CHAPTER 3 SUGGESTED SOLUTIONS

SOLUTION TO MULTIPLE CHOICE QUESTIONS

3.1 (d) 3.6 (e)
3.2 (b) 3.7 (d)
3.3 (b) 3.8 (d)
3.4 (a) 3.9 (b)
3.5 (c) 3.10 (a)

END OF CHAPTER QUESTIONS

3.1
As with all systems analysis one would start by defining the output.
OUTPUT: The output, if one wished to have a successful business, would be a well constructed,
aesthetically pleasing swimming pool, in accordance with the customer's requirements. This would
require defining the various parts, such as the casing, the steps, the surrounds and the filter in
accordance with a certain standard of specification.
INPUT: Having defined the output the next step is to determine what input is necessary in order to
achieve the output. The input would comprise earth-digging and earth-removal equipment, as well as
the materials to be used in the construction of the swimming pool. A filter plant and cleaning equipment
will also be necessary. A consideration of the labour requirements will also be made at this stage.
PROCESS: The process would entail the digging of a hole in the ground, the removal of the rubble,
the structuring of the sides and bottom of the pool, painting the pool and installing a filter plant.
FEEDBACK: This would entail measuring the structure of the pool, the effectiveness of the filter plant
and the general appearance of the pool against the required standard. A decision would have to be
made as to whether the pool had been timeously and effectively completed. Feedback would also be
obtained from the customer, who would inspect the pool, check that the filter plant is operating and
ensure that there are no apparent faults in the structure before making payment.
3.2
(a) The Accounting System with its four major components

INPUT PROCESS OUTPUT

SOURCE DOCUMENTS ASSETS = EQUITY + LIABILITIES BALANCE SHEET

+ - - + - +
ADJUSTMENTS DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT INCOME STATEMENT
THE GENERAL LEDGER FRAMEWORK

FEEDBACK
b) The diagram shows an accounting system designed to produce the primary financial
statements, namely, the balance sheet and the income statement. To discuss the diagram
from a functional perspective, we need to consider the functions performed at each stage of
the system.
As with all systems, the first element to identify is the output. The output of an accounting
system is a statement of financial performance, which indicates whether the business made a
profit or loss for the period under review and a statement of financial position, which indicates
the present wealth of the business and the claims against that wealth. It is the reporting
function that produces this information, which is then evaluated, analysed and compared by
various users of the financial statements.

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 The input is the data that is required to produce the output. Such data must be identified,
measured and captured on source documents. Source documents comprise all documents
used in the process of buying and selling goods or conducting the financial affairs of the
business. They would include for example cash slips, invoices, receipts and cheques.
The process that is used to transform the data captured on the source documents into
information useful for decision making involves further recording, classifying and summarizing
the data further. This is achieved through the use of a General Ledger, which classifies all
transactions into categories, known as accounts.

3.3
The term debit means the left-hand side of a General Ledger account drafted in the traditional
T form. It has no other significant meaning. It is not to be confused with plus and minus, which
is the logic of the system. Whether the + is on the left-hand side of an account, it is the Debit
side. When a minus is on the left-hand side, it is still a debit.
A credit is the right hand side. Only that and nothing more.

3.4

ASSETS = EQUITY + LIABILITIES

+ - - + - +
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
THE GENERAL LEDGER FRAMEWORK
3.5
(1) Credit purchases invoice
(2) Cheque counterfoil
(3) Bank deposit slip
(4) Bank deposit slip/entry on bank statement
(5) Cash register roll/cash sales slip
(6) Credit sales invoice
(7) Credit purchases invoice
(8) Debit note
(9) Cheque counterfoil
(10) Cheque counterfoil/fixed deposit receipt

3.6

ASSETS = EQUITY + LIABILITIES

(1) Purchase of office equipment on credit. + 0 -
(2) Shareholders acquire shares in the company. + + 0
(3) Purchase of office furniture for cash. +&- 0 0
(4) Collection of amounts owing by debtors. +&- 0 0
(5) Payments to creditors. - 0 -
(6) The return of certain office equipment
previously purchased on credit. - 0 -

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3.7

Assets = Equity + Liabilities

1 25,000 25,000
2 37,000 37,000
3 2,600
(Note 1)
-2,600
4 1,550 1,550
5 -1,200 -1,200
6 20,000 15,000
(Note 2)
-5,000
7 -520 -520
8 4,000
(Note 3)
9,000 13,000
9 -1,900 -1,900
10 9,000
(Note 4)
-9,000
87,930 = 35,930 + 52,000
Notes
1. The purchase of consumable stores is treated as an asset. As the stores are used
up/consumed, such amount will be shown as an expense.
2. The cost of the asset, which is R20 000, should be shown as an increase in assets. The
payment of the deposit of R5 000 reduces the assets, as the bank balance will be reduced.
After the deposit has been paid, the balance owing is R15 000, which should be recorded as
an increase in liabilities.
3. Assets have increased by R4 000, which was received in cash, and by R9000, which is due
from debtors. The equity has increased by the total of R13 000, which is the total charge for
services rendered.
4. When a debtor pays, the asset 'debtors' decreases, and the asset 'bank' increases.

3.8
Assets = Equity + Liabilities
Capital 2,000,000 2,000,000
(1) 126,000 126,000
(2) 1,640,000
-1,640,000
(3) 215,000 65,000
-150,000
(4) 20,500
-20,500
(5) -14,200 -14,200
(6) 99,920 99,920
(7) -1,000 -800 -200
(8) 400 400
(9) -5,150 -5,150
Adjustments
i -10,200 -10,200
-100 -100
ii -17,660 -17,660
2,243,010 = 2,051,810 + 191,200

Profit for the month 51,810

Projected profit for the year 621,720 (R51 810 x 12)
Return on Equity 31.1% (R621 720/R2 000 000)

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(b) The business has earned a profit of R51 810 in its first month of business; this represents a
projected annual return on equity of 31%. This can be considered a positive start to the
business and the shareholders should be satisfied at this point.
The financial position of the business at the end of the month shows a net asset value (the
value of the business to the shareholders) of R2 051 810. This comprises the original amount
invested of R200 000, plus the profit earned during the month.
Notes
(1) This represents the original investment by the shareholders.
(2) Calculated as follows:
Fares earned 99 920
Less: Expenses 48 110
Wages and salaries 14 200
Interest on loan 800
Motor vehicle expenses (5150 + 10200) 15 350
Stationery used 100
Depreciation (1% of R1 7660 000) 17 660
Net income 51 810

3.9
Quickprint (Pty) Ltd

Assets account = Equity account + Liabilities account

(1) 20,000 (3) 12,000 (5) 1,200 (1) 20,000 (7) 100 (2) 26,000
(2) 26,000 (4) 2,500 (7) 1,900 (6) 3,920 c/d 134,300 (3) 108,000
(3) 120,000 (5) 1,200 (9) 150 (8) 400
(4) 2,500 (7) 2,000 Adj 1,500
(6) 3,920 (9) 150 Adj 100
(8) 400 Adj 1,500 c/d 19,070
Adj 100
c/d 153,370
172,820 172,820 23,920 23,920 134,400 134,400
b/d 153,370 b/d 19,070 b/d 134,300

153,370 = 19,070 + 134,300

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3.10 Nadia Sereng's Company
(a) Impact of the transactions on the accounting equation

ASSETS = EQUITY + LIABILITIES

Registered a company investing R500 000 500,000 500,000
(1) Negotiated a 12% loan of R200 000 from Coronation Bank. 200,000 200,000
(2) Purchased equipment for cash: R126 700. 126,700
-126,700
(3) Purchased a vehicle on credit from Orbit Motors for R189 000. 189,000 189,000
(4) Purchased stocks of jaks and paid by cheque: R168 000. 168,000
-168,000
(5) Purchased consumable stores by cheque for R27 000. -27,000 -27,000
(6) Paid rent for premises for the month R9 000 -9,000 -9,000
(7) Sold jaks with a cost of R78 000 for R110 000 cash. -78,000 -78,000
110,000 110,000
(8) Sold jaks with a cost of R70 000 for R94 000 on credit. -70,000 -70,000
94,000 94,000
(9) Paid general expenses by cheque: R5 200. -5,200 -5200
(10) Paid R14 000 on the account to Orbit Motors. -14,000 -14000
(11) Debtors paid R20 000 off on their accounts. -20,000
20,000
(12) Paid herself and her assistant their salaries R14 200. -14,200 -14200
875,600 500,600 375,000
CHECK 0 600
NET PROFIT

Transaction (5), consumable stores, may also be treated the acquisition of an asset rather than a
decrease in Equity. As treated above, we have assumed that all the stores have been used during the
month and are therefore a legitimate expense for the period.
(b)

Assets account = Equity account + Liabilities account

500,000 (3) 126,700 (5) 27,000 (1) 500,000 (10) 14,000 (1) 200,000
(1) 200,000 (4) 168,000 (6) 9,000 (7) 110,000 c/d 375,000 (4) 189,000
(2) 126,700 (5) 27,000 (7) 78,000 (8) 94,000
(3) 189,000 (6) 9,000 (8) 70,000
(4) 168,000 (7) 78,000 (9) 5,200
(7) 110,000 (8) 70,000 (12) 14,200
(8) 94,000 (9) 5,200 c/d 500,600
(11) 20,000 (10) 14,000
(11) 20,000
(12) 14,200
c/d 875,600
1,407,700 1,407,700 704,000 704,000 389,000 389,000
b/d 875,600 b/d 500,600 b/d 375,000

875,600 = 500,600 + 375,000

check 0 Net Profit R 600

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(c)

Bank account = Share Capital account + Loan from Cor Bank a/c
# 500,000 2 126,700 # 500,000 1 200,000
1 200,000 4 168,000
7 110,000 5 27,000 Retained Income a/c Orbit Motors account
11 20,000 6 9,000 10 14,000 3 189,000
9 5,200 175,000
10 14,000 Consumable Expense a/c
12 14,200 5 27,000
465,900
Equipment account Rent Expense a/c
2 126,700 6 9,000

Vehicles account Sales Revenue a/c

3 189,000 7 110,000
8 94,000
Stock account 204,000
4 168,000 7 78,000 Cost of Sales account
8 70,000 7 78,000
20,000 8 70,000
Debtors account 148,000
8 94,000 11 20,000 General expenses a/c
74,000 9 5,200

Salaries Expense a/c

12 14,200

(d)

Trial Balance at month end

Bank account 465,900
Equipment account 126,700
Vehicles account 189,000
Stock account 20,000
Debtors account 74,000
Share Capital account 500,000
Loan from Cor Bank a/c 200,000
Orbit Motors account 175,000
Consumable Expense a/c 27,000
Rent Expense a/c 9,000
Sales Revenue a/c 204,000
Cost of Sales account 148,000
General expenses a/c 5,200
Salaries Expense a/c 14,200
1,079,000 1,079,000

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(e)
NADIA SERENG'S COMPANY
GENERAL LEDGER: BALANCE SHEET ACCOUNTS

BANK ACCOUNT – 01
Month Day Other account Fo Debit Credit Balance
Sept # Share Capital 02 500,000 500,000
1 Loan from Cor Bank 05 200,000 700,000
2 Equipment 03 126,700 573,300
4 Stock 05 168,000 405,300
5 Consumables 10 27,000 378,300
6 Rent Expense 11 9,000 369,300
7 Sales Revenue 12 110,000 479,300
9 General Expenses 14 5,200 474,100
10 Orbit Motors 06 14,000 460,100
11 Debtors 08 20,000 480,100
12 Salaries 15 14,200 465,900

SHARE CAPITAL – 02
Month Day Other account Fo Debit Credit Balance
Sept # Bank 01 500,000 500,000 #
EQUIPMENT – 03
Month Day Other account Fo Debit Credit Balance
Sept 2 Bank 01 126,700 126,700
VEHICLES – 04
Month Day Other account Fo Debit Credit Balance
Sept 3 Orbit Motors 01 189,000 189,000
CORONATION BANK - 05
Month Day Other account Fo Debit Credit Balance
Sept 1 Bank 01 200,000 200,000 #
ORBIT MOTORS - 06
Month Day Other account Fo Debit Credit Balance
Sept 3 Vehicles 04 189,000 189,000
10 Bank 01 14,000 175,000 #
STOCK ACCOUNT - 07
Month Day Other account Fo Debit Credit Balance
Sept 4 Bank 01 168,000 168,000
7 Cost of Sales 13 78,000 90,000
8 Cost of Sales 13 70,000 20,000
DEBTORS ACCOUNT - 08
Month Day Other account Fo Debit Credit Balance
Sept 8 Sales 12 94,000 94,000
11 Bank 01 20,000 74,000
GENERAL LEDGER: INCOME STATEMENT ACCOUNTS
CONSUMABLE EXPENSES - 10
Month Day Other account Fo Debit Credit Balance
Sept 5 Bank 01 27,000 27,000
RENT EXPENSE- 11
Month Day Other account Fo Debit Credit Balance
Sept 6 Bank 01 9,000 9,000
SALES REVENUE - 12
Month Day Other account Fo Debit Credit Balance
Sept 7 Bank 01 110,000 110,000
8 Debtors 08 94,000 204,000 #
COST OF SALES ACCOUNT - 13
Month Day Other account Fo Debit Credit Balance
Sept 7 Stock 07 78,000 78,000
8 Stock 07 70,000 148,000
GENERAL EXPENSES - 14
Month Day Other account Fo Debit Credit Balance
Sept 9 Bank 01 5,200 5,200
SALARIES EXPENSE - 15
Month Day Other account Fo Debit Credit Balance
Sept 12 Bank 01 14,200 14,200

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3.11 Shaw Agencies (Pty) Ltd
(a) Impact of Transactions on the Accounting Equation
ASSETS = EQUITY + LIABILITIES
(1) A business opened with a deposit of R24 000 24,000 24,000
(2) Purchased equipment for R1 800 1,800 1800
paying cash of R1 000, with the balance on account. -1,000 -1000
(3) Purchased supplies costing R120 for cash -120 -120
(4) Paid office rent for the month of R2 500. -2,500 -2500
(5) Paid R300 to a creditor. -300 -300
(6) Earned sales commissions, cash of R1 400. 1,400 1,400
(7) Paid car expenses for the month of R160 -160 -160
and miscellaneous expenses of R90 -90 -90
23,030 22,530 500
CHECK 0 -1,470
NET LOSS

(b) Transactions of Shaw Agencies (Pty) Ltd using only 3 General Ledger accounts

Assets account = Equity account + Liabilities account

(1) 24,000 (2) 1,000 (3) 120 (1) 24,000 (5) 300 (2) 800
(2) 1,800 (3) 120 (4) 2,500 (6) 1,400 c/d 500
(6) 1,400 (4) 2,500 (7) 160
(5) 300 (7) 90
(7) 160
(7) 90
c/d 22,530
c/d 23,030
27,200 27,200 25,400 25,400 800 800
b/d 23,030 b/d 22,530 b/d 500

23,030 = 22,530 + 500

check 0 Net Profit/Loss -R 1,470

(c) Full set of General Ledger accounts

Bank account = Share Capital account + Creditor

1 24,000 2 1,000 1 24,000 2 1,000 2 1,800
6 1,400 3 120 5 300
4 2,500 Commission Income a/c 500
5 300 6 1,400
7 160
7 90 Consumable Expense a/c
3 120
21,230
Equipment account Rent Expense a/c
2 1,800 4 2,500

Vehicle Expenses a/c

7 160
Miscellaneous Expenses a/c
7 90

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 Trial Balance of Shaw Agencies (Pty) Lt at 30
Sept 20.0
Bank account 21,230
Equipment account 1,800
Share Capital account 24,000
Creditor 500
Consumable Expense a/c 120
Rent Expense a/c 2,500
Commission Income 1,400
Vehicle Expense 160
Miscellaneous expenses a/c 90
25,900 25,900

(e) For three column ledger format, see question 3.11

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3.12 Care Cleaners (Pty) Ltd
(a) Impact of transactions on the Accounting Equation

ASSETS = EQUITY + LIABILITIES

1 20,000 20,000
10,000 10,000
3 -3,000 -3,000
5 24,000
-24,000
6 36,000 36,000
12 2,600 2,600
14 3,200 3,200
29 -130 -130
30 9,300 9,300
31 -4,000 -4,000
73,970 25,370 48,600

(c) General Ledger accounts

Bank account = Share Capital account + Loan from SMB a/c

# 30,000 3 3,000 # 30,000 # 10,000
# 10,000 5 24,000
14 3,200 29 130 Porter Motors account
31 4,000 Cleaning Materials 6 36,000
43,200 31,130 12 2,600
12,070 Cleankem
Equipment account Rent Expense a/c 12 2,600
5 24,000 3 3,000

Vehicles account Fee Revenue a/c

6 36,000 14 3,200
30 9,300
Debtors account 12,500
30 9,300 General expenses a/c
29 130

Salaries Expense a/c

31 4,000

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(d)

Trial Balance of Care Cleaners (Pty) Ltd at 31

March 20.1

Bank account 12,070

Equipment account 24,000
Vehicles account 36,000
Stock account
Debtors account 9,300
Share Capital account 30,000
Loan from SMB a/c 10,000
Porter Motors account 36,000
Cleankem (Creditor) 2,600
Cleaning materials 2,600
Rent Expense a/c 3,000
Fee Revenue a/c 12,500
Cost of Sales account
General expenses a/c 130
Salaries Expense a/c 4,000
91,100 91,100
(e) For three column ledger format, see question 3.11

(f) The profit of R5370(3200+9300-3000-130-4000) represents a return on equity for the month of
26,9% which is very encouraging. It should be noted, however, that neither a salary for
Richard Mc Ginty nor interest on the long term loan have been provided for. If a minimum
salary of R2200 and interest of R150 (R10 000 x 18% x 1/12) are provided for, the profit is
reduced to R3 020 (5370 - 2200 - 150), which represents a return on equity of 15,1% for the
month. If this trend continues, his annual profit could be in the region of R36 000, which would
represent an annual return on investment of over 100%. WOW!! As regards financial position,
liabilities at 31 March amount to R48 600, whereas cash in the bank amounts to only R2 070.
Whether this is serious or not depends on the repayment terms of the loan (R10 000) and the
amount owed to Porter Motors (R36 000).
(g) Future prospects for the business depend on, inter alia, the following:

 The ability of the company to generate sufficient cash to pay the interest on the loan and to
make capital repayments.

 The amount of salary which Richard McGinty requires.

 The ability to recover money timeously from debtors.
 The efficient and optimal utilization of the company's resources.
 The ability to continue to generate the high profit earned for March 20.1

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