Week 2

The General Ledger

The use of Opening balances

 You will in most cases encounter a business which have existed in previous months. The balance from the previous month, in each account
in the general ledger, cannot be thrown away.

 This closing balance indicates the total amount of possessions (assets) the business has or the amounts the business has earned or spend
in the previous month. It is therefore very important that the closing balance of one month becomes the opening balance of the next
month, up to the end of the financial year.

 This would make it easier at the end of the year to determine the profit or loss or the value of the assets and liabilities for the purpose of
setting up the financial statements.

 Accounts will have balances on the side it increases (refer to Week 1 lesson 4).

 After the accounts has been opened with these opening balances, the normal procedure is followed to enter transactions in the general
ledger. At the end of the month the general ledger accounts are balanced again and the opening balances will be included in these closing
balances.

Example:

The following balances appeared in the general ledger of Easy Garden Services at the end of May 2020:

Capital R 20 000
Bank (favourable) 15 500
Services rendered 5 500

Required:
Open the applicable accounts, with the balances in the general ledger of Easy Garden Services on 1 June 2020.

Solution:

Capital
Date Details Folio number Amount Date Details Folio number Amount
1 June Balance* b/d R20 000
*Capital will have an opening balance on the credit side because it increases on the credit side

Bank
Date Details Folio number Amount Date Details Folio number Amount
1 June Balance* b/d R15 500
*Bank will have an opening balance on the debit side as it is a favourable bank balance and therefore an asset that increases
on the debit side

Services rendered
Date Details Folio number Amount Date Details Folio number Amount
1 June Balance* b/d R5 500
*Services rendered will have an opening balance on the credit side as it is an income that increases on the credit side
The format of the general ledger

 As discussed in Lesson 4 of Week 1 the general ledger will reflect the accounting history of the business from its inception up to the
present date. It is, therefore, a record of all transactions which have taken place in the business, classified by the nature of each specific
item.
 The general ledger is a collection of T-accounts, each account having a DEBIT and CREDIT side.
 Each of these sides can be divided into columns which makes provision for the important details of a transaction.
 Format of a general ledger account:

Debit Name of account Credit

Date Details Folio number Amount Date Details Folio number Amount

Date: used for the day, month, and year of the transaction
Details: used for the contra account name
Folio number: used for reference numbers
Amount: used for the amounts of the transaction
When recording transactions in the general ledger the DOUBLE-ENTRY principle must be used by using the rules explained in Week 1 lesson 4.

Recording of transactions in the general ledger accounts.

 When entering transactions in the various accounts of a general ledger the same steps need to be followed as discussed when the double
entry principle was explained in Lesson 4 of Week 1.

Step 1: Identify the giving and receiving, this will represent the accounts you must use.

Step 2: Identify the element to which theses accounts belong to.

Step 3: Decide whether each account increases (+) or decreases (-).

Step 4: Use the rules for debiting or crediting an account to decide which account should be debited and which account should be credited.

Step 5: Prepare the t-accounts in the general ledger for the transaction.

Example 1:

Purchased a motor vehicle for R75,000 cash on 1 September.

Step 1: Identify the giving and receiving, this will represent the accounts you must use.
o The business received a vehicle (first account: motor vehicles)
o The business gives money (second account: bank)
Step 2: Identify the element to which these accounts belong to.
o Motor vehicles are an asset
o Bank is an asset.
Step 3: Decide whether each account increases (+) or decreases (-).
o Motor vehicles increase (the business possess more motor vehicles)
o Bank decreases (money is used to pay for the motor vehicle)
Step 4: Use the rules for debiting or crediting an account to decide which account should be debited and which account should be credited.
o Motor vehicles = asset = increase = debit the account
o Bank = asset = decrease = credit the account
Step 5: Prepare the t-accounts for the transaction.
Debit Motor vehicles Credit
Date Details Folio Amount Date Details Folio number Amount
number
1 Sep Bank R75 000

(this is always the other

account of the transaction
called contra account)

Debit Bank Credit

Date Details Folio number Amount Date Details Folio Amount
number
1 Sep Motor vehicles R75 000

(contra account* in
transaction)
* The contra account is the name of the other account that will be affected

Example 2:

On 10 September the business received rent from a tenant for the partial use of the office, R 5 000

Step 1: Identify the accounts (giving and receiving)

o The business receives money (first account: bank)
o The business gave a part of their building to the tenant, therefore made an income (second account: rent income) on 10 September,
R5 000.
Step 2: Identify the element to which these accounts belong to.
o Bank is an asset
o Rent income is an income.
Step 3: Decide whether each account increases (+) or decreases (-).
o Bank increases as money is received from rent
o Rent income also increases, as more income is created for the business.
Step 4: Use the rules for debiting or crediting an account to decide which account should be debited and which account should be credited.
o Bank = asset = increase = debit the account
o Rent income = income = increase = credit the account
Step 5: Prepare the t-accounts for the transaction.

Debit Bank Credit

Date Details Folio Amount Date Details Folio number Amount
numbe
r
10 Sep Rent Income R5 000

(contra account)

Debit Rent Income Credit

Date Details Folio number Amount Date Details Folio Amount
number
10 Sep Bank R5 000

(contra account)
Example 3:

Paid the telephone account on 15 September, R1 500

Step 1: Identify the accounts (giving and receiving)

o The business gave money (first account: bank)
o The business paid the telephone account (second account: telephone) and received therefore the use of the telephone line
Step 2: Identify the element to which theses accounts belong to.
o Bank is an asset
o Telephone is an expense.
Step 3: Decide whether each account increases (+) or decreases (-).
o Bank decreases as the money is used.
o Telephone increases, as the business paid more expenses.
Step 4: Use the rules for debiting or crediting an account to decide which account should be debited and which account should be credited.
o Bank = asset = decrease = credit the account
o Telephone = expense = increase = debit the account
Step 5: Prepare the t-accounts for the transaction.

Debit Bank Credit

Date Details Folio number Amount Date Details Folio number Amount
15 Sep Telephone R1 500

(contra account)

Debit Telephone Credit

Date Details Folio Amount Date Details Folio number Amount
number
15 Sep Bank R1 500

(contra account)

Example 4:

On 20 February, the business paid R20 000 in part payment to ABC Motors.

Step 1: Identify the accounts (giving and receiving)

o The business gave money (first account: bank)
o The business paid the payable ABC Motors (second account: Payable: ABC Motors) and therefore have lesser debt
Step 2: Identify the element to which theses accounts belong to.
o Bank is an asset
o Payable ABC Motors is a liability.
Step 3: Decide whether each account increases (+) or decreases (-).
o Bank decreases as the money is used.
o Liabilities decrease as less is owed to ABC Motors, the payable.
Step 4: Use the rules for debiting or crediting an account to decide which account should be debited and which account should be credited.
o Bank = asset = decrease = credit the account
o ABC Motors (payable) = liability= decrease = debit the account
Step 5: Prepare the t-accounts for the transaction.
Debit Bank Credit
Date Details Folio number Amount Date Details Folio Amount
number
20 Feb Accounts payable: ABC R20 000
Motors

(contra account)

Debit Accounts payable: ABC Motors Credit

Date Details Folio Amount Date Details Folio number Amount
number
15 Sep Bank R20 000

(contra account)

Example 5:

On 30 March, Mr. Smith paid the amount he owed the business, R500.

Step 1: Identify the accounts (giving and receiving)

o The business received money(first account: bank)
o The receivable, Mr Smith, (second account: Receivable: Mr. Smith) paid his debt so the business has lesser people owing money
Step 2: Identify the element to which theses accounts belong to.
o Bank is an asset
o Receivable: Mr Smith is an asset.
Step 3: Decide whether each account increases (+) or decreases (-).
o Bank increases as the money is received.
o Assets decrease because of Mr Smith owing lesser money to the business.
Step 4: Use the rules for debiting or crediting an account to decide which account should be debited and which account should be credited.
o Bank = asset = increase = debit the account
o Receivable: Mr Smith= asset= decrease = credit the account
Step 5: Prepare the t-accounts for the transaction.

Debit Bank Credit

Date Details Folio number Amount Date Details Folio Amount
number
30 Mrch Receivable: Mr R500
Smith

Debit Accounts receivable: Mr Smith Credit

Date Details Folio Amount Date Details Folio number Amount
number
30 Mrch Bank R500
Example 6:

The owner withdrew R100 from the business bank account for his personal use on 3 April.

Step 1: Identify the accounts (giving and receiving)

o The business is giving money to the owner (first account: bank)
o The owner received the money for personal use which is called drawings (second account: Drawings)
Step 2: Identify the element to which theses accounts belong to.
o Bank is an asset
o Drawings is an owner’s equity account.
Step 3: Decide whether each account increases (+) or decreases (-).
o Bank decrease as the money is given to the owner
o Drawings increase as the owner has taken more money from the business.
Step 4: Use the rules for debiting or crediting an account to decide which account should be debited and which account should be credited.
o Bank = asset = decrease = credit the account
o Drawings= increase or owners equity= decrease = debit the account
Step 5: Prepare the t-accounts for the transaction.

Debit Bank Credit

Date Details Folio number Amount Date Details Folio Amount
number
3 Apr Drawings R100

Debit Drawings Credit

Date Details Folio Amount Date Details Folio number Amount
number
3 April Bank R100

Important!!! Please note that the business will only create ONE account for each item eg. Only one bank account will be created in the
general ledger for all the transactions that effects the bank account.
Balancing the general ledger accounts

 At the end of every month, each T-account must be balanced to obtain an opening balance which the next month starts with.

a) Accounts with entries on both sides but totals on the sides differs:

Use the following steps to balance an account in the general ledger which have entries on both the debit and credit sides of the account:

The bank account will be used as an example:

Bank

Date Details Folio number Amount Date Details Folio number Amount

1 Feb Opening balance b/d R1 500 7 Feb Insurance R500

10 Feb Rent Received R10 000 15 Feb Telephone R5 000

25 Feb Wages R1 500

Step 1: Add up the debit side and credit side separately and identify the side that adds up to the highest amount.

o The debit side: R1 500 + R10 000 = R11 500.

o The credit side: R500 + R5 000 + R1 500 = R7 000

o Therefore, the debit side is the side that adds up to the highest amount.

Step 2: Write the amount identified in Step 1 on both sides of the t-account as the total of the account. (Tip: leave a line open after the last
transaction and then write down the highest total)

Bank

Date Details Folio Amount Date Details Folio Amount

number number

1 Feb Opening balance b/d R1 500 7 Feb Insurance R500

10 Feb Rent Received R10 000 15 Feb Telephone R5 000

25 Feb Wages R1 500

R11 500 R11 500

Step 3: Make each side balance to the total line.

o The debit side already adds up to R11 500 (R1 500 + R5000). The credit side only adds up to R7 000. An additional amount of R4 500
needs to be added to the R7 000 to get to R11 500. This R4 500 becomes the closing balance of February of this bank account.

This is then the balance that need to be carried forward (c/f or c/d) to March, the next month.
 Bank

Date Details Folio number Amount Date Details Folio number Amount

1 Feb Opening balance b/d R1 500 7 Feb Insurance R500

10 Feb Rent received R10 000 15 Feb Telephone R5 000

25 Feb Wages R1 500

28 Feb Balance c/f R4 500

R11 500 R11 500

Step 4: Obtain the opening balance for the next month by taking the closing balance to the other side of the t-account (after totals)

Bank

Date Details Folio Amount Date Details Folio Amount

number number

1 Feb Opening balance b/d R1 500 7 Feb Insurance R500

10 Feb Cash sales R10 000 15 Feb Cash purchases R5,000

25 Feb Wages R1 500

28 Feb Balance c/d R4 500

R11 500 R11 500

1 Mar Balance b/d R4 500

The opening balance of the bank account brought down (b/d) on 1 March is R4 500.

b) Accounts with entries on one side of the account:

 If an account has more than one entry on one side of the account (either the debit or credit side), it does not have to be balanced.

 Only the following steps need to be followed:

Step 1: Draw a line under the last entry’s amount.

Step 2: Total the account and write the total on the next line.

o Do not draw a line under the total as this total represents the balance for the month and will be continued in the following month.

The wage account will be used as an example:

Wages

Date Details Folio number Amount Date Details Folio number Amount

1 Feb Opening balance b/d R1 500

7 Bank R10 000

21 Bank R10 000

28 Bank R10 000

R31 500
 c) Accounts totalling to the same amount on both sides:

 If an account totals to the same amount on the debit and credit side the account can be balanced by following this step:

 Add up the sides (both debit and credit) and write down the totals on both sides on the same line. The sides should be equal. There is
NO balance

 We will use an account receivable account as an example:

Accounts receivable-S Smith

Date Details Folio number Amount Date Details Folio number Amount

1 Feb Opening balance b/d R1 500 10 Feb Bank R2 000

5 Services R 500
rendered

R2 000 R2 000

d) Accounts where only ONE entry is made on one side:

 If an account has only one entry on one side of the account, no balancing is necessary and the account is left as is.

Activity 1

KitKat Limited, an auditor firm, entered the following transactions during July 2017:

July 2017

1 C Kat (one of the directors) contributed to the firm with a cash deposit of R400 000 in the business bank account.

2 Purchased office furniture on credit from Office Ltd for R35 000.

3 Paid office rent for July R25 000 with an EFT.

7 Purchased stationery for R1 030 cash from CNA Clearwater.

10 Paid Office Ltd R12 000.

15 Sent an account to Rex Manufacturers for services rendered R19 800.

20 Received a direct deposit for R7 900 from Rex Manufacturers.

25 Paid salaries R80 000 via EFT.

31 C Kat withdrew R5 800 for his own use.

Required:

Post the above transactions to the general ledger (T-accounts) of KitKat Limited for the month ended 31 July 2017. Properly balance the
accounts at the end of the month.
 Office furniture (Asset)

Debit Credit
2 July 2017 Office Ltd 35 000

Capital (Equity)
1 July 2017 Bank 400 000

Bank (Asset)
1 July 2017 Capital: C Kat 400 000 3 July 2017 Rent expense 25 000
20 July 2017 Rex Manufacturers 7 900 7 July 2017 Stationary 1 030
10 July 2017 Office Ltd 12 000
25 July 2017 Salaries 80 000
30 July 2017 Drawings: C Kat 5 800
31 July 2017 Balance c/d 284 070
407 900 407 900
1 Aug Balance b/d 284 070

Office Limited (Creditor - Liability)

10 July Bank 12 000 2 July 2017 Office furniture 35 000
31 July 2017 Balance c/d 23 000
35 000 35 000
1 Aug Balance b/d 23 000

Rent expense (Expense)

3 July 2017 Bank 25 000

Stationary (Expense)
7 July 2017 Bank 1 030

Rex Manufacturers (Debtors- Asset)

15 July 2017 Service rendered 19 800 20 July 2017 Bank 7 900
31 July 2017 Balance c/d 11 900
19 800 19 800
1 Aug Balance b/d 11 900

Service Rendered (Income)

15 July 2017 Rex Manufacturers 19 800
 Salaries (Expense)
25 July 2017 Bank 80 000

Drawings (Equity)
31 July 2017 Bank 5 800
Trial Balance

 A trial balance is prepared at the end of the month, after all posting from the subsidiary journals and balancing of general ledger accounts
have been completed. It is a list of all the accounts in the general ledger and reflects whether the double – entry principle has been used
throughout the month.

REMEMBER!

An account normally has a balance on the side it increases (see Lesson 4 Week 1)

Structure of a Trial Balance

TRIAL BALANCE OF …………..(name of business) on ………………..(last day of month)

FOL DEBIT CREDIT

Statement of financial position Section

List all owner’s equity, assets, and liabilities accounts in this section

Nominal account Section

List all income and expense accounts in this section

xxxx xxxx

 The Statement of financial position section will reflect the following accounts:

→ Capital, which will be credited

→ Drawings, which will be debited

→ Assets, which will be debited and

→ Liabilities, which will be credited

→ These are the accounts that will be shown in the Statement of financial Position at the end of the financial year, hence the name
Statement of Financial Position section.

 The Nominal account section will reflect the following accounts:

→ Income, which will be credited

→ Expenses, which will be debited

 These are the accounts that will be shown in the Statement of profit or loss at the end of the year.

 Once the trial balance is completed the debit and the credit columns are added up. The amount of the debit column must equal to the
amount of the credit column. This will indicate that the business has used the double entry principle correctly throughout the month.

 It is important to note that although the debits and credits is equal in the Trial Balance, mistakes or errors may still be present in the
records of the entity.

 The last Trial Balance for the year (mostly the 12th month’s trial balance) will be called the Pre-adjustment Trial balance and will reflect the
total owner’s equity, assets and liabilities the business has as well as the total income earned and expenses paid during the financial year.
Activity

1.1 Example of a Trial balance at the end of a month:

The following general ledger accounts of Mickey Traders are provided. Prepare a trial balance on the 31st of March 2020.

GENERAL LEDGER ACCOUNT BALANCE ON 31 MARCH 2020.

Capital 240 000

Vehicles 350 000

Receivables 33 000

Drawings 10 000

Rent Paid 18 000

Advertisements 12 000

Salaries 15 000

Payables 38 000

Sales 200 000

Cost of Sales 140 000

Solution

TRIAL BALANCE OF Mickey Traders on 31 March 2020

FOL DEBIT CREDIT
Statement of financial position Section
Capital 240 000
Drawings 10 000
Vehicles 350 000
Receivables 33 000
Payables 38 000
Loan 100 000

Nominal account Section

Sales 200 000
Cost of sales 140 000
Rent Paid 18 000
Advertisements 12 000
Salaries 15 000
578 000 578 000
Value Added tax (VAT)
 VAT is a tax system whereby tax is levied on goods and services provided.
 A person or business registered for VAT is called a VAT vendor. (Maritz, C.J, 2019, p 77). A business that has a turnover of more than R
1000 000 in any 12 consecutive months are obliged to register as a VAT vendor.
 These vendors will need to keep accurate records of all transactions on which VAT is applicable. When registering as a VAT vendor the
South African Revenue Services (SARS) will decide whether the business will fall in a two-month, One-month, Four-month, Six month or
12-month tax period. The period a business falls into depends on the turnover it generates. Most business however fall in a two-month
tax period and will need to submit their VAT returns, on a VAT201 form, in this period.
 The current VAT rate in South Africa is 15%.

VAT supply categories

a. Standard rated supplies:

→ These are goods and services on which a 15% VAT rate are charged. Most goods and services fall under this category except for:

b. Zero-rated Supplies:
→ These are goods on which VAT is charged but the rate is 0%.
→ Examples of Zero-rated goods:
· Petrol, diesel, and paraffin
· Brown, bread, milk, fruit, and vegetables, samp, lentils, unflavoured milk powder and maize meal
· Certain goods used for agricultural purposes.
· Certain export goods or services

c. Exempt Supplies:
→ These are goods on which NO VAT is levied.
→ Examples of Exempt supplies:
· Life assurance
· Interest received and paid.
· Passenger transport eg. Taxi or train
· certain educational services
· members contribution to a trade union
· supply of accommodation in a private dwelling (primary residence)

How does the VAT system work?

 When a vendor is supplied with goods or services by another vendor, VAT will be levied by the supplier of those goods or services. The VAT
on those goods or services received is the input tax of the vendor who receives those goods or services. When that vendor in turn
supplies goods or services to other persons (or vendors), VAT must be included in the price charged for those goods or services. This is
the output tax of the vendor.
 When a business submits its VAT return to SARS, only the difference between INPUT and OUTPUT VAT will be payable or receivable from
SARS.
 When the INPUT VAT > OUTPUT VAT = Difference will be receivable from SARS (ASSET)
 When the OUTPUT VAT > INPUT VAT = Difference will be payable to SARS (LIABILITY)

Example:
The output VAT of a business is R 200 000, and the input VAT is R 80 000.
Calculate the amount payable to / refundable from the South African Revenue Service (SARS).

Step 1: Calculate the difference between the INPUT and OUTPUT VAT
200 000 – 80 000 = 120 000
Step 2: Determine whether INPUT or OUTPUT VAT is the higher amount.
Input Vat = 80 000
Output VAT = 200 000 Therefore Output VAT is the higher amount
Step 3: Determine if the difference will be payable or receivable.
The difference is payable because Output VAT > Input VAT.

How to calculate VAT.

 When entering transactions of a registered VAT vendor, the VAT, VAT EXCLUSIVE and VAT INCLUSIVE amounts needs to be determined.
What does this mean?
 VAT amount: The 15% levied on goods and services.
 VAT EXCLUSIVE: The amount without VAT (or amount before VAT was added)
 VAT INCLUSIVE: The amount including VAT (or amount after VAT has been added)

Use the following easy way to calculate these amounts:

Step 1: Start by writing the equation:

EXCLUSIVE + VAT = INCLUSIVE if EXCLUSIVE = 100 (forms the base of the formula) then:

100 + 15 = 115

Step 2: Use the following formula to determine amounts:

PRICE GIVEN x WHAT I WANT

WHAT I HAVE

Use the % reflected in the equation above

Example 1:

You are provided with R 300 (EXCLUSIVE of VAT). You are required to calculate the INCLUSIVE and the VAT amounts.

Step 1: Write the equation:

EXCL + VAT = INCL

100 + 15 = 115 (This will always be the same unless the VAT rate is changed by government)

Step 2: Use the formula (provided above) to calculate

1) INCLUSIVE 2) VAT amounts

1) 300 (price given) x 115 (What I want is the INCLUSIVE amount = 115 in equation)

100 (What I have is the EXCLUSIVE amount = 100 in equation)

= R 345

2) 300 x 15 (What I want is the VAT amount = 15)

 100 (What I have is the exclusive amount = 100)

= R 45

OR

If two of the amounts is known, we can just subtract or add: R 345 (Inclusive) – R 300 (Exclusive) = R 45

Example 2:

You are provided with R 1000 (Inclusive of VAT). You are required to calculate the EXCLUSIVE and VAT amounts.

Step 1: Write the equation:

EXCL + VAT = INCL

100 + 15 = 115

Step 2: Use the formula (provided above) to calculate

1) EXCLUSIVE 2) VAT amounts

1) 1000 x 100/115 = R 870

2) 1000 x 15/115 = R 130 OR 1000 – 870 = 130

Example 3:

You are provided with R 115 (VAT). You are required to calculate the INCLUSIVE and EXCLUSIVE amounts.

Step 1: Write the equation:

EXCL + VAT = INCL

100 + 15 = 115

Step 2: Use the formula (provided above) to calculate

1) INCLUSIVE 2) EXCLUSIVE amounts

1) 115 x 115/15= R 882

2) 115 x 100/15= R 767 OR 882 – 115 = 767

Activity 1

Complete the following table:

CUSTOMER GOODS SOLD (EXCLUDING VAT TOTAL INVOICE AMOUNT

VAT)

1 R 13 158

2 R 1 474

3 R 19 298

4 R 20 520

Solution

CUSTOMER GOODS SOLD (EXCLUDING VAT TOTAL INVOICE AMOUNT

VAT)
1 R 13 158 1 974 15 132

(13158 x 15/100 (13158 x 115/100)

2 9 827 R 1 474 11 301

(1474 x 100/15) (1474 x 115/15)

3 R 19 298 2 895 22 193

(19298 x 15/100) (19298 x 115/100)

4 17 843 2 677 R 20 520

(20520 x 100/115) (20520 – 17843)

TRANSACTIONS INCLUDING VAT

 When dealing with a registered VAT vendor’s transaction, it is important to keep accurate records of all the VAT in the transactions.
 The double entry system is still used but an additional account will be used for both the INPUT VAT and OUTPUT VAT. This account is called
the VAT control account (a liability).
 INPUT VAT will be debited to the VAT control account, while OUTPUT VAT will be credited to the VAT control account. Input VAT will be
received from SARS and therefore the liability to SARS will decrease, while Output VAT will increase the liability as more is owed to SARS.
 THREE accounts will therefore be used when the business buys or sells goods on which VAT is levied.

 The following rules is important to remember:

o The Bank, Receivables or Payables account will use the INCLUSIVE amount.
o The VAT control account will use the VAT amount.
o Whatever the business buys, sells or pays will use the EXCLUSIVE amount.
o When these rules are followed the DEBITS will still be equal to the CREDITS.

VAT Application Examples

Example 1:

Paid the telephone account on 15 September, R1 500 (INCLUSIVE of VAT)

Step 1: Identify the accounts (giving and receiving) – DOUBLE ENTRY

o The business gave money (first account: bank)

o The business paid the telephone account (second account: telephone) and received therefore the use of the telephone line.

Step 2: Identify whether the business levied VAT and whether this is OUTPUT or INPUT VAT.

o VAT is levied on telephone.

o As the business pays for telephone this will be regarded as INPUT VAT

Step 3: Identify the element to which these accounts belong to.

o Bank is an asset
o Telephone is an expense.
o Input VAT is an asset

Step 4: Decide whether each account increases (+) or decreases (-).

o Bank decreases as the money is used.

o Telephone increases, as the business paid more expenses.
o VAT control will decrease, as less VAT is payable to SARS.

Step 5: Use the rules for debiting or crediting an account to decide which account should be debited and which account should be credited.

o Bank = asset = decrease = credit the account

 o Telephone = expense = increase = debit the account
o VAT control = decrease = debit the account

Step 6: Calculate the appropriate amounts for each account. Use the rules provided earlier:

o Bank = INCLUSIVE amount = R 1 500

o Telephone = what the business has paid = EXCLUSIVE amount = 1500 x 100/115 = R 1304
o VAT = 1500 x 15/115 = R 196 or 1500 – 1304 = R 196

The general ledger entry would be:

Bank

Date Details Folio number Amount Date Details Folio number Amount

15 Sep Telephone and VAT R 1 500

control

Telephone

Date Details Folio number Amount Date Details Folio number Amount

15 Sep Bank R1 304

VAT control

Date Details Folio number Amount Date Details Folio number Amount

15 Sep Bank R 196

Note: Always check if the amounts on the debit side is equal to the amounts on the credit side.

In this example the debit side adds up to R 1 500 (1304 + 196) and this is equal to the credit side which is R 1 500.

Example 2:

On 15 September, a registered VAT vendor rendered plumbing services to a customer for cash, R 2 500 (INCLUSIVE OF VAT)

Step 1: Identify the accounts (giving and receiving) – DOUBLE ENTRY

o The business received money (first account: bank)

o The business gave services which creates an income to the business (second account: Services Rendered)

Step 2: Identify whether the business levied VAT and whether this is OUTPUT or INPUT VAT.

o VAT is levied on Plumbing services

o As the business is selling their services this will be OUTPUT VAT

Step 3: Identify the element to which these accounts belong to.

o Bank is an asset
o Services rendered is an income
o Output VAT is a liability

Step 4: Decide whether each account increases (+) or decreases (-).

o Bank increases as the business receives money

o Income increases as the business are creating income for themselves by rendering services
o VAT control increases as more VAT is payable to SARS
Step 5: Use the rules for debiting or crediting an account to decide which account should be debited and which account should be credited.

o Bank= asset = increase = debit the account

o Services rendered = Income = Increases= credit the account
o VAT Control = liability = increase = credit the account

Step 6: Calculate the appropriate amounts for each account. Use the rules provided earlier:

o Bank = INCLUSIVE amount = R 2 500

o Services rendered = what business “sells” - EXCLUSIVE amount = 2500 x 100/115 = R 2 174
o VAT = VAT = 2 500 x 15/115 = R 326 or R 2 500 – R 2 174 = R 326

The general ledger entry would be:

Bank

Date Details Folio Amount Date Details Folio number Amount

number

15 Sept Services rendered and R2 500

VAT control

Services rendered

Date Details Folio Amount Date Details Folio number Amount

number

15 Sep Bank R2 174

VAT control

Date Details Folio Amount Date Details Folio number Amount

number

15 Sep Bank R 326