PARTNERSHIPS FINANCIAL STATEMENTS SK GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

PARTNERSHIPS: FINANCIAL STATEMENTS SK

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) q GAAP represents a body of knowledge q that consist of both the written rules q that govern accountants in their reporting duty. q Knowledge is consistently been added to GAAP. q The following are the basic principles of GAAP:

GAAP Business Entity Principle Historical cost Principle Going concern Principle The financial affairs of the business are kept entirely separate from those of the owner. All assets are valued at their original cost. The assumption is that a business will continue for the foreseeable future.

GAAP Matching Principle Expenses are offset against income generated by those expenses. Income and expense items are allocated to the correct time period. Principle of Prudence Financial results are reflected on a conservative basis i. e. if in doubt, the pessimistic viewpoint is used. Principle of Materiality Any information that is important to the reader must be highlighted or reflected separately.

USERS OF FINANCIAL STATEMENTS The owner(s) of the business The business is making return to justify their investment in the business and the risk that they have taken Potential owner(s) The business has appositive trend in profits that which will continue into the future in order to justify further investment. . Banking institutions The business is making enough profit to pay interest, and it has enough security in order to repay overdrafts or long-term debts.

USERS OF FINANCIAL STATEMENTS Employees and their trade unions Salaries, wages and working conditions are fair for the workers. South African Revenue Services (SARS) The business is regularly paying VAT and PAYE, and the correct income tax in the case of companies and close corporations. External auditor of the business The business is able to manage proper bookkeeping for the financial year.

USERS OF FINANCIAL STATEMENTS The manager or other senior personnel The information reflects any dayto-day problems that need to be resolved in improving the operation of the business. Creditors and suppliers who grant credit to a business The business is able to repay its debts without a problem i. e. its creditworthiness.

BASELINE ACTIVITY

CHARACTERISTICS OF FINANCIAL STATEMENTS Understandability presenting information clearly and concisely Relevance Must have both a predictive value and confirmatory value Reliability The information must be free of material error and bias, and not misleading Comparability can be compared with a similar information about other entities and with similar information about the same entity for another period or another date Fairness completeness, neutrality and freedom from error Timeliness information is available to decisionmakers in time to be capable of influencing their decisions

PRINCIPLES OF GAAP Trading stock is reflected at R 23 500 in the financial statements of the partnership. The trading stock will sell at R 35 250 in the next financial year Postage stamps purchased for R 250 is recorded as Sundry Expenses Prudence Principle Materiality principle

PRINCIPLES OF GAAP One of the partners receives R 1, 5 million as part of his inheritance. The amount is not recorded in the books o the partnership The partnership has purchased dental equipment for R 1, 7 million. Technology is changing virtually everyday. The equipment will be useless to anyone in the future. Therefore the partnership decides to depreciate it over its useful life time of 8 years. Business Entity Principle Going Concern Principle

PRINCIPLES OF GAAP The Income Statement of the partnership will reflect the telephone account with the amount paid for the 11 months and the accrual amount. Land Building is recorded in the Balance Sheet for R 300 000 for the past 5 years. It was recently Matching Principle Historical Cost Principle

YEAR-END ADJUSTMENTS

PROVISION FOR BAD DEBTS • A certain percentage is determined to write off the accounts of those debtors that do not settle their accounts • 1 year provision for bad debts written off is regarded as a loss • Therefore the provision for bad debts adjustment account is regarded as an expense account (-E) • And the Provision for bad Debts is regarded as an Asset with a credit balance (-A) • Thereafter the amount to be written off may increase or decrease from the previous year

PROVISION FOR BAD DEBTS Example: Extract from Trial Balance Debtors R 48 600 Adjustment: It was decided to create a provision for bad debts at 5% of total debtors. SOLUTION 5% of R 48 600 = R 2 430

PROVISION FOR BAD DEBTS GENERAL LEDGER OF AC TRADERS Dr. PROVISION FOR BAD DEBTS (B) 2015 28 Provision for Bad Feb Debts Adjustment Cr. 2 430 Dr. PROVISION FOR BAD DEBTS ADJUSTMENT (N) 2015 Provision for 2015 Profit and loss Feb 28 Bad debts 2 430 Feb 28 account Cr. 2 430 EFFECT ON ACCOUNTING EQUATION Source document Journal Voucher Account debit Account credit Provision for bad debts Adjustment A = - E + - L 0

INCREASE IN THE PROVISION FOR BAD DEBTS Example: Extract from Trial Balance Debtors Provision for bad debts R 56 400 R 2 430 Adjustment: The provision for bad debts must be adjusted to 5% of total debtors SOLUTION 5% of R 56 400 = R 2 820 -R 2 430 (minus last year’s Provision for Bad Debts) R 390 (This means that the Provision for Bad Debts must increase by R 390)

GENERAL LEDGER OF AC TRADERS Dr. 2015 Feb 28 Balance PROVISION FOR BAD DEBTS 2014 c/d 2 820 Mar 01 Balance 2015 Provision for Bad Feb 28 Debts Adjustment 2 820 2015 Mar 01 Balance Cr. b/d 2 430 390 2 820 b/d Dr. PROVISION FOR BAD DEBTS ADJUSTMENT (N) 2015 Provision for 2015 Profit and loss Feb 28 Bad debts 390 Feb 28 account 2 820 Cr. 390 EFFECT ON ACCOUNTING EQUATION Source document Journal Voucher Account debit Account credit Provision for bad debts Adjustment debts A = - E + - L 0

DECREASE IN THE PROVISION FOR BAD DEBTS Example: Extract from Trial Balance Debtors Provision for bad debts R 42 800 R 2 430 Adjustment: The provision for bad debts must be adjusted to 5% of total debtors SOLUTION 5% of R 42 800 = R 2 140 -R 2 430 (minus last year’s Provision for Bad Debts) R 290 (This means that the Provision for Bad Debts must decrease by R 290)

GENERAL LEDGER OF AC TRADERS Dr. 2015 Feb PROVISION FOR BAD DEBTS 28 Provision for Bad Debts Adjustment Balance 2014 290 Mar c/d 01 Cr. Balance b/d 2 190 2 430 2015 Mar 01 Balance b/d 2 190 Dr. PROVISION FOR BAD DEBTS ADJUSTMENT (N) 2015 Profit and loss 2015 Provision for Feb 28 account 390 Feb 28 Bad debts Cr. 290 EFFECT ON ACCOUNTING EQUATION Source document Journal Voucher Account debit Account credit Provision for bad debts Adjustment A = + E + + L 0

WORK WITH ACTIVITY

ADJUSTMENTS 1 Trading stock Deficit The physical stocktaking of trading stock on 28 February 2015 is R 121 000 R 126 500 – R 121 000 = R 5 500 Amount to be calculated: Amount from Trial Balance OR TB + Purchases – Returns to Creditors + Returns from Debtors (cost price) ACCOUNT DEBIT ACCOUNT CREDIT Trading Stock Deficit Trading Stock

ADJUSTMENTS 2 Consumable stores on hand The physical stocktaking of stationery on 28 February 2015 is R 500 ACCOUNT DEBIT ACCOUNT CREDIT Consumable Stores on hand Stationery

ADJUSTMENTS 3 ACCOUNT DEBIT ACCOUNT CREDIT Depreciation Accumulated Depreciation on vehicles

ADJUSTMENTS 3 CONTINUED Provide for depreciation at 20% p. a. on equipment on cost price Equipment with a cost price of R 30 000 was sold for R 18 000 on 28 February 2015. The accumulate depreciation of the asset sold was R 14 000 on the date of sale. No entries were made for this transaction. Disposal at carrying value = Cost Price – Accumulated depreciation = R 20 000 – R 17 000 = R 3 000 ACCOUNT DEBIT Cost Price = R 30 000 Assets Disposal Selling Price = R 18 000 Bank R 14 000 R 18 000 + R 14 000 – R 30 000 = R 2 000 Accumulated depreciation on equipment Asset Disposal ACCOUNT CREDIT Equipment Asset Disposal Profit on sale of assets

ADJUSTMENTS 3 CONTINUED ACCOUNT DEBIT Depreciation ACCOUNT CREDIT Accumulated depreciation on Equipment

ADJUSTMENTS 4 Bad debts The account of debtor, B Hind, R 400 must be written off as irrecoverable R 400 ACCOUNT DEBIT ACCOUNT CREDIT Bad Debts Debtors Control

ADJUSTMENTS 5 Bad debts recovered Debtor, C Chad, deposited R 1 500 directly into bank account. It was discovered that his account was written off as bad debts previously. R 1 500 ACCOUNT DEBIT ACCOUNT CREDIT Bank Bad Debts Recovered

ADJUSTMENTS 6 Correction of error Repairs to the building, R 4 000 was erroneously debited to the land building account. R 4 000 ACCOUNT DEBIT ACCOUNT CREDIT Repairs to building Land Building

ADJUSTMENTS 7 Amount from Trial Balance ACCOUNT DEBIT ACCOUNT CREDIT Income Accrued Interest on Fixed Deposit

ADJUSTMENTS 8 Income received in advance The rent income was received for March and April 2015. The rent Income increased by R 800 from 1 September 2014 R 800 X 8 = R 6 400 Sep - April= 8 months R 118 400 – R 6 400 =R 112 000 ÷ 14 = R 8 000 Amount before the R 8 000+R 800 = R 8 800 increase R 8 800 X 2 = R 17 600 ACCOUNT DEBIT ACCOUNT CREDIT Rent Income Received in Advance

ADJUSTMENTS 9 Expenses Prepaid Included in the Insurance is an amount of R 26 400 per annum paid on 31 August 2014. R 26 400 ÷ 12 = R 2 200 X 6 = R 13 200 ACCOUNT DEBIT ACCOUNT CREDIT Expenses Prepaid Insurance

ADJUSTMENTS 10 Expenses Accrued The water and electricity account, R 1 400, for February 2015 is still outstanding R 1 400 ACCOUNT DEBIT ACCOUNT CREDIT Telephone Expenses Accrued

ADJUSTMENTS 11 Provision for bad debts The provision for bad debts must be adjusted to R 1 662 R 1 800 – R 1 662 = R 138 Amount from Trial Balance Decreasing Income (CR) ACCOUNT DEBIT ACCOUNT CREDIT Provision for Bad debts Provision for bad debts adjustment

ADJUSTMENTS 12 The details of an employee were left out of the Salaries Journal for February by mistake. His details are as follows: R 120 000÷ 12 =R 10 000 Gross salary: R 120 000 per annum 18%XR 10 000 =R 1 800 PAYE deduction: 18% Pension Fund: 7, 5 % of gross salary 7, 5%XR 10 000 =R 750 Medical Aid: R 980 1% X R 10 000 = R 100 UIF: 1% of gross salary The business contributes: R 750 X 1, 5 = R 1 125 R 1, 50 to the pension fund for every R 1 paid by the employee. The business also contributes to the medical aid on rand for rand basis. R 980 UIF: 1% 1% X R 10 000 = R 100

ADJUSTMENTS 12 The details of an employee were left out of the Salaries Journal for February by mistake. His details are as follows: . Deductions Gross Salary 10 000 PAYE UIF Pension fund 1 800 100 750 Medical Aid Fund UIF Pension Fund 980 100 1 125 Dr UIF Contribution Cr Pension Fund Dr Salaries Cr SARS (PAYE) Contributions Cr UIF R 10 000 – R 1 800 – R 750 – R 980 – R 100 = R 6 370 Cr Creditors for Salaries Cr UIF Cr Medical Aid Dr Medical Contributions Cr Medical Aid Dr Pension Fund Contribution Cr Pension Fund

ADJUSTMENTS 13 Loan and Interest on loan Interest on Loan has been Capitalised to the Loan amount. Balance Beginning of Year R 300 000 Bank (including interest) R 165 000 Balance end of year R 180 000 It is estimated that R 120 000 of the capital portion will be paid for the next financial year

ADJUSTMENTS 13 – CONTINUED DR LOAN: MONEY BANK DATE DETAILS 2015 Feb 28 F Bank Balance AMOUNT DETAILS 2014 Mar 01 2015 180 000 Feb 28 165 000 b/d DATE CR F Balance 300 000 Interest on loan 45 000 345 000 – 300 000 = 45 000 ACCOUNT DEBIT Interest on loan AMOUNT 345 000 2015 Mar 01 Balance b/d ACCOUNT CREDIT Loan: Money Bank 180 000

ADJUSTMENTS 13 - CONTINUED It is estimated that R 120 000 of the capital portion will be paid for the next financial year ACCOUNT DEBIT ACCOUNT CREDIT Loan: Money Bank Current portion of Loan

ADJUSTMENTS 14 Partners’ Salaries Each partner earned R 240 000 p. a ACCOUNT DEBIT Salaries: L Laila ACCOUNT DEBIT Appropriation ACCOUNT DEBIT Salaries: Z Zanele ACCOUNT DEBIT Appropriation ACCOUNT CREDIT Current account L Laila ACCOUNT CREDIT Salaries: L Laila ACCOUNT CREDIT Current account: Z Zanele ACCOUNT CREDIT Salary Z Zanele

ADJUSTMENTS 14 – CONTINUED Interest on Capital The partners earned interest of 10% p. a. L LAILA ACCOUNT DEBIT Interest on Capital R 90 000 + R 60 000 = R 150 000 ACCOUNT DEBIT Appropriation Z ZANELE ACCOUNT CREDIT Current account: Laila Current account: Z Zanele ACCOUNT CREDIT Interest on Capital

ADJUSTMENTS 14 - CONTINUED Bonus to Partners Each partner was paid a bonus of R 5 000 each ACCOUNT DEBIT Bonus to Partners R 5 000 + R 5 000 = R 10 000 ACCOUNT DEBIT Appropriation ACCOUNT CREDIT Current account: Laila Current account: Z Zanele ACCOUNT CREDIT Bonus to Partners

ADJUSTMENTS 14 - CONTINUED Sharing of profits/losses The remaining profits/losses are shared between the partners according to the balances on their capital accounts on 28 February 2015. 800 530 – 240 000 – 150 000 – 10 000 = R 160 530 900 000 : 600 000 =3: 2 R 160 530 ÷ 5 X 3 = R 96 318 ACCOUNT DEBIT Appropriation R 160 530 ÷ 5 X 2 = R 64 212 ACCOUNT CREDIT Current account: Laila ACCOUNT DEBIT Appropriation Current account: Z Zanele