SINGLE ENTRY AND INCOMPLETE RECORDS

FINANCIAL STATEMENTS FROM INCOMPLETE RECORDS

MEANING- accounting records, which are not strictly kept according to double entry
system. Normally, under this system records of cash and personal accounts of trade
receivables and trade payables are properly maintained.

DISADVANTAGES OF INCOMPLETE RECORDS

 A trial balance cannot be prepared and accuracy of accounts cannot be ensured.
 Correct determination and evaluation of financial result of business operations
cannot be made.
 Analysis of profitability, liquidity and solvency of the business cannot be done. This
may cause a problem in raising funds from outsiders and planning future business
activities.
 Failure to identify fraud and embezzlement.

STATEMENT OF AFFAIRS
 If the only records available are those relating to the assets and liabilities of the
business.
 These assets and liabilities are listed in a STATEMENT OF AFFAIRS which is
similar to the statement of financial position.
 The statement is prepared to determine the amount of change in the capital during
the period.
 It is known as statement of affairs rather than statement of financial position
because it is prepared without the use of set of double entry records.

[Date] 1
PREPARED BY M. GABATWESEPE
DIFFERNCE BETWEEN STATEMENT OF AFFAIRS AND STATEMENT OF
FINANCIAL POSITION

Basis of difference Statement of affairs Statement of financial position

Reliability It is less reliable as it is prepared It is more reliable as it is prepared
from incomplete records. from double entry records.
Objective It is prepared to estimate the It is to show the true financial
balance in capital account on a position of an entity on a particular
particular date. date.
Omission Omission of assets or liabilities Omission of assets or liabilities can
cannot be discovered easily. be discovered easily and can be
traced from accounting records.

Example
Segomotso does not keep proper accounting records. He provided the following
information about his assets and liabilities at 31 December 2018.
P
Motor Vehicle at cost 24 000
Fixtures and fittings at cost 8 000
Inventory 7 800
Trade receivables 5 200
Other receivables (prepaid insurance) 400
Trade payables 6 700
Bank overdraft 600

Required;
Prepare Segomotso’s statement of affairs at 31 December 2018.

[Date] 2
PREPARED BY M. GABATWESEPE
Solution;
Segomotso
Statement of affairs at 31 December 2018
Non-current assets P P P
Fixtures and fittings 8 000
Motor vehicle 24 000
32 000

Current assets
Inventory 7 800
Trade receivables 5 200
Other receivables 400 13 400

Current liabilities
Trade payables 6 700
Bank overdraft 600 7 300
Net current assets 6 100
38 100
Financed by
Capital (Balance) 38 100

CALCULATION OF PROFIT
 Profit is measure by comparing the changes in capital over the financial period.
 The basic formula;
PROFIT =CLOSING CAPITAL –OPENING CAPITAL

 If drawings were made during the year, the formula will be modified;
PROFIT=CLOSING CAPITAL- OPENING CAPITAL +DRAWNIGS

 Also if additional capital/ further capital introduced during the period/ year, the
formula will also be modified;
PROFIT=CLOSING CAPITAL-OPENING CAPITAL+DRAWINGS –CAPITAL
INTRODUCED.

[Date] 3
PREPARED BY M. GABATWESEPE
  An alternative, will be to construct a capital account, to calculate profit/loss.
Capital account
Date Details Amount Date Details Amount
2019 Dec. 31 Drawings xx 2019 Jan. 1 Balance b/d xx
Dec. 31 Balance c/d xx Dec. 31 Bank/cash xx
Dec. 31 Profit xx
xx xx

Closing capital opening capital capital introduced

CALCULATION OF SALES
 Even when a business does not keep a full set of double entry records, the cash
book can be used to identify;
 Receipts from trade receivables
 Receipts from cash sales
 These receipts together with the figures for trade receivables at the beginning and
at the end of the period, provide the information needed to calculate the total sales
for the period.

 Cash sales, the total of such sales for a period can then be found from the
cashbook without the need for any adjustment.

CALCULATION OF CREDIT SALES

P
Receipts from trade receivables xx
Add: trade receivables at the end xx
Discount allowed xx
xx
Less: trade receivables at the beginning xx
Total credit sales for the year xx

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PREPARED BY M. GABATWESEPE
  Alternatively, the calculation of credit sales can be found by preparing a TOTAL
TRADE RECEIVABLES ACCOUNT, the amount of credit sales will be inserted
as a balancing figure.

Total trade receivables account

Date Details Amount Date Details Amount
2019 Jan. 1 Balance b/d xx 2019 Dec. 31 Bank/cash xx
Dec. 31 Sales ? Dec. 31 Balance c/d xx
xx xx

Trade receivable at the beginning Receipts from trade receivables

Balancing figure Trade receivables at the end

 The total sales for the year will be ;

 Total sales =cash sales +credit sales

CALCULATION OF PURCHASES

 As with cash sales, when a business does not keep a full set of double entry
records, the cash book can be used to identify;
 Payments to trade payables
 Payments for cash purchases
 These receipts together with the figures for trade payables at the beginning and at
the end of the period, provide the information needed to calculate the total
purchases for the period.
 Cash purchases, as with the cash sales, the total of cash purchases is found from
the cash book records.

[Date] 5
PREPARED BY M. GABATWESEPE
CALCULATION OF CREDIT PURCHASES

P
Payments to trade payables xx
Add: trade payables at the end xx
Discount received xx
xx
Less: trade payables at the beginning xx
Total credit purchases for the year xx

 Alternatively, the calculation of credit purchases can be found by preparing a

TOTAL TRADE PAYABLES ACCOUNT, the amount of credit purchases will be
inserted as a balancing figure.

Total trade payables account

Date Details Amount Date Details Amount
2019 Dec. 31 Bank/cash xx 2019 Jan. 1 Balance b/d xx
Dec. 31 Balance c/d xx Dec. 31 Purchases ?
xx xx

Payments to trade payables Trade payables at the beginning

Trade payables at the end Balancing figure

 Then, the total purchases for the year will be;

 Total purchases=cash purchases +credit purchases

[Date] 6
PREPARED BY M. GABATWESEPE
Example
Dimpho is a trader who does not keep a full set of double entry records. She supplied the
following information about her assets and liabilities.

1 January 2019 31 December 2019

P P
Machinery at cost 9 000 ?
Fixtures and fittings at cost 4 500 ?
Motor vehicle at cost - 10 000
Inventory 2 200 2 340
Trade receivables 1 620 1 780
Trade payables 1 090 1 000
Bank 3 200 -
Bank overdraft - 720
Prepayments 150 90
Accruals 50 30
Loan from Thusano loans 7 500 4 000

On 31 December 2019, it was decided that the machinery and fixtures and fittings should
be depreciated by 15% on cost.

During the year, Dimpho took drawings of P100 per month. On 1 October 2019, Dimpho
brought her private motor vehicle into the business at a valuation of P10 000.

Required;
a) Prepare the statement of affairs for Dimpho as at;
i. 1 January 2019
ii. 31 December 2019
b) Calculate Dimpho’s profit or loss for the year ended 31 December 2019.

[Date] 7
PREPARED BY M. GABATWESEPE
Solution;
a)
Dimpho’s Statement of affairs at 1 January 2019
Non-current assets P P P
Fixtures and fitting 4 500
Machinery 9 000
13 500

Current assets
Inventory 2 200
Trade receivables 1 620
Other receivables 150
Bank 3 200 7 170

Current liabilities
Trade payables 1 090
Other payables 50 1 140
Net current assets 6 030
19 530
Financed by
Capital at 1 January 12 030
Loan- Thusano loans 7 500
19 530

[Date] 8
PREPARED BY M. GABATWESEPE
 Dimpho’s statement of affairs as at 31 December 2019
Non-current assets P P P
Fixtures and fittings 4 500 675 3 825
Machinery 9 000 1 350 7 650
Motor vehicle 16 000 - 10 000
21 475

Current assets
Inventory 2 340
Trade receivables 1 780
Other receivables 90 4 210

Current liabilities
Trade payables 1 000
Other payables 30
Bank overdraft 720 1 750
Net current assets 2 460
23 935
Financed by
Capital at 31 December 19 935
Loan- Thusano loans 4 000
23 935

b) Calculation of profit or loss for the year ended 31 December 2019

P
Capital at 31 December 2019 19 935
Less: Capital at 1 January 2019 12 030
7 905
Add: Drawings (P100 x 12) 1 200
9 105
Less: Capital introduced 10 000
Loss for the year 895

[Date] 9
PREPARED BY M. GABATWESEPE
Alternative; constructing a capital account to calculate profit or loss for the year;
Capital account
Date Details Amount Date Details Amount
2019 Dec. 31 Drawings 1 200 2019 Jan. 1 Balance b/d 12 030
Dec. 31 Balance c/d 19 935 Dec. 31 Bank/cash 10 000
Dec. 31 Loss 895
22 030 22 030

CALCULATION OF GROSS PROFIT

 Once the sales and purchases are calculated, the information can be used to work
out how much Gross profit is made over a given period.
 If the information for inventory held at the beginning and at the end of the period is
provided, the cost of sales will be calculated.
 Therefore the Gross profit will be calculated using the trading account;
i.e. Gross profit= Sales- Cost of sales

PREPARATION OF FINANCIAL STATEMENTS

 If further information can be obtained from incomplete records, financial
statements can be prepared.
 The statement of affairs is prepared to show the owner’s capital at a certain date.
 The cash book provides information about cheques and cash received from
customers and paid to suppliers.
 Also if further information can be obtained on expenses, drawings and other
adjustments required, then it will be possible to prepare financial statements.

[Date] 10
PREPARED BY M. GABATWESEPE
Example;
Boikobo has the following information about his assets and liabilities.

1 January 2019 31 December 2019

P P
Furniture at cost 52 000 ?
Inventory 1 500 1 800
Trade receivables 3 900 4 700
Trade payables 4 200 2 800
Bank (dr) 2 600 6 400
Insurance prepaid 200 350
Rent accrued 600 780

All receipts and payments go through the business bank account. Payments from the
bank account during the year ended 31 December 2019 include;
P
Administrative expenses 5 500
Insurance 800
Rent 6 200
Boikobo’s drawings 9 500

Boikobo also decides that as from 1 January 2019 his furniture will depreciate by 10%
per annum.
During the year ended 31 December 2019;
P
Receipts from trade receivables 48 650
Cash sales 9 650
Cheques paid to trade payables 32 500

[Date] 11
PREPARED BY M. GABATWESEPE
Calculation of sales
P
Receipts from trade receivables 48 650
Add; Trade receivables at 31 December 2019 4 700
53 350
Less; Trade receivables at 1 January 2019 3 900
Credit sales 49 450
Add; Cash sales 9 650
Total sales 59 100

Alternative; construction of total trade receivables account to calculate credit sales.

Total trade receivables account
Date Details Amount Date Details Amount
2019 Jan. 1 Balance b/d 3 900 2019 Dec. 31 Bank 48 650
Dec. 31 Sales 49 450 Dec. 31 Balance c/d 4 700
53 350 53 350

Calculation of purchases

P
Cheques paid to trade payables 32 500
Add; Trade payables at 31 December 2019 2 800
35 300
Less; Trade payables at 1 January 2019 4 200
Credit purchases 31 100

[Date] 12
PREPARED BY M. GABATWESEPE
Alternative; construction of total trade payables account to calculate credit purchases.
Total trade payables account
Date Details Amount Date Details Amount
2019 Dec. 31 Bank 32 500 2019 Jan.1 Balance b/d 4 200
Dec. 31 Balance c/d 2 800 Dec. 31 Purchases 31 100
35 300 35 300

Boikobo’s Statement of affairs at 1 January 2019

Non-current assets P P P
Furniture 52 000

Current assets
Inventory 1 500
Trade receivables 3 900
Other receivables 200
Bank 2 600 8 200

Current liabilities
Trade payables 4 200
Other payables 600 4 800
Net current assets 3 400
55 400
Financed by
Capital at 1 January 2019 55 400

[Date] 13
PREPARED BY M. GABATWESEPE
 Boikobo’s Income statement for the year ended 31 December 2019

P P
Sales 59 100

Less cost of sales

Opening inventory 1 500
Add Purchases 31 100
Goods available for sale 32 600
Less closing inventory 1 800
Cost of sales 30 800
Gross profit 28 300
Less Expenses
Administrative expenses 5 500
Insurance (800+200-350) 650
Rent (6 200+780-600) 6 380
Depreciation ( 10% x P52 000) 5 200
Total expenses 17 730
Profit for the year 10 570

[Date] 14
PREPARED BY M. GABATWESEPE
Boikobo’s statement of financial position as at 31 December 2019.

Non-current assets P P P
Furniture 5 2 000 5 200 46 800

Current assets
Inventory 1 800
Trade receivables 4 700
Other receivables 350
Bank 6 400 13 250

Current liabilities
Trade payables 2 800
Other payables 780 3 580
Net current assets 9 670
Total net assets 56 470

Financed by
Capital at 1 January 2019 55 400
Add profit for the year 10 570
65 970
Less drawings 9 500
Capital at 31 December 2019 56 470

[Date] 15
PREPARED BY M. GABATWESEPE
NON-PROFIT MAKING ORGANISATIONS

RECEIPTS AND PAYMENTS ACCOUNT

FEATURES OF NON-TRADING ORGANISATIONS

 Their main aim is to provide facilities and services to its members and society.
 The main source of income is the subscriptions from members.
 Accumulated fund represent capital in the statement of financial position.
 A treasure is appointed to take care of the clubs or societies’ money.

DIFFERENCE BETWEEN TRADING ORGANISATION AND NON-TRADING

ORGANISATION
TRADING ORGANISATION NON-TRADING ORGANISATION
 Main aim is to earn profit.  Main aim is to render/ provide
service to members and society.
 Funds are represented by capital  Funds are represented by
contributed by proprietors and accumulated fund comprising of
accumulated reserves. donations, subscriptions and
surplus.
 Prepares manufacturing account,  Prepares receipts and payments
trading account, income statement account, income and expenditure
and statement of financial position. account and statement of financial
position.
 The balance of the income  The balance of the income and
statement is either profit or loss for expenditure account is either
the year. surplus or deficit.

[Date] 16
PREPARED BY M. GABATWESEPE
RECEIPTS AND PAYMENTS ACCOUNT

 It is a summary of the cashbook for the financial period.

 The account records all the money paid and all the money received for the period.
 Any money received during the year is entered on the debit side of the account
and any money paid out during the year is entered on the credit side of the account.
 The account is balanced in the usual way at the end of the financial period and the
balance is carried down becomes the opening balance for the next period.
 A debit balance is an asset to the club and represents money the club or society
possess.
 A credit balance is a liability and represents money owed by the society or club
to the bank (bank overdraft).

 In preparing the Receipts and payments account, the following apply;

i. No adjustments are made for accruals and prepayments
ii. No distinction is made between capital and revenue expenditure.
iii. No distinction is made between capital and revenue receipts.
iv. No entries are made for non-monetary items like depreciation.

Example
Mabogo-Dinku Pool Club was formed some years ago.
On 1 April 2018 it had P3 900 in the bank account. All receipts are paid into the bank and
payments were made by cheque. The treasurer provided the following information for the
money received and paid during the year ended 31 March 2019.
P
Subscriptions received 4 700
Receipts from tuck-shop sales 2 800
Purchases of tuck-shop supplies 1 240
Purchases of new equipment 2 200
Wages of part-time tuck-shop assistant 1 500
Wages of part-time care-taker 2 000

[Date] 17
PREPARED BY M. GABATWESEPE
Rates and insurance 560
Receipts from tickets for annual tournament 3 400
Expenses of annual tournament 1 780
Administrative expenses 890

Required;
Prepare the Receipts and Payments account for Mabogo-Dinku Pool Club for the year
ended 31 March 2019.

Solution;
Mabogo-Dinku Pool Club’s receipts and payments account
Receipts P Payments P
Balance b/d 3 900 Purchase of tuck-shop supplies 1 240
Subscriptions 4 700 Purchase of new equipment 2 200
Tuck-shop sales 2 800 Wages tuck-shop assistant 1 500
Tickets for annual tournament 3 400 Wages of care-taker 2 000
Rates and insurance 560
Expenses of annual tournament 1 780
Administrative expenses 890
Balance c/d 4 630
14 800 14 800
Balance b/d 4 630

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PREPARED BY M. GABATWESEPE
INCOME AND EXPENDITURE ACCOUNT AND THE STATEMENT OF FINANCIAL
POSITION

CAPITAL AND REVENUE EXPENDITURE AND RECEIPTS

CAPITAL EXPENDITURE
 Is money a business/firm spends on buying non-current assets or money spent to
increase/ improve the value of an existing non-current asset.
 The capital expenditure includes;
 Buying non-current asset
 Increasing the value of an existing no-current asset. This could be an
extension of an existing building.
 Legal cost incurred in buying or extending buildings.
 Cost carriage and installation of new machinery.
 Any other cost needed to get a fixed asset ready for use.

REVENUE EXPENDITURE
 Money spent on the day to day running of the business.
 This includes;
 Goods purchased for resale
 Salaries of workers
 Lighting and heating
 Rent
 Insurance

CAPITAL RECEIPTS
 Money received from the sale of non-current assets.
E.g. plot of land sold

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PREPARED BY M. GABATWESEPE
REVENUE RECEIPTS
 Money received from sales, commission received for services supplied and all
other revenue received such as rent received and discount received.

Example;
Classify the following items under the heading of capital expenditure or revenue
expenditure;
a. Repairs to motor vehicle
b. Cost of building expansion of factory
c. Insurance for motor vehicle
d. Cost of painting of new expansion
e. Purchase of new motor vehicle
f. Petrol costs for motor vehicle

Solution;
Capital expenditure Revenue expenditure
Cost of building expansion of factory Repairs for motor vehicle
Purchase of new motor vehicle Insurance for motor vehicle
Cost of painting new expansion Petrol costs for motor vehicle

[Date] 20
PREPARED BY M. GABATWESEPE
SUBSCRIPTIONS

 Subscription in an income and expenditure account must be the subscriptions for

the time period covered by that account.
 The amount received is adjusted for accruals and prepayments.
 Any subscriptions owing by members is an asset and any subscriptions prepaid is
a liability.
 Subscriptions owing appear as a debit balance in the subscription account and
subscriptions paid in advance appear as a credit balance in the subscription
account.
 It is possible to have two balances in the subscription account as some members
may be owing and other may have paid in advance.
Example;
Mabogo-Dinku Pool Club have the following information;
P
Subscriptions received during the year 4 700
Subscriptions owed by members at 31 March 2019 1 380
Subscriptions paid in advance by members at 31 March 2019 660

Required;
Prepare the subscriptions account

Solution;
Subscriptions account
Date Details Amount Date Details Amount
2019 Mar.31 Income & 5 420 2019 Mar. 31 Bank 4 700
expenditure
2019 Mar.31 Balance c/d 660 2019 Mar. 31 Balance c/d 1 380
6 080 6 080
2019 Apr. 1 Balance b/d 1 380 2019 Apr. 1 Balance b/d 660

[Date] 21
PREPARED BY M. GABATWESEPE
TRADING ACTIVITIES

 Many of the non-trading organisations carry out trading activities on a regular basis
with the intention of earning profit.
 Some activities may include cafe or restaurant, bar or coffee shop.
 For any such activity that involve trading, a separate trading account should be
prepared in which the profit or loss on that activity is calculated.
 The profit or loss is then transferred to the income and expenditure account.

Example;
Mabogo-Dinku Pool Club has a café where soft drinks, beverages, sandwich and
confectionary are sold to members and visitors.
The following information is available for the year ending 31 March 2019;
P
Inventory 1 April 2018 220
Sales 2 800
Purchases 1 240
Wages of tuck-shop assistant 1 500
Inventory at 31 March 2019 360

Required;
Prepare the trading account for the year 31 March 2019 to calculate the profit and loss
on trading.

[Date] 22
PREPARED BY M. GABATWESEPE
Solution;
Mabogo-Dinku Pool Club trading account 31 March 2019
P P
Sales 2 800

Less cost of sales

Opening inventory 220
Add Purchases 1 240
Goods available for sale 1 460
Less closing inventory 360
Cost of sales 1 100
Add wages of tuck-shop assistant 1 500 2 600
Profit on café 200
(transferred to the Income & Expenditure account)

INCOME AND EXPENDITURE ACCOUNT

 Same as the profit and loss account of a trading business. It shows all the income
(gains) and expenses (losses) for the financial year.
 When the gains are more than the losses, the organisation will have a surplus
(excess of income over expenditure).
 When the losses are more than the gains, the organisation will have a deficit
(excess of expenditure over income).
 It is prepared from the receipts and payments account and takes into
consideration the following;
i. Accruals and prepayments
ii. Depreciation of non-current assets
iii. Profit or loss on sale of non-current assets.

[Date] 23
PREPARED BY M. GABATWESEPE
Example;
Using the Receipts and Payments account for Mabogo-Dinku Pool Club and the following
additional information;
i. At 31 March 2019 subscription owed by members for the current financial year
amounted to P1 380.
ii. Subscriptions raised from members for the next financial year amounted to P660.
iii. Insurance prepaid amount to P80
iv. Care taker’s wages outstanding amounted to P150
v. Equipment is to be depreciated by P1 350

Required;
Prepare the Income and Expenditure account for the year ending 31 March 2019.

Solution;
Mabogo-Dinku Pool Club Income and Expenditure account at 31 March 2019
P P
Income
Subscriptions (P4 700+1 380-660) 5 420
Profit on café 200
Tickets for annual tournament 3 400
less Expenses for tickets 1 780 1 620
7 240
Expenditure
Wages of care taker (P2 000+150) 2 150
Rate & Insurance (P560-80) 480
Administrative expenses 890
Depreciation of equipment 1 350 4 870
SURPLUS 2 370
(transferred to statement of financial position)

[Date] 24
PREPARED BY M. GABATWESEPE
 DIFFERENCE BETWEEN RECEIPTS AND PAYMENTS ACCOUNT AND INCOME
AND EXPENDITURE ACCOUNT

RECEIPTS AND PAYMENTS ACCOUNT INCOME AND EXPENDITURE ACCOUNT

 Summary of cash transactions for  Summary of income and expenditure
a period and it is a real account. and it is a nominal account.
 Prepared to show cash and bank  Prepared to show the net result of the
receipts and payments during the operation during the period to
period to determine the closing determine surplus or deficit.
balance of cash and bank.
 No distinction between capital and  All expenses and incomes of revenue
revenue receipts and payments. nature recorded on accrual basis.
 Contains only cash and bank  Contains both cash and non-cash
transactions. expenses and incomes of revenue
nature.
 No adjustments are required.  Adjustments are made because it is
prepared on accrual basis.

CALCULATION OF ACCUMULATED FUND

 Calculated the same way capital is calculated.

i.e. Accumulated fund=Assets-Liabilities

Example;
Mabogo-Dinku Pool Club’s assets and liabilities on 1 April 2018 were as follows;
P
Premises at cost 32 000
Equipment at cost 6 070
Bank (dr) 3 900
Café inventory 220
Trade payables for café 350

[Date] 25
PREPARED BY M. GABATWESEPE
Solution;
Accumulated fund =Assets – Liabilities
Assets= 32 000+ 6 070 + 3 900 +220
=P42 190
Liabilities= P350
Accumulated fund= P42 190-P350
= P41 840.

STATEMENT OF FINANCIAL POSITION OF A NON-TRADING ORGANISATION

 Similar to that of a trading business, the only difference is that the capital is
replaced by Accumulated fund.
 This is the surplus that has accumulated in the organisation over the years, if the
organisation makes a deficit, the accumulated fund will be reduced.

Example;
Using the information for Mabogo-Dinku Pool Club, the statement of financial position can
be prepared as follows;

[Date] 26
PREPARED BY M. GABATWESEPE
Solution;
Mabogo-Dinku Statement of financial position as at 31 March 2019

Non-current assets P P P
Premises 32 000
Equipment (6 070+2 200) 8 270 1 350 6 920
38 920
Current assets
Inventory 360
Insurance prepaid 80
Subscriptions owing 1 380
Bank 4 630 6 450

Current liabilities
Trade payables 350
Wages outstanding 150
Subscription prepaid 660 1 160
Net current assets 5 290
Total net assets 44 210

Financed by
Accumulated fund 41 840
Add Surplus for the year 2 370
44 210

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PREPARED BY M. GABATWESEPE
PAYROLL ACCOUNTING

PAYROLL RECORDS
TERMS USED
EMPLOYER-a person who hires another person to do business activity.
EMPLOYEE-a person hired to do business activity and he or she is paid for the work
done.
GROSS PAY-total amount earned before any deductions (basic salary/wage)
NET PAY-total amount left after paying deductions (take home) i.e. Gross pay less
Deductions.

METHODS USED TO CALCULATE REMUNERATION

 There are two main methods;
 Time rate
 Piece rate

TIME RATE
 Employee is paid an agreed amount for each hour worked.
 Wages are calculated by multiplying the fixed rate per hour by the number of hours
worked.
 The standard rate per hour is known as BASIC RATE.
 Any amount of work done above the normal time is regarded as “OVERTIME”.

Example;
Dineo works as a dressmaker in a dressmaking business. She paid at the rate of P15 per
hour. The normal working week is 48 hours. During the week ended 7 th July 2018, Dineo
worked the normal weekly hours. Calculate Dineo’s gross pay for the week ending 7 th
July 2018;
Gross pay = P15 x 48 hours
= P720

[Date] 28
PREPARED BY M. GABATWESEPE
During the week ending 14 July 2018, Dineo worked total of 52 hours. Overtime is paid
at a rate of time and a third. Calculate Dineo’s gross pay for the week ended 14 July 2018.
Overtime hours=52 hours-48 hours
=4 hours
Normal working week=P15 x 48 hours
= P720

Overtime pay= 4 x {(1/3xP15) +P15}

=4 x P20
=P80
Gross pay=P720+80
=P800.00

PIECE RATE
 Employee is paid agreed amount for each product/item produced or task
performed.
 Wages are calculated by multiplying the piece rate per article (task performed)
by the number of articles or products produced or task performed.
 Sometimes the employee will have a basic wage. (minimum wage)

Example;
John and Tiro work in a factory making candles. They are paid P5 for every candle
produced. Their employer pays a minimum wage of P400 per week. During the week
ended 14 July 2018, John produced 100 candles and Tiro produced 70 candles. Calculate
the gross pay for the week ended 14 July 2018 for;

a) John
b) Tiro

[Date] 29
PREPARED BY M. GABATWESEPE
Solution;
John = 100 x P5= P500

Tiro= 70 x P5= P350, then he will be paid P400, because P350 is less than the minimum
wage.

RECORDS OF ATTENDANCE
 There are two main methods of recording attendance, i.e. clock cards and time
sheet.

CLOCK CARDS
 Used by wages department to calculate the hours worked by each employee.
 Each employee is required to insert their individual card into the time recorder
when arriving or leaving work.

Layout of clock card

Badiri Motor Repairs
Clock card
Employee: Moagi Tumelo Week ending:7 March 2019
Day In Out In Out Total hours
Monday 0730 1230 1345 1700 9 hrs. 15mins
Tuesday 0730 1230 1345 1700 9 hrs. 15 mins
Wednesday 0730 1230 1345 1800 10 hrs. 15 mins
Thursday 0730 1230 1345 1800 10 hrs. 15 mins
Friday 0730 1230 - - 5 hrs.
Total hours 44 hrs.

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PREPARED BY M. GABATWESEPE
TIME SHEET
 Time sheets are used when the employee works away from the premises of the
business.
 Employee is required to complete a time sheet showing the hours worked each
day.

Layout of time sheet

Badiri Motor Repairs

Time sheet
Employee: Omphile Tau Week ending:14 March 2019
Day Job Total hours
Monday
Tuesday
Wednesday
Thursday
Friday

VOLUNTARY DEDUCTIONS
 These are deductions that an employee choose to have from his or her gross pay,
e.gs, insurance premium, medical aid contribution, pension, subscription to trade
union/ club, donation to charity.

STATUTORY DEDUCTIONS
 These are deduction that are required by law, e.g. income tax

COMPLETING THE PAYROLL REGISTER AND PAY SLIP

PAYROLL REGISTER-document that list the total gross pay, deductions and net pay of
each employee.

[Date] 31
PREPARED BY M. GABATWESEPE
 PAY SLIP- document given to the employee that shows gross pay, net pay and details of
various deductions.

Example;
Layout of a payroll
BADIRI MOTOR REPAIRS
Payroll
Month ending 30 April 2019
Earnings Deductions
Name of Basic Overtime Total Income Pension Trade union Total Net
employee pay gross tax contribution subscription deductions pay
pay
P P P P P P P P

Moagi Tumelo 3 500 400 3900 390 175 35 600 3 300

Omphile Tau 2 200 200 2400 240 110 22 372 2 028

Layout of a pay slip

BADIRI MOTOR REPAIRS

PAY DATE: 28 APRIL 2019
NAME: Tumelo Moagi PAYROLL NO. 678906305
BANK NAME BRANCH NAME & ACCOUNT TYPE ACCOUNT NUMBER
THUSO BANK PALAPYE-CURRENT 660 167 867
EARNINGS AMOUNT DEDUCTIONS AMOUNT
Basic salary 3 500 Income tax 390
Overtime 400 Pension contribution 175
Trade union subscriptions 35

Total earnings 3 900 Total deductions 600

NET SALARY 3 300

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PREPARED BY M. GABATWESEPE
BOOKKEEPING ENTRIES FOR PAYROLL

 The usual principle of double entry is applied when making entries in books of
account.
 The bookkeeping entries involve an expense account for wages and accounts for
each of the main types of statutory and voluntary deductions.
 An employer often has to forward amounts deducted from employees’ wages to
the appropriate government department or organization at monthly intervals.
 Until the amounts are paid, the accounts will have credit balances as they are
liabilities of the business.

Example;
The employees of badiri garage are paid monthly in cash. All deductions from wages
are passed to the appropriate organisations at the end of each month.
The total gross wages of Badiri motor repairs for the month of April amounted to P6
300. Total deductions from wages for the month of April were;
P
Income tax 630
Pension contributions 285
Trade union subscriptions 57
972

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PREPARED BY M. GABATWESEPE
The ledger entries that Badiri motor repairs would make on 30 April 2019 are;

Badiri motor repairs

Cash book (cash column only)
Date Details Amount Date Details Amount
P P
2019 April 30 Wages 5 328
(total net pays)

Wages account
Date Details Amount Date Details Amount
P P
2019 April 30 Cash 5 328
Income tax 630
Pension contribution 285
Trade union 57
subscription

Income tax account

Date Details Amount Date Details Amount
P P
2019 April 30 Wages 630

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PREPARED BY M. GABATWESEPE
 Pension contribution account
Date Details Amount Date Details Amount
P P
2019 April 30 Wages 285

Trade union subscription account

Date Details Amount Date Details Amount
P P
2019 April 30 Wages 57

[Date] 35
PREPARED BY M. GABATWESEPE
FARM ACCOUNTS
FARM INCOME AND EXPENSES

Farm accounts-these are accounting records that help to track the performance of the
farm. Using accounting records the farmer is able to keep the following records;
 Variable and fixed costs of the farm
 Crop records
 Livestock records
 Assets of the farm
 Produce used at home

Importance of farm records

 Helps to evaluate the performance of any farm or farm enterprise within a given
period of time. Farmer know the progress and contributions of each aspect of the
farm to its overall success.
 Records are an aid to managerial control. A farmer can keep a close check on
whether work on the farm is going according to his/her plan. E.g. Farmer can check
on whether he is using too much animal feeds or too much seed or whether crop
and livestock yields are falling.
 They are important for planning and budgeting. Provides a farmer with enough
information needed for proper planning and budgeting at every point in time.
 Tells a farmer how much he is earning.
 Enable the farmer to obtain loans from banks and other financial institutions. Banks
usually gives loans if only a farmer can produce adequate physical records with
the corresponding as well as the overall farm plan.

[Date] 36
PREPARED BY M. GABATWESEPE
TYPES OF FARM RECORDS
 There are different types of farm records a farmer could keep to run a successful
farm business.
They include;
1. Records of farm implements and equipment
 This is used to keep inventory of all the equipment on the farm and their quantity.
 It can also contain the date of purchase of the equipment and sometimes their
description.
2. Record of agricultural inputs
 This record is used to keep track of all agricultural inputs such as fertilisers, seeds,
livestock feeds etc.
 The record often also contain the amount of that was bought, the amount that has
been used, and what is left.
3. Records of livestock and livestock products
 Farmers keep different records of livestock for each type of livestock on the farm.
 Also for livestock that have products e.g. eggs from chickens, the farmer keep a
record that accounts for the number of eggs laid every day, if a farmer keeps dairy
cows, he keeps record of amount of litres of milk produced per day.
4. Employees records
 This type is used to keep record of staffs, their salaries, and payment. It is also
known as labour record.

5. Production records
 Used to document everything that is produced on the farm on weekly, monthly
and annually.
 Helps the farmer to keep track of how well the farm is doing.
6. Sales records
 Records all sales made from the farm produce.

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PREPARED BY M. GABATWESEPE
CROP RECORDS AND LIVESTOCK BOOKS
Crop records
 Is a record which gives details of the crops in each plot, providing the following
details; date of planting and harvesting, quantity of seeds used, quantity of
fertilizer used, treatment, yield etc.

Example of crop records

Crop Date of Amount Date of Quantity Yield Remarks
planting of seeds harvest of
used fertiliser
Maize 30 October 2 tonnes 15 March 2 tonnes 12 tonnes satisfactory
2018 2019
Beans 30 October 1 tonne 30 April 500 kg 2.5 tonnes satisfactory
2018 2019
Vegetables 15 November 10 kg 20 20 kg 50 bales satisfactory
2018 December
2018

Livestock records
 Is a record which keeps details of each type of livestock such as, chickens,
sheep, goats, cattle, pigs etc.
 It shows the opening and closing balances.
 It helps to check on thefts, deaths and losses.

[Date] 38
PREPARED BY M. GABATWESEPE
Example of livestock records

Class Opening Bought/ Born Total Losses/death Sold/ Closing

of balance received received given balance
stock away
Cattle 100 10 30 140 25 15 100
Sheep 150 60 86 296 12 9 275
&goats
Chicken 200 Nil 75 275 90 30 155

SOURCES OF FARM INCOME AND EXPENSES

Farm income – farmers may receive income from many sources, but the most common
sources are;
 Sale of livestock
 Sale of fruits
 Sale of grains
 Sale of vegetables
 Sale of hay

Farm expenses-expenses on a farm may result from its productive operations. This
include the following;
 Seed material
 Fertilisers
 Livestock feeds
 Wages of farm workers
 Pest control chemicals
 Repairs to equipment and buildings
 Transport
 Depreciation of farm machinery

[Date] 39
PREPARED BY M. GABATWESEPE
CALCULATING THE COST OF FARM PRODUCE

Farm variable costs-these are costs or expenses which change according to the volume
of production in the farm. Examples are; seed, fertilisers, sprays, veterinary costs,
livestock feeds.

Farm fixed costs (overheads)-these are costs which will not change according to the
volume of production. Usually these expenses remain the same even if production levels
change. Examples are; wages of permanent employees, maintenance and repairs of
buildings and equipment, interest on borrowed capital, depreciation on equipment and
buildings.

Produce used in the home-these are farm products which have been used or consumed
by the owner of the farm for domestic purposes, examples are; eggs eaten at home,
chicken eaten at home etc. these must be valued at market value and added to sales
(receipts) to give total production of the farm.

Crop production
 Farm produce is usually valued at its production cost.
 However, only direct costs actually incurred in producing the crop to date, are
used. The fixed costs are ignored. The direct costs may include the following;
 Land preparation cost
 Seeding costs
 Fertilisers
 Costs of pesticides and chemicals used
 Labour costs
 These costs are transferred to the period in which the crop is harvested and
matched against the revenue earned from the crop.
 This would show if the crop was a financial success.

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PREPARED BY M. GABATWESEPE
Livestock production
 In livestock production the costs will be a bit different.
 The main costs would be some of the following;
 Feeds
 Medicines/ vaccines
 Chemicals
 Labour
 These costs are mainly direct costs and their total would give the overall cost of
the livestock produced over the period.

ESTIMATING THE SELLING PRICE OF FARM PRODUCE

 The methods of fixing the selling price of agricultural produce may vary depending
on the circumstances in the market.
 Sometimes the prices of agricultural products may be controlled by either the state,
marketing boards, or cooperatives.
 When the prices are not controlled, the farmer may use one of several methods.
This may include the following;
 Cost plus pricing
 Marginal pricing
 Competitive pricing
 What the market will bear approach

Cost plus pricing

 It is the simplest form of pricing strategy.
 Involves adding a specific amount of markup to a product’s unit cost.
 It is aimed at ensuring that the business covers all its costs and makes an
acceptable profit.
 It is used when the unit cost of the produce can be easily calculated.

[Date] 41
PREPARED BY M. GABATWESEPE
 Example
Total production units; 10 000 kg Beans
Total production cost; P8 000

Solution;

Unit cost of production =Total production cost

Units produced

=P8 000/10 000 units

= P0.80

Mark up profit margin is 25%

Mark up = 25%x P0.80
= P0.20
Selling price =P0.80 + P0.20
=P1.00
Or
Selling price=1.25xP0.80
=P1.00

Marginal pricing

 This approach uses only the direct, variable costs incurred in producing the
product to arrive at its production cost.
 Marginal costs includes all of the costs that vary with the level of production,
hence the term marginal pricing.
 Any fixed costs or overhead are ignored.
 This method of pricing may be used after the farmer has already sold enough
produce to cover his fixed or overhead costs.

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PREPARED BY M. GABATWESEPE
Example

Total production units: 10 000 units

Total costs: P8 000
Fixed costs: P3 200
Variable costs (marginal costs): P4 800
Mark up profit margin is maintained at 25%.

Solution;
Marginal unit cost: P4 800/ 10 000
=P0.48
Mark up profit margin: 25%xP0.48
= P0.12
Selling price: P0.80+P0.12
=P0.92

Competitive pricing

 This involves the business setting its prices competitively.

 The price of the products are set close to the prices of competing products.
 It is used more by businesses selling similar products since services can vary from
business to business, while the attributes of a product remain similar.
 It is generally used once a price for a product/service has reached a level of
equilibrium.

Example
Selling price; Yellow maize P12 per kg
White maize P8 per kg
If the maize produced in the farm are of mixed variety then the farmer may decide to price
his product using the formula (12 + 8)/ 2=P10 per kg.

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PREPARED BY M. GABATWESEPE
What the market will bear approach
 The product is priced according to assessment of how much customers would be
willing to pay.
 The price must not be too high which may attract competition
 Too high a price will also discourage customers.
 Too low a price will not give the farmer an adequate return on his/her yield.

Valuing the produce used by the farmer and the workers

 On most farms, some of the produce is consumed at the point of production or may
be used as inputs for other activities.
 Produce used by the owner/ farmer is valued at selling price and treated as
drawings.
 Where produce is used as rations for employees, it is valued at selling price and
treated as an expense. It is debited to the income statement.
 Where the product of one enterprise is an input for a second enterprise, it is valued
at market price and treated as an expense of the second enterprise.

FARM INCOME STATEMENT AND STATEMENT OF FINANCIAL POSITION

Calculating the value of closing inventory of farm produce and livestock using
standard rates

 Several methods may be used to value inventory of farm produce. The prudence
concept suggests that they should be valued at the lower of cost and net realisable
value. The following methods are used for valuing growing crops, unsold produce and
supplies on hand;
 Cost of purchase
 Lower of cost or market value
 Cost of production

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PREPARED BY M. GABATWESEPE
Valuation of livestock

 For valuation purposes, livestock may be divided into two categories; trading stock
and productive stock.
 Trading stock refers to livestock sold for revenue purposes to produce income for the
farm. This includes all livestock kept mainly for sale.
 Productive stock refers to fixed or breeding stock. That is those animals kept for their
purpose in terms of producing young ones, milk, wool, eggs, etc. they are capital
assets and kept on the farm mainly to produce items for sale.
 Trading stock is valued at cost of production, or at 75 to 80 percent of market value
whichever is lower.
 Productive livestock is usually valued at fixed prices called standard values.
 The valuation of productive livestock should not be affected by changes in the market
prices.
 There are a number of methods used to value livestock. The most common are;
 Average cost
 Market value
 Standard value
 Differential standard value

Average cost
 The value of the opening inventory, plus purchases (at cost) and natural increase
(at selected value) is divided by the sum of the animals at the beginning plus
purchases plus natural increase.
 The average cost is then multiplied by the number of animals on hand at the end
of the year.

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PREPARED BY M. GABATWESEPE
Example
Inventory valuation- Average cost
Inventory valuation Cattle Goats
Number Value Number Value
P P P
Opening inventory 500 20 000 1 500 15 000
Purchases 150 6 300 30 360
Natural increase (valued @ cattle:P35, 350 12 250 700 5 600
goat: P8/head)
Total 1 000 38 550 2 230 20 960
Average cost 38 550 38.55 20 960 9.40
1 000 2 230
Closing inventory 470 18 118.50 920 8 648

Market value
 An estimate is made of the market selling value of the various classes of
livestock at the statement of financial position date.
 The valuator then uses 75-80% of the market value.
 The values are then multiplied by the number of animals in each class to arrive at
the total herd value.

Standard value
 These are usually fixed prices.
 Standard values are usually fixed at production costs or estimated market value
whichever is lower.
 Different prices are used for each class of livestock
 The value assigned to each class of livestock is multiplied by the numbers on hand
at the end of the each year.
 Sometimes for taxation purposes, the law prescribes minimum values for each
species.

[Date] 46
PREPARED BY M. GABATWESEPE
Example;
Mr. Sefako owns a farm in Boteti, he provides the following information;

Number of animals 31 Standard values

December 2018 P
Fully grown cattle 195 410
Heifers 55 200
Calves 30 70
Fully grown sheep 220 35
Lambs 45 10

Mr. Sefako values his animals at standard values plus 20%.

a) Calculate the value of Mr. Sefako’s livestock on 31 December 2018. Show your
workings.
Solution;
Calculation Total values
P
Fully grown cattle 195 x 410 79 950
Heifers 55 x 200 11 000
Calves 30 x 70 2 100
Fully grown sheep 220 x 35 7 700
Lambs 45 x 10 450
Total 101 200
Plus 20% 20 240
Total value of livestock 121 440

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PREPARED BY M. GABATWESEPE
Differential standard value

 This is a more detailed version of the standard value method.

 Each species of livestock is divided into different classes, e.g. Cattle may
subdivided into; bulls, breeding cows, oxen, heifers, calves etc. different values
are assigned to each class.

THE FARM FINANCIAL STATEMENTS

FARM INCOME STATEMENT
 A farm is basically a unit of production. It may conduct several different production
activities at the same time.
 The income statement measures the success of a business, in terms of net income
or loss, for a period of time.
 It shows both the income earned during and expenses assignable to the
accounting year.
 The income from each activity must be determined in order to arrive at the farm’s
total income.
 A trading account may be prepared to find the gross profit from trading livestock.
 A farm income statement (sometimes called a profit and loss statement) is a
summary of income and expenses that occurred during a specified accounting
period, usually the calendar year for farmers.
 In preparation, the income statement may be divided into two parts; income and
expenses.

[Date] 48
PREPARED BY M. GABATWESEPE
Example; Thuto is a farmer. His financial year ends on 30 June. He provided the following
information.
P
Sales of livestock 65 750
Sales of grains 21 600
Other cash income 2 570
Feeds purchased 18 800
Labour wages 22 000
Seeds 12 700
Fertilisers 6 500
Diesel for engine 8 420
Veterinary fees 5 650
Required;
Prepare Thuto’s income statement for the year ended 30 June 2019.
Solution;
Thuto’s income stamen for the year ended 30 June 2019
Details P P
Income (Receipts)
Livestock 65 750
Grains 21 600
Other cash income 2 570 89 920

Expenses (Payments)
Feeds 18 800
Labour wages 22 000
Seeds 12 700
Fertilisers 6 500
Diesel for engine 8 420
Veterinary fees 5 650 74 070
Net profit 15 850

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FARM STATEMENT OF FINANCIAL POSITION
 It provides a picture of farm’s financial position on a specific date.
 It describe all the assets owned by the farm and all of the liabilities or financial
obligations to others.
 Assets are items owned by the farm business that have value. They include items
the farm uses to produce the products they sell. Assets include, but are not limited
to;
 Cash, grains and feed inventories, livestock for sale (trading livestock),
breeding livestock, machinery and equipment, buildings, and farmland.
 Liabilities are debts owed to others, including;
 Uncashed cheques, bank overdraft, trade payables, provision for income
tax payable on income earned during the previous year etc.

VALUING FARM BUILDINGS AND EQUIPMENT

 Farm equipment and buildings should be valued at historical cost less
depreciation.
 The cost of the asset and all depreciation written off should be shown in the
statement of financial position.
 The closing valuation for the year is used to calculate the statement of financial
position totals.
 For items like loose tools, the revaluation method of depreciation may be used.

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PREPARED BY M. GABATWESEPE
Example;
Mogami is a farmer. His financial year ends on 31 July. On 31 July 2019, he provided the
following information for his first year of operation;
P
Capital 367 100
Plant and machinery 78 000
Land and building 200 000
Breeding livestock 32 000
Motor vehicles 82 000
Trade receivables 2 500
Trade payables 3 200
Bank (dr) 6 800
Short term loan 12 000
Farm profit 19 600
Inventory at 31 July 2019
Trading livestock 15 000
Growing crops 6 400
Livestock feeds 1 200
Drawings 1 730
Additional information;
1. Plant and machinery to be depreciated by 15% on cost.
2. Motor vehicles’ to be depreciated by 10% on cost
3. Taxable income accrued amounted to P1 400.
4. During the year Mogami took crops costing P570 for his own family consumption. This
has not been recorded in the books.
5. Short term loan interest accrued amount to P1 800.

Required;
Prepare Mogami’s statement of financial position as at 31 July 2019.

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Solution;
Non-current assets Cost Accumulated Net book
P depreciation value
P P
Land and buildings 200 000 --- 200 000
Plant and machinery 78 000 11 700 66 300
Motor vehicles 82 000 8 200 73 800
Breeding livestock 32 000 --- 32 000
372 100
Current assets
Trading livestock 15 000
Growing crops 6 400
Trade receivables 2 500
Bank 6 800 30 700

Current liabilities
Trade payables 3 200
Short term loan 12 000
Taxable income 1 400
Loan interest 1 800 18 400
Net current assets 12 300
Total net assets 384 400

Financed by
Capital 367 100
Add Farm profit 19 600

less drawings (1 730 + 570) 2 300

384 400

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INTERPRETATION OF ACCOUNTS
RATIOS
MEANING
 They describe all the calculations involved in interpreting accounts, expressed in
terms of percentages and time periods.
 Ratios are categorized into;
 Profitability
 Liquidity
 Efficiency
 Capital structure

PROFITABILITY RATIOS
 These are ratios that shows how profitable the business is, as they relate the profit
figures to other figures within the same set of accounts.

a) Return on capital employed (ROCE)

 This shows the amount of profit earned from every P100 of capital employed.
 It is a measure of the profit as a percentage of the amount invested in the business
in order to earn that profit.
 The higher the rate, the more effectively the capital invested.
Formula;
Profit for the year x 100%
Capital employed

 Capital employed- is the amount of money in business, consists of owner’s capital

plus long term liabilities OR it can also be non-current assets plus net current
assets, i.e. Net assets

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b) Gross profit as percentage of sales (Gross profit/ sales)

 Also known as Gross profit as percentage of turnover (turnover=sales-sales

returns)
 This shows the gross profit earned for every P100 of sales.
 It indicates how profitable the sales were
 The higher the rate, the more profitable the business is;
Formula;
Gross profit x 100%
Sales

 A gross profit percentage may fall due to the following;

 Holding seasonal sales
 Selling goods at lower prices
 Increasing the rate of trade receivables

 Gross profit percentage may be improved by;

 Increasing selling price of goods
 Increasing advertising and sales promotion
 Obtaining cheaper supplies

c) Net profit as a percentage of sales

 Measures net profit for every P100 of sales
 Indicates how well the business is able to control its operating expenses
 The higher the rate, the more profitable the business is
 An increase in rate indicates that the operating expenses are controlled.
Formula;
Net profit x 100%
Sales

NB: A change in gross profit percentage will also affect the net profit percentage.

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LIQUIDITY RATIOS
 Liquidity means ease and speed in which assets can be turned into cash.

a) Current ratio
 Also known as working capital ratio/ net current assets ratio.
 Compares the assets that will become liquid within 12 months with liabilities due
for repayment within that period of time.
 Measures the business ability to pay its current liabilities when they are due for
payment.
 Ratios between 1.5:1 and 2:1 are regarded satisfactory.
 Ratios over 2:1 may indicate poor management of current assets.
Formula;
Current assets
Current liabilities

OR current assets: current liabilities

 The working capital/ net current asset of a business must be adequate to meet the
day to day trading activities.
 A business short of net current asset/working capital may encounter the following
problems;
 Cannot meet liabilities when they fall due
 Difficulty in obtaining further goods on credit
 Inability to take advantage of business opportunities as they arise
 Inability to take advantage of cash discount

WAYS OF IMPROVING THE NET CURRENT ASSETS/ WORKING CAPITAL

 Avoid excessive drawings/ reduce drawings by owner

 Selling of surplus and old non-current assets
 Introduction of further capital by owner
 Obtaining a long term loan

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PREPARED BY M. GABATWESEPE
b) Quick ratio
 Known as the Acid test ratio.
 Compares the assets that are liquid with the liabilities that are due for payment
in a near future, excluding inventory which is not regarded as liquid.
 A ratio of 1:1 is regarded satisfactory.
 It indicates that the immediate liabilities can be met out of the liquid assets
without having to sell inventory.
 If the ratio is over 1:1 it may indicate poor management of liquid assets.

Formula;
Current assets - inventory
Current liabilities

EFFICIENCY RATIOS

a) Rate of inventory turnover

 Also known as Stock turnover.

 It calculates the number of times a business sells and replaces inventory in a
given period of time.
 The ratio vary according to the types of business, i.e. businesses selling luxury
goods such as expensive jewellery and private jet planes will have a low rate
of inventory turnover whereas a business selling low value goods such as
bread and newspapers will have a high rate of stock turnover.

Formula;
Can be calculated in two ways;
i. To give the number of times inventory is sold and replaced in a period
of time;

Cost of sales
Average inventory

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PREPARED BY M. GABATWESEPE
 ii. To give the number of days inventory is held before being sold;

Average inventory x 365

Cost of sales

 A business may have similar rate of inventory turnover from year to year.
 An increase in the rate may indicate improved efficiency.
 A decrease in the rate of inventory turnover may indicate that the business has too
much inventory or that sales are slowing down.
 The quicker the rate of inventory turnover the less time funds are tied in inventory
which is regarded as the least liquid of the current assets.
 A lower rate of inventory turnover can be caused by the factors such as;
 Lower sales
 Inventory over purchased
 Too high selling price
 The falling demand
 The business inefficiency

b) Collection period for trade receivables

 Also known as trade receivable/sales ratio.

 It measures the average time the trade receivable take to pay their accounts,
i.e. the length of time trade receivables actually take to pay their accounts.
 The quicker the trade receivable pay their accounts the better it is the money
is used in the business for other purposes.
 The longer the business has to wait for a debt to be paid the greater the risk of
it becoming a bad debt.
 An increase in the trade receivables/ sales ratio indicates inefficient credit
control policy, while a decrease in the trade receivables/sales ratio indicate an
efficient credit control policy.

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PREPARED BY M. GABATWESEPE
Formula;
Trade receivables x 365/12/52
Credit sales

=To give answer in days/months/weeks.

WAYS OF IMPROVING COLLECTION PERIOD FOR TRADE RECEIVABLES

 Offer cash discount for early settlement or prompt payment.
 Charge interest for overdue accounts or amounts.
 Refusing further supplies on credit until any outstanding debt is paid.
 Improving credit control policy (i.e. sending regular statement of account to trade
receivables or remind of overdue debt).

c) Payment period for trade payables

 Also known as trade payables/purchases ratio.

 Measures the average time taken to pay the trade payables account.
 A decrease in the trade payable/ purchase ratio indicates that the business is
paying its trade payables quickly while an increase indicates that the business
is short of immediate funds and find it difficult to meet debts when they fall due.
 The ratio can also be influenced by the collection period for trade receivables,
if the trade receivables do not settle their accounts promptly the business may
not be able to pay the trade payables promptly.

Formula;
Trade payables x 365/12/52
Credit purchases

To give answer in days/ months/ weeks.

[Date] 58
PREPARED BY M. GABATWESEPE
  Taking longer to pay the trade payables means that the business can use the
funds for other purposes, but there can be adverse effects such as;

 Supplier refusing credit in future

 Supplier refusing further credit supplies
 The loss of cash discount for early settlement.
 Damaged relationship with the supplier

Example;
The financial year of MG limited ends on 31 July.
The following information is available;
Ratio 31 July 2018 31 July 2019
Rate of inventory turnover 9.45 times 8.17 times
Trade payables payment period 40 days 53 days
Trade receivables collection period 29 days 33 days
Current ratio 2.54:1 ?
Quick (acid test) ratio 1.44:1 ?

At 31 July 2019
P
Inventory 36 400
Trade receivables 28 200
Trade payables 34 000
Short term bank loan 8 000
Cash at bank 16 000
Cash 400

All the goods are bought and sold on credit terms. If credit customers pay their accounts
within 30 days they are allowed a cash discount. If the accounts of credit suppliers are
paid within 45 days MG limited is entitled to a cash discount.

[Date] 59
PREPARED BY M. GABATWESEPE
a) Comment on the change in the rate of inventory turnover.
b) State two effects of the change in the trade payables payment period.
c) Comment on the change in the trade receivables collection period.
d) Calculate the following ratios at 31 July 2019, give answers to two decimal places.
i. Current ratio
ii. Quick (acid test) ratio

Solution;
a)
 Inventory not sold as quickly in second year/ inventory turnover
reduced/decrease/went down/fell down from 9.45 to 8.17
 Money tied in inventory for longer
 May be slowing of sales/ falling demand
 May be holding increased levels of inventory
b)
 Will not obtain cash discount
 May be charged interest on late payment
 Relationship with suppliers damaged
 May be using the funds for other purposes

c)
 Credit customers taking longer to pay their accounts
 Affects ability to pay credit suppliers
 Money is not available for other purposes
 Credit customers will not qualify for cash discount
 May be result of poor credit control
 Greater risk of bad debts
 Can charge interest on late payments

[Date] 60
PREPARED BY M. GABATWESEPE
 d)
i. Current ratio = (28 200+36 400+16 000+400): (34 000+8 000)
=81 000:42 000
=1.93:1

ii. Quick (acid test) ratio=(28 200+16 000+400):(34 000+8 000)

=44 600:42 000
=1.06:1

IMPORTANCE OF ACCOUNTING RATIOS

 Ratios are the best tool for measuring liquidity, solvency, profitability and
management efficiency of a firm.
 Management can use ratios to find out problem areas and improve them.
 They helps to allocate the assets and financial resources efficiently to avoid
unnecessary expenses.
 Helps a business maintain the required level of short term and long term solvency.
 Help lenders to assess the long term debt paying capacity of the business.

LIMITATIONS OF ACCOUNTING RATIOS

 Ratios are only as accurate as the information used for their calculation. If
incorrect information from financial statements is used to calculate ratios then
the performance of business will be affected.
 Ratios are calculated using monetary items only but ignore important non-
monetary items such as the skill of the work force, effectiveness of the
manager, reputation of the business.
 Ratios are not solutions to problems they serve as a guide but do not provide
strategies on how to improve the performance of the business.

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  Ratios are historical costs based on past records but do not take account of
inflation, market trends, recession etc. and may not successfully show what
may happen in the future.
 Ratios can only be used for comparison of like with like but cannot be used to
compare businesses which are different in terms of size, accounting policies,
types of goods they sell etc.

[Date] 62
PREPARED BY M. GABATWESEPE