DIFFERENT TYPES OF DISCOUNT

1. Trading discount
 If the supplier decides unconditionally to give the customer some discount. E.g. Quantity
of goods sold – if a retailer buys 1000 or more of a supplier of specific unit, he will
receive a reduction in the amount payable. The discount is not recorded in the
bookkeeping system but appears only on the source document.
2. Settlement discount Granted/allowed
 This is a conditional discount. The business sells goods and services to debtors at a
selling price. If they grant the debtors a discount, the debtors pay back a reduced
amount. The transaction must be recorded in the bookkeeping system of the business.
3. Settlement discount received
 This is a conditional discount. The business purchases goods and services from a
creditor but receives a discount. The payment will be less than the purchase price. The
transaction must be recorded in the bookkeeping system of the business.

SALES
Sales is the main source of Income in a trading business. A business buys inventory with a
main purpose to sell it again at a higher price. Services Rendered is the main source of
income in a Service organisation.

NET SALES IN THE PERIODIC INVENTORY SYSTEM:

Sales
Less: Sales return
Less: Settlement discounts granted (because if discounts are granted, not all the sales
income is received or realised)
= NET SALES

COST OF SALES
Cost of Sales includes all cost involved, to get the Trading Inventory, available for sale. Cost
of Sales is therefore the expense related to the sales in that specific period. Cost of Sales in
the perpetual Inventory system is calculated just below the Sales in the Statement of
Comprehensive Income.

CALCULATING THE GROSS PROFIT – PERIODIC INVENTORY SYSTEM

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Cost of sales NOT GIVEN and must be calculated!!
Trading statement for the year ended …….
R
Net sales1 XXX
Less: Cost of sales2 (XXX)
Opening inventory (balance in inventory account that was NOT adjusted Xx
during the year)
Plus: Purchases (purchases less purchases return) Xx
Plus: Carriage on purchases Xx
Plus: Freight Xx
Plus: Railage on purchases Xx
Plus: Import taxes Xx
= Goods available for sales Xxx
Less: Closing inventory (determined by a physical stock count) (xxx)
Less: Total settlement discount received on the current year’s purchases (as
goods cost less when discount is received) (xxx)
Add: Inventory deficit / losses xxx
GROSS PROFIT (Sales less cost of sales) XXX

Calculate cost price or cost of sales using mark-up%!!

Description of formulas
Mark up The percentage added to the cost price to calculate the selling
price, i.e. the profit %.
MARK UP % ON COST
100 %
× selling price
COST PRICE = 100 %+ MARK UP %
MARK UP % ON SALES
100 %−MARK UP %
× selling price
COST PRICE = 100 %

ACCOUNTING EQUATION – EXTRA ORDINARY TRANSACTIONS

In the day to day activities of an entity, there sometimes arises the need to account for
transactions other than the normal trading activities or the payment of operating expenses.
 Trade discount - immediate discount
 Settlement discount allowed/received
 Returned cheque
 Interest charged
 Credit losses or credit losses recovered
 Additional capital contributions

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 Withdrawal of inventories or cash
 Payment for personal expenses with the entity’s resources

Example 2.3
Transactions:
1. An item marked at R2 000 is sold at 10 % trade discount.
2. A debtor settled his account of R2 000 within 30 days from purchases with a cheque,
that debtor will qualify for 10 % settlement discount.
3. The bank returned the debtors cheque marked (R/D) Refer to drawer
4. Charge the debtor R200 on his overdue account.
5. B. Bad owes the company R2 200. He was declared insolvent and his estate paid
30c in the rand. The rest must be written off as irrecoverable.
6. The owner contributed a vehicle of R10 000.
7. The owner withdrew stationery for his personal use, R1 000.
8. The owner paid his personal telephone account of R500 simultaneously with the
business’s account of R5 000 from the bank account of the entity.

TRADE DISCOUNT – IMMEDIATE DISCOUNT

Immediate discount/ trade discount is granted and received on the spot and does not
involve two separate transactions.

1. An item marked at R2 000 is sold at 10 % trade discount.

Calculation: R2000 x 10% = R200
Thus: R2000 – R200 = R1800 this is how much the customer will pay.
Account debited Account credited Assets Owners’ equity Liabilities

2. SETTLEMENT DISCOUNT
Settlement discount can only occur after a cash payment has been made to a creditor or
received from a debtor, in accordance with the credit policy

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2. A debtor settled his account of R2 000 within 30 days from purchases with a cheque, that
debtor will qualify for 10 % settlement discount.
Calculation: R2000*10% = R200 (discount granted/ discount allowed)
Thus: R2000 – R200 = R1800 this is how much the debtor will pay.
Account debited Account credited Assets Owners’ equity Liabilities

Bank (A) Debtors (A) +/-R1800 0 0

Settlement discount Debtor (A) -R200 -R200 0
allowed (I)

3. RETURNED CHEQUE (R/D) – Return to drawer

Cheques received from debtors will be deposited into the entity’s bank account and transfer
of funds will thereafter occur between the two different bank accounts – the account of the
entity and the individual debtor.

Refer to drawer (R/D) implies that there were insufficient funds in the bank account of the
debtor to honour the value on the cheque, or the date on the cheque was incorrect, the
amount in words and figures differ, or the drawer did not sign the cheque. The complete
receipt transaction will be reversed in the books of the entity who received the cheque
earlier.

3. The bank returned the debtor’s cheque marked (R/D) Refer to drawer.
Account debited Account credited Assets Owners’ Liabilities
equity

N.B:
 If an expense is CREDITED it increases (+) OE

4. INTEREST CHARGED
If the account of a debtor remains outstanding for a long period of time, it is as though the
entity is financing the economic activities of a third party. The entity has already performed
their side – providing the debtor with the goods or services – and now needs the economic
benefits from the debtor to complete the transaction. Interest will be charged on long
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overdue accounts to compensate for the postponed cash inflow according to the credit
policy of the entity.

4. Charge the debtor R200 on his overdue account.

Account Account Assets Owners’ equity Liabilities
debited credited

Debtor (I) Interest received (I) +R200 +R200 0

5. CREDIT LOSSES OR CREDIT LOSSES RECOVERED

In some instances, the debtors who owe the entity money gets declared insolvent or
disappears and cannot be reached to recover the outstanding amounts. The balances of
their accounts will then have to be written off as it will not be classified as an asset of the
entity any longer.

In some cases, when the debtor was declared insolvent, the liquidator will determine a
certain dividend payable to all the parties involved to ensure that everyone recovers at least
some amount of the outstanding balances.

Example:
B. Bad owes the company R2 200. He was declared insolvent and his estate paid 30c in
the rand. The rest must be written off as irrecoverable.

Calculation: Owes R2 200 * 30 cents /100 cents = R660 received from his insolvent estate.
The remaining balance R2 200 – R660 = R1 540 must be written off.
Account Account Assets Owners’ Liabilities
debited Credited equity

Bank (A) Debtor (A) -/+R660 0 0

Credit loss (E) Debtor (A) -R1540 -R1540 0

6. ADDITIONAL CAPITAL CONTRIBUTIONS

The owner can contribute cash or any other asset to the entity as part of his/her capital
contributions.

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6. The owner contributed a vehicle of R10 000.
Account debited Account credited Assets Owners’ equity Liabilities

Capital (OE) Vehicle (A) +R10 000 +R10 000 0

7. WITHDRAWAL OF INVENTORIES OR CASH

When the owner takes merchandise or any other consumable goods for personal use, it will
be account for as a withdrawal and this transaction will be separated from the business’s
consumption of the same inventories.

7. The owner withdrew stationery for his personal use, R1 000.

Account debited Account credited Assets Owners’ equity Liabilities

Drawings (OE) Stationery (E) -R1 000 -R1 000 0

8. PAYMENT FOR PERSONAL EXPENSES WITH THE ENTITY’S RESOURCES

In the case when the owner settles a personal account with a business cheque or from the
business’s bank account, the entry will also be against the drawings account, and not the
specific expense account.

8. The owner paid his personal telephone account of R500 simultaneously with the
business’s account of R5 000 from the bank account of the entity

Account debited Account credited Assets Owners’ equity Liabilities

Drawings (OE) Bank (A) -R500 -R500 0

Telephone (E) Bank (A) -R5 000 -R5 000

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ACTIVITY 1
Simply the best Guesthouse had the following transactions during March 2018:

1. The Guesthouse bought a delivery vehicle to the value of R250 000 and paid cash for
it.
2. The Guesthouse bought inventory to the value of R120 000 on credit from Seaview
Suppliers.
3. The owner of the Guesthouse contributed the following to the business:
(a) Cash – R100 000
(b) Equipment – R60 000
4. Received R1 350 cash for accommodation from guests.
5. The owner withdrew equipment for his personal use – R20 000.
6. Inventory marked R2 000 is sold at 10 % trade discount.
7. One of the debtors of the Guesthouse, Mr. Badman owed the Guesthouse R2 200.
Badman was declared insolvent and his estate paid 0,30 cents in the rand and the
rest must be written off as irrecoverable.
8. The owner took R500 from the bank account of the Guesthouse to pay his personal
telephone account.
9. A debtor settled his account for R4 000 within 30 days from purchase with a cheque.
He qualifies for a 5 % settlement discount.
10. The bank returned his cheque marked R/D.
11. Charge the debtor R500 interest on his overdue account.

YOU ARE REQUIRED TO:

 Record the above-mentioned transactions in the following table. Clearly indicate the
effect of the transactions on the accounting equation by making use of the following
symbols with amounts (+); (-); 0

Account Account Accounting equation

No
debited credited Assets Owners’ equity Liabilities
1
2
3(a)
3(b)
4
5
6
7(a)
7(b)
8
9(a)
9(b)
10(a)
10(b)
11
(30 marks)
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ACTIVITY 2 (Should be done online)
The following transactions took place in the books of SA Cycling Company during May
2017. Record the following transactions in the perpetual inventory system in the accounting
equation. Mark up on cost is 25%. Do accounting equation.
1. The owner contributed R25 000 in cash as her capital contribution
2. The business sold goods on credit, R10 000
3. Bought a computer on credit from Game Store, R15 000
4. The owner takes a computer for private purposes, R5 000.
5. The debtors paid their outstanding debt, and received 20% discount.
6. Settle the creditors account and receive 10% discount

YOU ARE REQUIRED TO:

Record the above-mentioned transactions in the accounting equation. Indicate whether the
Assets positive/negative, Liabilities positive/negative, Owners’ Equity positive/negative.
Show no effect with a 0. Use the answer sheet provided.

INSTRUCTIONS
 Indicate which account is to be debited and credited correctly
 Show the effect in words, to increase indicate with the word POSITIVE and to decrease
show with the word NEGATIVE and do not show the amount when showing the effect on
accounting equation just type in the word POSITIVE OR NEGATIVE
 Letter X and Z indicate the amount only for example 50 000 and do not write sign next to
the amount
 If your answer is POSITIVE AND NEGATIVE type in as it is.

Please note that you don't have to give answers for all letters just give the answers of
the letters provided only

ANSWER SHEET – 18 marks

e.g. 8. Pay water and electricity cash R5 000
Date Account debited Account Asset =Owner’s +Liability
credited Equity
e.g. Water and electricity Bank Negative Negative 0
1 A J S BB LL
2 (a) B K T CC MM
2 (b) C L U DD NN
3 D M V EE OO
4 E N W GG PP
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5(a) F O X HH QQ
5(b) G P Y II RR
6(a) H Q Z JJ SS
6(b) I R AA KK TT
Total

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