Partnerships: Financial Statements

Partnerships:
Partnership
 This business is formed by between 2 – 20 persons.
 Each partner invests capital and/or his skills in the
business.
 Risk is shared amongst the partners.
 Profits/losses are shared between partners in an agreed
proportion.
 Partners are liable for the debts of the partnership
Advantages
• Additional skills/expertise improves profit potential.
• More capital can be raised.
• Risk is shared
• The workload is shared.
• Easy to form – no legal formalities are required except for
a partnership agreement.
• Personal contact with clients/customers can still be
maintained.
• Etc.
Disadvantages
• Profits will have to be shared
• Communication breakdowns/conflicts may arise amongst
the partners.
• Liability for the debts of the partnership is unlimited
(unlimited Liability) – personal assets are at risk.
• A partner’s resignation, death or retirement may affect the
continuity of the business.
• A partner acts as an agent of a partnership – an incapable
or vindictive partner could cause financial loss
 • to the other partner.
• Etc.

The steps he would have to put in place before admitting a

partner into the business is. He will have to draft a Partnership
Agreement; he could ask an accountant or lawyer to assist.
Although Partners are jointly responsible for the debts of a
partnership, if any partner defaults on his/ her responsibilities
in this regard, the other partners can be held responsible
separately or severally for repayment of the debts.
To minimise the potential for disagreements/arguments over
lack of internal control, partners might agree to an internal
(business employed) or external audit (independent
accounting firm)
Audit - process whereby an independent person checks internal
control procedures and then issues a report which indicates his
opinion whether the figures presented in the financial
statements can be relied upon

Concepts (+GAAP)
Business Entity Rule- The Financial affairs of the owners are
kept entirely separate from those of the business

Historical Cost Rule- An asset is recorded at its original cost

price not its replacement cost or an estimation of its worth

Rule of Prudence- Financial results are reported in a conservative

manner and must not be overstated.

Matching concept- Income and Expenses must be recorded in

the correct financial period, and any expense incurred in producing
income must be deducted from that income.

Concept of materiality- Financial information that is important

to the decisions of users must be shown separately or highlighted.
Going-Concern concept- Financial Statements are prepared on
the assumption that the business will continue for the foreseeable future.

Operating, Financing & Investing activities

Operating – Activities in ruining the business (buying
and selling goods, paying wages, etc)
Financing- Activities in raising funds for the business
either from the owner, or form lenders (Capital, taking
loans, repaying loans, pay or owes interest)
Investing- Activities in investing the funds of a
business with the intention of earning a profit (Fixed
Deposit, transfer fund from savings account, earning
interest)
Income Statement
Sales 340 000
Cost of Sales (170
000)
Gross Profit 170
000
Other Operating Income 80 000
Commission Income 20 000
Rent Inc 50 000
Discount Received 10 000
Gross Operating 250
Income/Profit 000
Operating Expense (200
000)
Salaries and Wages 130 000
Advertising 20 000
Insurance 10 000
Depreciation 30 000
Bad debts 10 000
Operating Profit 120
000
Interest Income 120 000
Net Profit Before Interest 6500
Expense
Interest Expense (100
000)
Net Profit/Loss for the 70 000
year

Income – Expense = Net Profit

 Gross Profit 100
Mark up= ×
Cost Of Sales 1

Year-End Adjustment
 Correction of errors
 Expense payable(accrued)
An expense that has been incurred during the
financial year but has not been paid off. (still
outstanding expense)
 Debit: -OE (ACCOUNT NAME)
 Credit: +L (EXPENSE ACCRUED)
 Expense prepaid
An Expense paid for in the current financial year
but concerns the next accounting period.
 Debit: +A (EXPENSE PREPAID)
 Credit: +OE (ACCOUNT NAME)
 Income receivable (accrued)
An income that has been earned during the
financial year but has not been received.
 Debit: +A (INCOME ACCRUED)
 Credit: +OE (ACCOUNT NAME)
 Income received in advance (deferred)
Cash that has been received in advance for a
product/ service that has not yet been provided.
Income has not truly been earned yet.
  Debit: -OE (ACCOUNT NAME)
 Credit: +L (DEFERRED INCOME)

 Consumable Stores on hand

 Trading Stock deficit
 Debit: -A (TRADING STOCK DEFICIT)
 Credit: -OE (TRADING STOCK)
 Depreciation
 Debit: -A (DEPRECIATION)
 Credit: -OE (ACCUMULATED
DEPRECIATION ON EQUIPMENT)
 Asset disposal
 Amounts due to partner regarding their
salaries and interest on capitals

Bad debts, Bad Debts Recovered & Provision

for Bad Debts
Bad Debts
 Written off
 Debit: -OE (BAD DEBTS)
 Credit: -A (DEBTORS CONTROL)/
(DEBTORS PERSONAL ACCOUNT)
 Recovered
 Debit: +A (BANK)
 Credit: +OE (BAD DEBTS RECOVERD)
Provision for Bad Debts
Debit: -OE (PROVISION FOR BAD DEBTS
ADJUSTMENT)
Credit: -A (PROVISION FOR BAD DEBTS)
INCREASE-
Debit: -OE (PROVISION FOR BAD DEBTS
ADJUSTMENT)
Credit: -A (PROVISION FOR BAD DEBTS)
DECREASE-
Debit: +A (PROVISION FOR BAD DEBTS
ADJUSTMENT)
Credit: +OE (PROVISION FOR BAD DEBTS)

Capitalised Interest on Loans & Investments

Non-capitalised Interest on Loans
Dr Loan Cr
1 Mar Bank 100 000
20.2

Dr Expense Cr
Payable
28 Feb Expense 12 00
20.2 Payable

Dr Interest on Cr
Loan
28 Feb Expense 12 00
20.2 Payable
Capitalised Interest on loans
Dr Loan Cr
1 Mar Bank 100 000
20.1
28 Feb Interest on 12 000
20.2 Loan

Dr Interest on Cr
Loan
28 Feb Loan 12 000
20.2

Non-Capitalised Interest on Fixed Deposit

Dr Fixed Deposit Cr
1 Mar Bank 50 000
20.2

Dr Income Cr
receivable
28 Feb Interest 3 000
20.2 Income

Dr Interest Cr
Income
28 Feb Income 3 000
20.2 Receivable

Capitalised Interest on Fixed Deposit

Dr Fixed Deposit Cr
1 Mar Bank 50 000
20.2
28 Feb Interest 3 000
20.2 Income

Dr Interest Cr
Income
28 Feb Fixed Deposit 3 000
20.2
Balance sheet
A=O+L
ASSETS
Non-Current Assets
Fixed
Financial
Current Assets = CA ratio
× CL
Inventory
Cash and Cash
Equivalents
Trade and other
Receivables
TOTAL ASSETS
EQUITY AND LIABILITIES
Owners Equity
Capital
Current Account
Non-Current Liabilities
Mortgage Loan
Current Liabilities = CL
ratio × CA
Trade and Other
Payables
Bank Overdraft
TOTAL EQUITY AND
LIABILITIES

Solvency (Total assets: Total Liabilities)

Debt Equity (Total Liabilities: Owners Equity)
Current Ratio (Current Assets: Current Liabilities)
Notes
7. Capital
Bob Mike Total
Opening Balance 8000 20000 2800
0
Additions 2000 2000
Withdrawals 5000 5000
Closing Balance 10000 15000 2500
0

(
Interest on capital = openingbalance ×
no month
12 )(
× Interest on capital ( % ) + closing balance×
no month
12
× Inte

8. Current Account
Bob Mike Total
Profit per Income 28880 41120 70000
Statement
Salaries (annual) 12000 24000 36000
Bonus 5000 - 5000
Interest on Capital 1000 800 1800
Primary (18000 (24800 (42800)
Distribution of ) )
Profits
Final Distribution 10880 16320 27200
of 2/5 3/5 5
Profits (Ratio used
2:3)
 Drawings during year (1200 (1000 (22000
0) 0) )
Retained income for year 16880 31120 48000
Retained income at (3000) 10000
Beginning
Retained Income at End 1388 4112 55000
0 0

Primary Distribution=Partners (Salaries + Bonus+ Interest on capital)

Final Distribution=Net Profit∨ profit per Inc−Primary Distribution

The Final distribution of each partner is shared

according to the profit-sharing ratio.

Dr Current: Mike Cr
30 Apr Drawings 10 000 30 Apr Balance b/d 10 000
20.21 20.21
Balance c/d 41 120 Salaries 24 000
Bonus 0
Interest on 800
cap
Appropriation 16 320
51 120 51 120
Balance b/d 41 120

Dr Current: Bob Cr
30 Apr Balance b/d 3000 30 Apr Salaries 12 000
20.21 20.21
Drawings 12 000 Bonus 5 000
Balance c/d 13 880 Interest on 1 000
cap
Appropriation 10 880
28 880 28 880
Balance b/d 13 880
Current accounts could end up with debit balance
of the do to (net loss & partners drawings
exceeding the money the currently have)
Dr Appropriation Cr
30 Apr Partners 36 000 30 Apr Profit & Loss 70 000
20.21 Salaries 20.21
Interest on 1800
Cap
Partners 5000
Bonus
Current: Bob 10880
Current: 16320
Mike
70 000 70 000

 Current: Bob & Current: Mike is the final

distribution of profits according to the profit-
sharing ratio given
 Partner Salaries, Interest on Cap & Partners
Bonus is the primary distribution of the
partners
 Profit & loss is the net profit/loss for the
financial year
Remaining Losses:
It is possible a business could earn a net profit
and yet there is a remain loss instead of profit -
when the net profit is not as high as expected
and is exceeded by the primary distribution
In current accounts
 Appropriation moves to debit side
  Everything else stays the same
In appropriation accounts
 The final distribution moves to credit side
 Everything else stays the same
Dr Trading Cr
Account
30 Apr Cost of 170 30 Apr Sales 340
20.21 Sales 000 20.21 000
Profit & 170
Loss 000
340 000 340 000

Gross Profit = Sales – Cost of Sales

Profit & Loss is the Gross profit

Dr Profit & Loss Cr

30 Apr Salaries & 130 000 30 Apr Trading 170
20.21 Wages 20.21 Account 000
Advertiseme 20 000 Commission 20 000
nt income
Insurance 10 000 Rent income 50 000
Depreciation 30 000 Discount 10 000
received
Bad Debts 10 000 Interest on 120
investment/inco 000
me
Interest on 100 000
Loan
Appropriati 70 000
on
370 000 370
000
Income - Expense = Net Profit or Loss
(Profit/Loss) pg.128
Appropriation = all Expenses – all Income
If there is a Net Loss
 Appropriation is credited
 Ratios
Profitability/efficiency
1. Gross profit on sales (turnover)
Gross Profit
×100
Sales

2. Gross Profit on cost of sales (markup)

Gross Profit
×100
Cost of Sales

3. Operating profit on sales (turnover)

Operating Profit
× 100
Sales

4. Operating Expense on sales (turnover)

Operating Expenses
× 100
Sales
5. Net profit on sales (turnover)
Net Profit
× 100
Sales

Return
1. Return on average owners’ equity
Tells them how profitable their investment in the
business is.
Net Profit
×100
1
(totals current+ capital)at begin∧end
2

2. Amount earned by each partner

Partners salaries+ Interest on capital+ Bonus ± Share of remaining profit ∨loss

3. Return earned by each partner

 Amount earned by partner
¿× 100
1
(current +capital ) at begin∧end ¿
2

Solvency
If the business can pay off all its debts it is solvent
(assets>liabilities)
1. Net assets
Net Assets=Owners Equity=Assets−liabilities

2. Total assets to total liabilities

Total Assets :Total Liabilities

Right side always 1

Debt Equity
How the business is financed either by debts or by
income and the degree of financial risk the business is
facing
Non−current Liabilities:Owners Equity

 If non-current liabilities are <= 50% of the Equity

the degree of financial risk is low if >90% the
degree of financial risk is very higher.
Gearing
Positive: if return > interest on Loan
Negative: if return < interest on Loan
Liquidity
1. Current ratio
Current Assets :Current Liabilities

2. Acid test ratio

The ability of a business to settle its current debts
under abnormal conditions (decline in sales, drastic
drop in prices, economic depressions)
Current Assets−Inventories∨Receviables+ cash :Current Liabilities

3. Stock turnover rate

Amount of time in a year the stock is restocked
Cost of Sales
1
( opening stock +closing stock )
2

4. Stock Holding Period

The period for which there is enough stock on hand
( how long it will take to sell the stock)
Trading stock (average∨closing)
× 365
cost of sales

5. Debtors’ collection Period

How long it takes to collect money from debtors
Debtors (average∨closing)
×365
Credit sales

6. Creditors payment period

How long it takes to pay creditors
Creditors(average∨closing )
× 365
Credit purchases∨cost of sales

Commenting on liquidity
 20.4 20.5
Current ratio
Acid test ratio
Stock turnover rate
Stock holding period
Debtors’ collection
period
Creditors payment
period
Debtors’ collection vs creditors payment
Possibly Holding too much stock
Should or should not experience any liquidity issues
 Reconciliations

Books of a Trader
INCREASE (+) DECREASE (-)
CRJ (Dr) CPJ (Cr)
500
200

 When money is deposited an entry is made in the

CRJ-Bank (asset) increases
 When payments are made an entry is made into
the CPJ- Bank (asset) decreases

Banks books (Bank Statement)

INCREASE (+) DECREASE (-)
Dr Cr
500
200

When we deposit money into the bank, the money does

not belong to the bank, therefor the bank owes us
money and we become a liability to the bank. From
the banks point of view:
 a deposit is an increase in liability-credit
 A withdrawal or payment is a decrease in liability-
debit
OVERDRAFT
 The bank lends you money that is not in your bank
account (must be negotiated with the bank)
 Unlike loan money is not transferred to account
but it’s made available when you need it.
 Interest is charged on the borrowed amount but
only for the period that you use it.
Ex. A trader has R10 000 in his current account but
has negotiated an overdraft facility of R20 000. He
makes a payment of R15 000. R10 000 will be
taken out of his bank account and the bank will lend
him the extra R5 000. Interest will be charged on
the R5 000 for the period that the bank lends the
trader the money. If he makes a deposit the next day
for R5 000 he would only be charged interest for the
one day.
 An overdraft (O/D) is a liability to a trader- an
amount owing to the bank.
 From bank’s point of view an overdraft is an asset-
an amount owing by a trader to the bank.
Books of a Trader
Favourable Unfavourable (O/D)

Banks books (Bank Statement)

Unfavourable (O/D) Favourable (O/D)
DISHONOURED CHEQUES
Reversed in CPJ: Bank decreases (if favourable) and
increases (if unfavourable): Debtors control
increases.

Bank Reconciliation
Updating Books (CPJ & CRJ) with errors or omissions –
shown on bank statement but not on books
CRJ
Total (before 100 000
adjustments)
Rent income 10 000
Interest Income 5 000
Total (after 115 000
adjustments)

CPJ
Total (before 60 000
adjustments)
Water and electricity 5 000
Insurance 5 000
Bank charges (always look 250
for)
Total (after 70 250
adjustments)

Dr Bank Cr
30 Apr Balance b/d 5 500 30 Apr Total 70 250
20.21 20.21 payments
Total 115 1 May Balance c/d 50 250
receipts 000
 120 500 120 500
1 May Balance c/d 50 250

Bank Reconciliation Statement

Debit Credit
Balance according to bank 60 000
statement
Outstanding deposit 2 000
Outstanding EFT No.1 250
2 000
No.2
Amount wrongly debited 3 000
Amount wrongly credited 12 500
Debit balance according to 50 250
bank acc
65 000 65 000

 Balance according to bank statement comes from

the bank statements totals and is usually
credited, but if we owe the bank money it will be
debited.
 Outstand deposits are accounts that we missed
form the CRJ and are credited
 Outstanding EFTs are payments we missed from
the CPJ
 Amount wrongly debited is a payment that was
wrongly made and is credited to cancel it out
 Amount wrongly credited is a deposit that was
made to the incorrect account and is debited to
cancel it out
 Balance according to bank account comes from the
general ledger bank account and is usually
debited but can be credited if money is owed to
the bank.
Creditors Reconciliation
Fixed Assets
Depreciation
The amount by which an asset decreases in value.
 Its an expense and an indication of the usage of an
asset
 A part of the asset is being converted to an
expense
 Depreciation of all Fixed/Tangible assets is recorded
at the end of the financial year in compliance with
matching principles.
 It is an imputed expense (that portion of the asset
is being imputed /assigned to the specified
accounting period which is regarded as an
operating expense.
NOTE: only equipment and vehicles are depreciated;
land and building are generally not subjected to it.
An asset will only be depreciated for the number of
months you own it

Two methods:
Fixed Instalment: deprecation is calculated in equal
amounts over the useful life of asset.
Over the span of years or at a fixed percentage.
 Ex: if equipment costing R10 000 is expected to
have a life span of 10 years then the annual
depreciation of R1 000 (10 000/10).
 Ex: depreciation can be calculated at a fixed
percentage of cost price.
Diminishing balance:
1. Cost Price− Accumulated Deprecation=CarryingValue

2. Deprecation=Carrying value× Rate of Depreciation

3. Accumulated Depreciation=Accumulated Depreciation+ D eprec iation

Dr Accumulated Cr
Depreciation
on Vehicles
1 Feb Balance c/d 60 000 1 Jan Balance 30 000
20.6 20.5
20.6 Depreciation 30 000

60 000 60 000
1 Feb Balance b/d 60 000
20.6

Depreciation = (150 000-30 000) × 25% = R30 000

Assets Disposal

Dr Vehicles Cr
1 Jan Balance b/d 150 20 Feb Asset 150
20.5 000 20.6 Disposal 000

150 000 150 000

Dr Accumulated Cr
Depreciation
on Vehicles
28 Feb Asset 60 000 1 Jan Balance 30 000
20.6 disposal 20.5
28 Feb Depreciation 30 000
20.6

60 000 60 000

Depreciation = (150 000-30 000) × 25% = R30 000

Dr Depreciation Cr
28 Feb Accumulate 30 000 Profit & Loss 30 000
20.6 d
Depreciatio
n on
Vehicles

30 000 30 000
 Dr Asset Disposal Cr
28 Feb Vehicles 150 28 Feb Accumulated 60 000
20.6 000 20.6 Depreciation
on vehicles
Profit on 20 000 Bank 110
asset 000
disposal

170 000 170 000

If it is a Loss, then Loss on Asset disposal will be on the

credit side

Dr Profit on Cr
Disposal of
Asset
Profit & 20 000 28 Feb Asset 20 000
Loss 20.6 disposal

20 000 20 000
Fixed /Tangible Asset Note
Vehicles
Carrying value at beginning of 80 000
year
Cost 110 000
Accumulated depreciation (30 000)
Movements (46 000)
Additions at cost -
Disposals at carrying value (28 000)
Depreciation (18 000)
Carrying value at end of year 34 000
Cost 70 000
Accumulated depreciation (36 000)

Dr Vehicles Cr
1 Jan Balance b/d 110 000 30 June Asset 40 000
20.5 20.5 Disposal
31 Dec Balance c/d 70 000
110 000 110 000
1 Jan Balance b/d 70 000
20.6

Dr Accumulated Cr
Depreciation
on Vehicles
28 Feb Asset 12 000 1 Jan Balance 30 000
20.6 disposal 20.5
Balance c/d 36 000 30 June Depreciation 4 000
31 Dec Depreciation 14 000
48 000 48 000
1 Jan Balance b/d 36 000
20.6
 Dr Depreciation Cr
30 June Acc dep on 4 000 31 Dec Profit & Loss 18 000
20.5 vehicles 20.5
31 Dec Acc dep on 14 000
vehicles
18 000 18 000

Dr Asset Disposal Cr
28 Feb Vehicle 40 000 28 Feb Acc dep on 12 000
20.6 20.6 vehicles
Profit on 7 000 Debtors 35 000
asset control
disposal

47 000 47 000

Disposals at carrying value = 40 000 (cost) – 12 000

(acc dep)
= R28 000

Dr Profit on Cr
Disposal of
Asset
Profit & 7 000 28 Feb Asset 7 000
Loss 20.6 disposal

7 000 7 000
 Cost Accounting
Costing Concepts
1. RAW (DIRECT) MATERIALS COSTS
Materials that go into the final product. Are
converted during the manufacturing process into
the FINISHED product
2. DIRECT LABOUR COST
The labour costs of those workers directly
involved in the manufacture of the goods
3. INDIRECT LABOUR COST
This labour is NB, but is NOT directly involved in
the production process
Ex. Cleaning, maintenance, foreman, managers
4. INDIRECT MATERIAL COSTS
These materials DO NOT form an integral part of
the finished product but are still necessary in the
process.
Ex. Cleaning material, petrol, oil
5. FACTORY OVERHEADS (FOH)
Refers to all the costs incurred to run the factory
(other than the direct materials and labour)
Ex. Rent expense, Insurance, depreciation,
electricity
 6. FIXED COSTS
These costs remain constant within a period
IRRESPECTIVE of the amount of goods produced
 Factory Overhead (FOH)
 Administration cost (AC)
7. VARIABLE COSTS
These vary in direct proportion to the amount of
goods produced
 Direct materials cost (DMC)
 Direct Labour cost (DLC)
 Selling and distribution cost (SDC)
8. TOTAL COST OF PRODUCTION
Raw materials + direct labour + Factory
Overheads
9. UNIT COST
Refers to the cost of one item
Total Production
No . of units produced

10. MARK UP
Refers to the profit that the BUS adds to the cost.
Can be quoted as a %
Gross Profit
×100 %
Cost of sales
 11. SELLING PRICE
The Cost price + mark-up = selling price
or
(100+mark up)
selling price=cost price ×
100

12. COST PRICE

(100)
cost price=selling price ×
(100+mark up)

Break Even Point

How many products they need to sell before they
start making a profit.
This point tells you how many units must be
made & sold before you start making a profit
This means that only after selling 60 ‘s will Ann
start making a profit. I.e. 61 or more. FOHC/
u
¿Costs AC/u
Break even point=
SP/u−VC /u
DM/u

DL/u
SDC/u

How to calculate the:

Direct material cost
Opening stock + raw material bought on cash &
credit + carriage on raw materials bought – raw
material retuned - closing stock
Direct labour cost
production ( salaries ) wages+overtime +contributions

Factory overhead cost

Indirect materials ( purchased +opening−clossing )+ indirect labour +rent expense+ maintenance+depreciation

General Ledgers
Dr Raw materials Cr
stock
30 Apr Balance b/d 10 000 30 Apr Raw 390
20.21 20.21 materials 000
issued
Creditors 300 000 balance 25 000
control
Bank 100 000
Bank(carriag 5 000
e)
415 000
Balance b/d 25 00

Dr Work-in Cr
progress stock
30 Apr Balance b/d 40 000 30 Apr Finished 570
20.21 20.21 goods stock 000
Direct 390 Balance c/d 50 000
materials 000
cost
Direct 70 000
labour cost
Factory 120
 Overhead 000
cost
620 000 620 000
Balance b/d 50 000

Dr Finished goods Cr
stock
30 Apr Balance b/d 120 000 30 Apr Cost of sales 650
20.21 20.21 000
Work in 570 Balance 40 000
progress 000
690 000 690 000
Balance c/d 40 000

Dr Consumables Cr
stores on hand
30 Apr Balance b/d 5000 30 Apr Consumables 5000
20.21 20.21 stores
Balance c/d 6 000

Dr Consumables Cr
stores
30 Apr Consumable 5 000 30 Apr Consumables 6 000
20.21 stores on 20.21 stores on
hand hand
Bank (CPJ) 15 000 Factory 14 000
overhead
cost
20 000 20 000
 Dr Factory Cr
overhead cost
30 Apr Consumabl 14 000 30 Apr Work in 120
20.21 e stores 20.21 progress 000
stock
Factory 8 000
electricity
Factory rent 70 000
Factory 8 000
maintenance
Depreciation 20 000
120 000 120 000

Dr Sales Cr
30 Apr Trading 900 30 Apr Bank 900 000
20.21 account 000 20.21

Dr Cost of sales Cr
30 Apr Finished 650 30 Apr Trading 470 000
20.21 goods 000 20.21 account
stock

Dr Direct labour Cr
cost
30 Apr Factory 70 000 30 Apr Work In 70 000
20.21 Wages 20.21 Progress

Dr Trading Cr
Account
30 Apr Cost of 650 30 Apr Sales 900
20.21 Sales 000 20.21 000
Profit and 250 000
loss
900 000 900 000
 Dr Selling and Cr
Distribution
30 Apr Rent 30 Apr Profit and 100
20.21 Expense 20.21 Loss 000
Bad Depts
Commissions
Insurance
Salary
salesmen
Advertiseme
nt
100 000 100 000

Dr Administration Cr
30 Apr Depreciation 30 Apr Profit and 110
20.21 20.21 Loss 000
Salary
secretary
Interest on
loan

110 000 110 000

Production Costs
DMC
Direct Material Total units produced
cost per unit
(DMC)
DLC
Direct Labour Total units produced
Cost per unit
(DLC)
Total Total direct ( prime ) cost
Total units produced
Direct/prime cost
per unit
FOHC
Factory overhead Total Units produced
cost per unit
(FOHC)
Cost of Production
Cost of finished Total units produced
goods per unit

SDC
Selling & Total units sold
Distribution cost
per unit (SDC)
AC
Administration Total units sold
cost per unit (AC)

DL
Variable cost DM /u+
u
+ SDC /u
per unit (VC)
Fixed Cost per FOHC /u+ AC /u

unit
Sales
Selling price No . of units sold
per unit
Contribution SP/u−VC /u

per unit
 ¿ Costs
Break-even SP /u−VC /u
point

1.Manufacturing / production costs for the year

R Per
unit
Direct costs 23 R23
000
Direct material cost 8 000 8
Direct labour cost 15 15
000
Factory overhead cost 17 17
000
Total manufacturing cost 40 40
000
Work in progress at 0
beginning of the year
40
000
Work in progress at end of 0
year
Cost of production of 40 R40
finished goods 000

2.Income Statement
R Per unit
Sales 52 000 R52,00
Cost of Sales (40 00 (40,00)
0)
Gross profit 12 000 12,00
Selling & distribution (5 500) (5,50)
cost
Administration cost (3 500) (3,50)
Net profit(loss) 3 000 R3,00

Inventory
Difference between:
Perpetual Periodic
Stock movements Stock
recorded continuously in movements/purchases are
assets account called recorded in nominal
Trading stock account called Purchases

Expenses that occur when Expenses that occur when

purchasing stock (e.g. purchasing stock (e.g.
carriage on purchases) carriage on purchases)
is charged directly to are charged to relevant
Trading stock account. expense account

Returns and allowances Returns and allowances

on stock are credited in on stock are credited in
trading stock Purchases

Donations and stock Donations and stock

withdrawals(drawings) are withdrawals(drawings) are
credited in trading stock credited in Purchases

Trading stock debited Purchases is debited when

when assets are bought, assets are bought, when
credited when they are sold it is not affected
sold.

If stock sold for cash If stock is sold for cash

bank is debited (assets bank is debited and
increase), Sales is Sales is credited. Cost of
credited (income sales is only calculated at
increases). But also cost the end of the year.
of sales is debited
(expense increases) and
Trading stock is credited
(assets decrease).
Sales, and cost of sales is In trading account credit -
closed off to trading debit = profit and loss
account which is used to account which is gross
determine the gross profit profit

Perpetual
 Better control over stock.
 Stock movements are recorded on a continuous
basis
 Theft/leakages are quickly/easily detected
 Stock purchases and sales are recorded in the
trading stock account
 This system requires expensive outlay
(computerisation/barcodes/scanning equipment/
etc.).

Trading stock
Dr Trading Stock Cr
30 Apr Balance b/d 90 000 30 Apr Cost of sales 50 000
20.21 20.21 (CRJ)
Bank (CPJ) 190 000 Cost of sales 190 000
(DJ)
Creditors 110 000 Creditors 20 000
 Control (CJ) control (CAJ)
we return
Cost of sales 10 000 Drawings 5 000
(DAJ) other
re
Donations 25 000
Balance c/d 200 000
500 000 500 000
Balance b/d 200 000

Periodic
 Cost effective no outlay for expensive equipment
 Not necessary to calculate cost of sales on a
continuous basis
 Theft/leakages not that easily detected
 System suitable for business where it is difficult or
not feasible to determine cost price of individual
items

Calculations for cost of sales

Opening stock 50 000
Net Purchases 250 000
Carriage on purchases 20 000
Customs duty 20 000
Cost of goods 300 000
Closing stock 75 0000
Cost of Sales 225 000

Dr Purchases Cr
 Bank (CPJ) 190 000 Donations 25 000
Creditors 110 000 Creditors 20 000
Control (CJ) control (CAJ)
Petty Cash 10 000 Drawings 5 000
(PCJ)
Trading 250 000
Account
300 000 300 000
Balance b/d 200 000

Net Purchases = Bank (goods on cash) + Creditors

control (goods on credit) + petty cash – Donations –
drawings – Crditors control (Goods we returned)
Dr Trading Cr
Account
30 Apr Opening 50 000 30 Apr Sales 325 000
20.21 stock 20.21
Purchases 250 000 Closing stock 75 000
Carriage on 20 000
purchases
Customs 20 000
duty
Profit and 60 000
loss
400 000 400 000

Sales = Cash sales + Credit sales – Debtors allowances

Profit & loss = Gross profit
Accounting Equation
Perpetual:
1. Purchased stock on cash
2. Purchased stock on credit
3. Sales
4. Credit sales
5. Good taken for own use
6. Paid for transportation of goods
7. Paid SARS for PAYE deductions
8. Paid for repairs
9. Received money from debtor whose debt had
previously been written of
No. Account debited Account credited
1 Trading stock Bank
2 Trading stock Creditors Control
3 Bank Sales
Cost of sales Trading stock
4 Debitors control Sales
Cost of sales Trading stock
5 Drawings Trading stock
6 Trading stock Bank
7 SARS(PAYE) Bank
8 Repairs Bank
9 Bank Bad debts recovered

Periodic:
1. Purchased stock on cash
2. Purchased stock on credit
3. Sales
4. Credit sales
5. Good taken for own use
6. Paid for transportation of goods
7. Donated goods to charity
8. Returned stock
9. Received rent
10. Stock was returned
No. Account debited Account credited
1 Purchases Bank
2 Purchases Creditors Control
3 Bank Sales
4 Debitors control Sales
5 Drawings Purchases
6 Carriage on purchases Bank
7 Donations Purchases
8 Creditors control Purchases
9 Bank Rent income
10 Debtors’ allowances Debtors control
 Budgets and Projected income statements
Budgets