustment

 Depreciation = (R120 000 – R33 500) × 15% = R12 975
 The R12 975 can be seen as the wear and tear on the vehicle for the financial year.
 It can also be seen as the cost of using the vehicle for the year.
Matching
 Depreciation is an imputed expense and by writing off depreciation we apply GAAP’s matching principle.
 Accumulated depreciation is a negative asset as it shows how much the value of the vehicle decreased in total.
 However, the accumulated depreciation cannot be entered in the Vehicles account as we need to apply
GAAP’s historical cost principle and only enter the cost price of the vehicle in the Vehicles account. Historical cost

Entry in the General Journal

Details Debit Credit

Depreciation 12 975

Accumulated depreciation on vehicles 12 975

Accounting equation

Assets Owner’s equity Liabilities

Effect Reason Effect Reason Effect Reason

– 12 975 The value of vehicles decreases – 12 975 Depreciation is an expense

Adjustment: BAD DEBTS

Example: M Franken owes the business R4 800. She is declared insolvent and her insolvent
estate pays out 40c in the rand. The rest should be written off.

Calculations and explanation of adjustment

 Amount received: R4 800 × 0,4 = R1 920
 Amount written off: R4 800 × 0,6 = R2 880
 The amount received of R1 920 will increase the Bank account and the R2 880 should be added to Bad Debts.
 Debtors Control will decrease with the total amount of R4 800.

Entry in the Cash Receipts Journal

Details Bank Debtors Control

M Franken 1 920 1 920

Entry in the General Journal

Details Debit Credit

Bad debts 2 880

Debtors control (M Franken) 2 880

Accounting equation

Assets Owner’s equity Liabilities

Effect Reason Effect Reason Effect Reason

– 4 800 Debtors decreases

– 2 880 Bad debts is an expense
+ 1 920 Cash increases
Adjustment: BAD DEBTS RECOVERED

Example:

Debtor A Lawrence, whose debt had been written off in the previous month,
paid R300 directly into the bank account.

Calculations and explanation of adjustment

 This debtor was removed from the Debtors Ledger in the previous month.

 Therefore we can not credit Debtors Control.

 We will debit Bank and credit Bad Debts Recovered, which is an income account.

Entry in the Cash Receipts Journal

Sundry accounts
Details Bank
Amount Details

A Lawrence 300 300 Bad debts recovered

Accounting equation

Assets Owner’s equity Liabilities

Effect Reason Effect Reason Effect Reason

+ 300 Cash increases + 300 Bad debts recovered is income

Adjustment: CORRECTION OF ERRORS

Example:
Stationery purchased on credit for R400, was entered in the business
books as trading stock.

Calculations and explanation of adjustment

 You want to take the R400 out of the Trading Stock account and put it into the Stationery account.
 Therefore you will correct the mistake by debiting Stationery and crediting Trading Stock.
 Nothing needs to be adjusted within Creditors Control account.

Entry in the General Journal

Details Debit Credit

Stationery 400

Trading stock 400

Accounting equation

Assets Owner’s equity Liabilities

Effect Reason Effect Reason Effect Reason

– 400 Trading stock decreases – 400 Stationery is an expense

Adjustment: OMISSIONS

Example: Trading stock of R600, returned to a creditor Wilson & Co, has not been entered in the books.

Calculations and explanation of adjustment

 Credit the Trading Stock account with R600.

 Debit the Creditors Control account (and the Wilson & Co. account) with R600.

Entry in the General Journal

Details Debit Credit

Creditors control (Wilson & Co.) 600

Trading stock 600

Accounting equation

Assets Owner’s equity Liabilities

Effect Reason Effect Reason Effect Reason

– 600 Trading stock decreases – 600 Debt to creditors decreases

Adjustment: ACCRUED INCOME (INCOME RECEIVABLE)

Example:
The rent income for February 2017, the last month of the financial year,
is still receivable, R2 300.

Calculations and explanation of adjustment

 This is income that has been earned during the current financial year.
 Therefore, according to GAAP’s matching principle, it must be accounted for in the current financial year.
 The business will add R2 300 to Rent Income by crediting the Rent Income account.
Matching

 The Accrued Income account will be debited.

 Accrued Income is an asset, as it is money owed to the business.

Entry in the General Journal

Details Debit Credit

Accrued income 2 300

Rent income 2 300

Accounting equation

Assets Owner’s equity Liabilities

Effect Reason Effect Reason Effect Reason

+ 2 300 Accrued income is an asset + 2 300 Rent income is an income that increases
Adjustment: INCOME RECEIVED IN ADVANCE (DEFERRED INCOME)

Example:
Received R3 400 from the tenant during February 2017, the end of the financial year.
It is an advance payment for the March 2017 rent.

Calculations and explanation of adjustment

 Although the business has already received the money, they have not yet earned it.
 It is income for the next financial year.
 Therefore, according to GAAP’s matching principle, it must be accounted for in the next financial year.
 The business will deduct the R3 400 from Rent Income by debiting the Rent Income account. Matching

 The contra entry will be in the Income Received in Advance account, which will be credited.
 Income Received in Advance is a liability, as the business now owes the tenant the service.

Entry in the General Journal

Details Debit Credit

Rent income 3 400

Income received in advance 3 400

Accounting equation

Assets Owner’s equity Liabilities

Effect Reason Effect Reason Effect Reason

– 3 400 Rent income is an income that decreases + 3 400 Income received in advance is a liability
Adjustment: EXPENSES PREPAID

Example:
The financial year ends on 28/29 February.
Paid for an advertisement contract of 6 months on 1 January 2017, R7 800.

Calculations and explanation of adjustment

 Four out of the six months paid for the advertisement fall within the next financial year.
 Therefore four months of advertisements will only be placed in the next financial year.
 The cost of the advertising for those four months is not an expense for the current financial year.
 The business must therefore apply GAAP’s matching principle.
 The business will deduct R5 200 (R7 800 × 4 ÷ 6) from Advertisements by crediting the Advertisements account. Matching

 The contra account is Expenses Prepaid, which will be debited.

 Expenses Prepaid is an asset, as the advertisement company now owes the business the service that was prepaid.

Entry in the General Journal

Details Debit Credit

Expenses prepaid 5 200

Advertisements 5 200

Accounting equation

Assets Owner’s equity Liabilities

Effect Reason Effect Reason Effect Reason
+ 5 200 Expenses prepaid is an asset + 5 200 Advertisements is an expense that decreases
Adjustment: ACCRUED EXPENSES (EXPENSES PAYABLE)

Example:
Directors’ fees of R23 400 is still payable on 28 February 2017, the end of
the financial year.

Calculations and explanation of adjustment

 This is an expense that was incurred during the current financial year.
 Therefore, according to GAAP’s matching principle, it must be accounted for in the current financial year.
 The business will add it to Directors’ Fees by debiting the Directors’ Fees account. Matching
 The contra account is Accrued Expenses, which will be credited.
 Accrued Expenses is a liability as it is money that is owed to the directors.

Entry in the General Journal

Details Debit Credit

Directors’ fees 23 400

Accrued expenses 23 400

Accounting equation

Assets Owner’s equity Liabilities

Effect Reason Effect Reason Effect Reason

– 23 400 Directors’ fees is an expense that increases + 23 400 Accrued expenses is a liability
Adjustment: PROVISION FOR BAD DEBTS – INCOME

Example:
Balances at the end of the financial year:
 Debtors control R23 400
 Provision for bad debts R1 056
Adjustment: Provision for bad debts should be adjusted to 4% of outstanding debtors.

Calculations and explanation of adjustment

 Provision for bad debts = R23 400 × 4% = R936

 Provision for bad debts should be adjusted to R936.
 The business must deduct R120 (R1 056 – R936) from Provision for Bad Debts, by debiting the Provision for Bad Debts account.
 The contra account, Provision for Bad Debts Adjustment, should be credited.

Entry in the General Journal

Details Debit Credit

Provision for bad debts 120

Provision for bad debts adjustment 120

Accounting equation

Assets Owner’s equity Liabilities

Effect Reason Effect Reason Effect Reason

+ 120 Provision for bad debts is a + 120 Provision for bad debts adjustment (credited) is an
negative asset that decreased income
Adjustment: PROVISION FOR BAD DEBTS – EXPENSE

Example:
Balances at the end of the financial year:
 Debtors control R19 860
 Provision for bad debts R904
Adjustment: Provision for bad debts should be adjusted to 5% of outstanding debtors.

Calculations and explanation of adjustment

 Provision for bad debts = R19 860 × 5% = R993

 Provision for bad debts should be adjusted to R993.
 The business must add R89 (R993 – R904) to Provision for Bad Debts, by crediting the Provision for Bad Debts account.
 The contra account, Provision for Bad Debts Adjustment, should be debited.

Entry in the General Journal

Details Debit Credit

Provision for bad debts adjustment 89

Provision for bad debts 89

Accounting equation

Assets Owner’s equity Liabilities

Effect Reason Effect Reason Effect Reason

– 89 Provision for bad debts is a – 89 Provision for bad debts adjustment (debited)
negative asset that increased is an expense
Adjustment: INTEREST CAPITALISED

Example:
Received the following loan statement from the bank on 28 February 2017, the last day of the financial year:

Loan statement of QT Bank for the 12 months ended 28 February 2017

Balance of loan on 1 March 2016 R200 000
Interest capitalised R21 000
Instalments on loan, paid monthly: R2 500 × 12 (R30 000)
Balance of loan on 28 February 2017 191 000

Adjustment: The monthly payments were entered in the CPJ and posted to the Bank and Loan accounts
every month. The interest on capital, however, still needs to be entered in the business’s books.

Calculations and explanation of adjustment

 The interest is capitalised and therefore needs to be added to the Loan account (credit the Loan account).
 The interest on loan needs to be accounted for in the current financial year (debit the Interest on loan account).

Entry in the General Journal

Details Debit Credit

Interest on loan 21 000

Loan: QT Bank 21 000

Accounting equation

Assets Owner’s equity Liabilities

Effect Reason Effect Reason Effect Reason

– 21 000 Interest on loan is an expense + 21 000 Loan increases

New adjustments relating to companies: Income tax

In Chapter 1, we leant that the following transactions relating to income tax take place during the financial year :

Beginning of 6 months after beginning Last day of 7 months after end

financial year of financial year financial year of financial year

1 Mar 2017 31 Aug 2017 28 Feb 2018 30 Sep 2018

Submit tax return form

First provisional Second provisional Third (final)

tax payment tax payment tax payment

Receive tax assessment

Note: Because of the provisional tax payments that are made during the year, the SARS (Income Tax) account should
always have a debit balance at the end of the financial year.
New adjustments relating to companies: Income tax
 As mentioned, at the end of the financial year the SARS (Income Tax) account should
always have a debit balance, because of the provisional tax payments that were made.

 At the end of the financial year, the business will submit a tax return form to SARS .

 SARS will then issue the business with the tax assessment.

 The tax assessment shows how much income tax is payable for the financial year.

 This amount for Income tax is the amount that will be : Dr SARS (Income Tax) account Cr

1st provisional tax payment Income tax

 closed off to the Appropriation account, and
2nd provisional tax payment
 shown on the face of the Income Statement.

 If the provisional tax paid is less than the total tax due, the SARS (Income Tax) account:

 will have a credit balance and be considered a liability.

 will be shown as a current liability in the Note for Trade and other payables.

 If the provisional tax paid exceeds the total tax due, the SARS (Income Tax) account:

 will have a debit balance and be considered an asset (advance payment).

 will be shown as a current asset in the Note for Trade and other receivables.
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Adjustment: INCOME TAX

Example:
The financial year of Danjo Traders Ltd ends on 28/29 February.

Danjo Traders Ltd

Pre-adjustment Trial Balance as at 28 February 2019
Balance Sheet accounts Debit Credit

SARS (Income tax) 155 000

Adjustment at the end of the financial year:

After completion of the audit, the income tax figure for the year was calculated at R162 000.

Required:
1. Show the entry for income tax in the General Journal.
2. Show the entries in the SARS (Income Tax) and Income Tax accounts in the General Ledger.
3. Show the entries for SARS (Income Tax) and Income Tax in the Post adjustment Trial Balance.

Solution:

Entry in the General Journal

General Journal of Danjo Traders Ltd for February 2019

GJ
Day Details Fol. Debit Credit

28 Income tax 162 000 00

SARS (income tax) 162 000 00
Adjustment: INCOME TAX (continued)

Posting to the General Ledger

General Ledger of Danjo Traders Ltd
Total income tax
Provisional income tax Balance Sheet accounts for the year
paid during the year
Dr SARS (Income Tax) Cr
2019 2019
Feb 28 Balance b/d 155 000 00 Feb 28 Income tax GJ 162 000 00
Balance c/d 7 000 00

162 000 00 162 000 00

2019
Mar 1 Balance b/d 7 000 00

Amount still payable

Nominal accounts to SARS – a liability
Dr Income Tax Cr
2019
Feb 28 SARS (income tax) GJ 162 000 00

Entries in the Post adjustment Trial Balance

Post adjustment Trial Balance of Danjo Traders Ltd as at February 2019

Debit Credit
Balance Sheet accounts

SARS (income tax) 7 000

Nominal accounts

Income tax 162 000

New adjustments relating to companies: Dividends
As mentioned in Chapter 1, dividends are the part of the profit that is paid out to shareholders.

Interim dividends
 Interim dividends are declared and distributed (paid) during the financial year.

 Since interim dividends are paid immediately, this transaction will be entered in the CPJ.

 This will then be recorded in the General Ledger as follows :

Debit: Dividends on Ordinary Shares Credit: Bank

Final dividends
 Final dividends are declared at the end of the financial year , but are not distributed.

 Since this is a non-cash transaction, this transaction will be entered in the GJ.

 This will then be recorded in the General Ledger as follows :

Debit: Dividends on Ordinary Shares Credit: Shareholders for Dividends

 Since final dividends are only declared and not distributed, this will be reflected as a liability
in the Statement of Financial Position (Balance Sheet) at the end of the financial year .

 These final dividends will only be paid in the next financial period.
______________________________________________________________________________________
Adjustment: DIVIDENDS

Example:
The financial year of Danjo Traders Ltd ends on 28/29 February.
On 28 February 2018 Danjo Traders Ltd has an issued share capital of R990 000 consisting of 60 000 ordinary shares.

Danjo Traders Ltd

Pre-adjustment Trial Balance as at 28 February 2019

Nominal accounts Debit Credit

Dividends on ordinary shares 12 000

Adjustment at the end of the financial year:

Declared a final dividend of 60c per share on 28 February 2019.

Required:
1. Show the entry for the final dividend in the General Journal.
2. Show the entries in the Shareholders for Dividends and Dividends on Ordinary Shares accounts in the General Ledger.
3. Show the entries for Shareholders for Dividends and Dividends on Ordinary Shares in the Post adjustment Trial Balance.

Solution:

Entry in the General Journal

General Journal of Danjo Traders Ltd for February 2019
GJ
Day Details Fol. Debit Credit

28 Dividends on ordinary shares 36 000 00

Shareholders for dividends 36 000 00
[Final dividends declared (60 000  0.60)]
Adjustment: DIVIDENDS (continued)

Posting to the General Ledger

General Ledger of Danjo Traders Ltd

Balance Sheet accounts Dividends payable to

shareholders – a liability
Dr Shareholders for Dividends Cr
2019
Feb 28 Dividends on ordinary shares GJ 36 000 00

36 000 00

Interim dividends Nominal accounts

paid during the year
Dr Dividends on Ordinary Shares Cr
2019
Feb 28 Balance b/d 12 000 00
Shareholders for dividends GJ 36 000 00

48 000 00 Final dividends

declared at end of year

Entries in the Post adjustment Trial Balance

Post adjustment Trial Balance of Danjo Traders Ltd as at February 2019

Debit Credit
Balance Sheet accounts

Shareholders for dividends 36 000

Nominal accounts

Dividends on ordinary shares 48 000

The Trial Balance
 Most businesses will prepare a Trial Balance at the end of each month.

 At the end of the financial year the following Trial Balances are used:

Pre-adjustment Year-end Post-adjustment Closing Post-closing

Trial Balance adjustments Trial Balance transfers Trial Balance

Prepared after the Consists of only

A summary of year-end adjustments Balance Sheet accounts,
as all the
all the were done.
Nominal accounts
balances and totals New accounts such as
have been closed off
at the Accrued Income and
to the Trading,
end of the year. Expenses Prepaid Profit and Loss and
are included. Appropriation accounts.

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Example: Trial Balance

The following Trial Balance shows various accounts that are unique to companies:

Danjo Traders Ltd

Post-adjustment Trial Balance as at 28 February 2019

Fol Debit Credit These two accounts are the

shareholders’ equity accounts.
Balance Sheet accounts section

Ordinary share capital B1 990 000

This amount is payable to SARS
Retained income B2 330 000
for tax deducted from salaries.
……

SARS (PAYE) B20 2 500

This amount is payable to SARS for VAT.
SARS (VAT) B21 11 900 Output tax – Input tax
SARS (income tax) B22 7 000
Amount owed to SARS for income tax.
……

Shareholders for dividends B26 36 000

Amount owed to shareholders for
dividends declared, but not yet paid

Nominal accounts

……

Directors’ fees N30 500 000 These two expenses are unique to companies.
They will be closed off to the Profit & Loss account.
Audit fees N31 80 020

…… Income tax for the accounting period.

To be closed off to the Appropriation account.
Income tax N34 162 000

Dividends on ordinary shares N35 48 000

Total dividends for the year, paid and declared.
XXX XXX To be closed off to the Appropriation account.
Reversal of adjustments
 Adjustments made at the end of a financial year need to be reversed (written back)
at the beginning of the new financial year.

 By doing this we apply the matching principle of GAAP.

Matching

Example:
 Stationery to the value of R1 642 was purchased during the financial year.
 At the end of the year, stationery to the value of R186 was not used.

 The unused stationery will only be used in the next financial year.

 Therefore the following adjustment must be made at the end of the financial year :

 credit the Stationery account (to deduct the R186 from Stationery), and

 debit the Consumable Stores on Hand account (to reflect the R186 as an asset).

 At the beginning of the next financial year, this adjustment must be reversed by :

 debiting the Stationery account (to write the R186 back to Stationery), and

 crediting the Consumable Stores on Hand account (to remove the asset).
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Reversal of adjustments (continued)
The following timeline illustrates the adjustment and reversal process in the previous example :

Stationery used during the financial

year: (R1 642 – R186) = R1 456

Stationery unused at the end of the

financial year: R186
Adjustment at end of financial year:
Deduct R186 from stationery.
Stationery purchased during the
1 Mar 2013 financial year: R1 642 28 Feb 2014

1 Mar 2014 28 Feb 2015

Reversal of adjustment on 1st day of Balance in Stationery account at

new financial year: beginning of new year: R186
Write stationery of R186 back, as it will be
used in the new year.

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Solutions to activities

 Activity 2.1

 Activity 2.2

 Activity 2.3

 Activity 2.4

 Activity 2.5

 Activity 2.6

 Informal assessment 2.1

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