Year Summary: ten CAPS topics across Paper 1 (Company Financial Statements, Cash Flow, Analysis & Interpretation, Corporate Governance) and Paper 2 (Reconciliations, Cost Accounting, Budgeting, VAT, Inventory Valuation, Fixed Assets), with full worked ledgers, journals and statements in the real official format throughout.
CAPS-aligned · Distinction-level Notes
Accounting · Grade 12 · Year SummaryDate: TopJournal
Every distinction begins with one topic at a time.- start now
⭐ EXAM FAVOURITE
This single topic carries roughly 55 of Paper 1's 150 marks, more than Cash Flow and Corporate Governance combined. It is also never asked in isolation: adjustments feed the Income Statement, the Income Statement feeds the Retained Income note, and Retained Income feeds the Balance Sheet. Master the chain, not four separate skills.
One topic at a time. That is how a distinction gets built.· 55 of Paper 1's 150 marks live right here, so master this chain first
Every number below is only intimidating until you see it is really four short statements, stacked on top of each other, each one carrying its previous answer forward.
What you must be able to do
Apply the core GAAP/IFRS principles (historical cost, matching, prudence, going concern, materiality, business entity rule) to real transactions
Distinguish authorised from issued share capital, and prepare the Ordinary Share Capital note for a share issue and a share buy-back
Process every standard year-end adjustment (depreciation, accrued and prepaid expenses, income received in advance, consumable stores on hand, the provision for bad debts adjustment, income tax, dividends) and trace its effect through the accounting equation
Build a full Income Statement from Sales through to Net profit after tax
Prepare the Retained Income note, showing how net profit, dividends and any share buy-back premium change the closing balance
Prepare the Tangible Assets, Trade and Other Receivables, and Trade and Other Payables notes
Build a full Balance Sheet that actually balances, using figures carried forward from every note above
Recognise where ethics and corporate governance concerns arise inside a company financial statements question, for example a share buy-back that favours one shareholder over the rest
Core concepts: GAAP, IFRS and shareholders' equity
📖 KEY DEFINITIONGAAP (Generally Accepted Accounting Practice) is the broad set of principles South African companies must follow when preparing financial statements. IFRS (International Financial Reporting Standards) is the detailed rulebook that puts those principles into practice. A company's financial statements must be GAAP compliant, meaning they were prepared according to these accepted principles, not according to whatever the directors find convenient.
GAAP principles at a glance
Historical cost: assets are recorded at what was actually paid, not at current market value
Matching (accrual): an expense or income is recorded in the period it relates to, not the period it was paid or received in
Prudence: do not overstate assets or income, and do not understate liabilities or expenses
Going concern: the statements assume the business will keep trading for the foreseeable future
Materiality: only information significant enough to affect a reader's decision needs separate disclosure
Business entity rule: the business is a separate legal person from its shareholders and directors
Shareholders' equity building blocks
Authorised share capital: the maximum number of shares the company's Memorandum of Incorporation allows it to ever issue
Issued share capital: the number of shares actually sold to shareholders so far, this is what appears in the Balance Sheet, never the authorised ceiling
Retained income: after-tax profit kept in the business instead of paid out as a dividend
Interim dividend: paid to shareholders during the year
Final dividend: declared at year end but not yet paid, so it becomes a current liability, "Shareholders for dividends"
How each adjustment moves through the accounting equation
⚡ MUST MEMORISEAssets = Shareholders' equity + Liabilities, every single time, before and after every adjustment. A company's equity is Ordinary share capital + Retained income, replacing the owner's or partners' equity used in Grade 10 and Grade 11. Every year-end adjustment must keep both sides of the equation equal, so if you cannot see where an adjustment landed on the other side, you have not finished it.
Decreases (higher expense lowers net profit, which lowers retained income)
No effect
Accrued interest on a loan
No effect
Decreases (higher expense lowers net profit)
Increases (accrued expense payable)
Prepaid insurance
Increases (a new current asset)
Increases (lower expense raises net profit)
No effect
Final dividend declared
No effect
Decreases (an appropriation of retained income, not an expense)
Increases (Shareholders for dividends payable)
Standard formats: Income Statement and Balance Sheet (companies)
Income Statement skeleton
Sales
xxx
Cost of sales
(xxx)
Gross profit
xxx
Other operating income
xxx
Gross operating income
xxx
Operating expenses
(xxx)
Operating profit
xxx
Interest income
xxx
Interest expense
(xxx)
Net profit before tax
xxx
Income tax
(xxx)
Net profit after tax
xxx
Balance Sheet skeleton
ASSETS
Note
R
NON-CURRENT ASSETS
xxx
Tangible assets
1
xxx
Financial assets: fixed deposit
xxx
CURRENT ASSETS
xxx
Inventory
xxx
Trade and other receivables
2
xxx
Cash and cash equivalents
xxx
TOTAL ASSETS
xxx
EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY
xxx
Ordinary share capital
3
xxx
Retained income
4
xxx
NON-CURRENT LIABILITIES
xxx
Mortgage bond
xxx
CURRENT LIABILITIES
xxx
Trade and other payables
5
xxx
Current portion of loan
xxx
TOTAL EQUITY AND LIABILITIES
xxx
⚠️ COMMON MISTAKE
Most marks in this topic are method marks, not final-answer marks. A correct total with no working shown loses almost everything. Show every intermediate step: the depreciation calculation, the average price used to remove shares, the tax percentage applied. Papers also plant distractor figures you do not need for a given part; a shaded cell in the answer book is an instruction to leave it blank, not a sign you missed something.
Fully worked example: Marula Bay Traders Ltd, year ended 28 February 2026
Marula Bay Traders Ltd is a fictional company used only to demonstrate the method below; every figure is invented for this worked example.
Figures from the accounting records, before the adjustments below
Sales
2 400 000
Cost of sales
1 380 000
Discount received
14 000
Bad debts recovered
6 000
Salaries and wages
420 000
Water and electricity
54 000
Insurance
33 600
Consumable stores
18 500
Bad debts
8 200
Sundry expenses
96 000
Interest income on fixed deposit
12 000
Land and buildings, at cost
1 850 000
Vehicles, at cost
480 000
Accumulated depreciation on vehicles (1 March 2025)
192 000
Equipment, at cost (includes the addition below)
260 000
Accumulated depreciation on equipment (1 March 2025)
88 000
Fixed deposit
150 000
Trading stock
314 500
Trade debtors control
186 000
Provision for bad debts (1 March 2025)
7 000
SARS: Income tax (provisional payments made this year)
80 000
Bank (favourable)
547 700
Ordinary share dividends: interim, paid 31 August 2025
200 000
Ordinary share capital (closing balance, see note 3)
2 430 000
Retained income (1 March 2025)
385 000
Mortgage bond (closing balance, before splitting current/non-current)
430 000
Trade creditors control
142 000
Additional information used to process the adjustments
Vehicles
Depreciated at 20% p.a. on cost. No vehicles were bought or sold this year.
Equipment
Depreciated at 10% p.a. on cost. New equipment costing R40 000 was bought on 1 December 2025; the R220 000 balance was held the full year.
Water and electricity
The February account of R6 000 was only paid in March, so it is still owing.
Insurance
The R33 600 covers 14 months to 30 April 2026, so 2 months (R4 800) is prepaid.
Consumable stores
Stationery worth R2 500 was still on hand and unused at year end.
Provision for bad debts
Must be adjusted to 5% of trade debtors.
Mortgage bond
Balance was R480 000 on 1 March 2025, interest is charged at 10% p.a. on the average balance and had not yet been entered in the books. R50 000 of the closing balance is repayable within the next 12 months.
Income tax
Calculated at 27% of net profit before tax for this example (the SA company rate since the 2023 year of assessment).
Ordinary share capital
400 000 shares in issue on 1 March 2025 at an average of R5.00 each. 100 000 new shares were issued on 1 July 2025 at R7.00 each. 50 000 shares were repurchased on 1 December 2025 for R6.00 cash each.
Final dividend
50 cents per share declared on 28 February 2026 on every share in issue that day, not yet paid.
Worked example: processing the adjustments
#
Adjustment
Working
Amount (R)
1
Depreciation: vehicles
20% × 480 000
96 000
2
Depreciation: equipment
(10% × 220 000) + (10% × 40 000 × 3/12)
22 000 + 1 000 = 23 000
3
Accrued expense: water and electricity
February account still owing
6 000
4
Accrued expense: interest on loan
10% × average of (480 000 + 430 000) ÷ 2
45 500
5
Prepaid expense: insurance
2 months × (33 600 ÷ 14)
4 800
6
Consumable stores on hand
Given
2 500
7
Provision for bad debts adjustment
(5% × 186 000) minus 7 000
9 300 - 7 000 = 2 300
8
Income tax
27% × net profit before tax of 256 200
69 174
9
Final dividend declared
50 cents × 450 000 shares in issue at year end
225 000
🔥 FREQUENTLY TESTED
Depreciation on a mid-year addition is a guaranteed method-mark trap: the R40 000 equipment was only held for 3 of the 12 months (December, January, February), so it earns only 3/12 of a full year's depreciation. Splitting assets into "held all year," "bought this year" and "sold this year" before calculating anything prevents blending them into one wrong number.
Worked example: the Income Statement
MARULA BAY TRADERS LTD
Income Statement for the year ended 28 February 2026
Sales
2 400 000
Cost of sales
(1 380 000)
Gross profit
1 020 000
Other operating income
20 000
Discount received
14 000
Bad debts recovered
6 000
Gross operating income
1 040 000
Operating expenses
(750 300)
Salaries and wages
420 000
Water and electricity (54 000 + 6 000)
60 000
Insurance (33 600 - 4 800)
28 800
Consumable stores (18 500 - 2 500)
16 000
Bad debts
8 200
Provision for bad debts adjustment
2 300
Sundry expenses
96 000
Depreciation (96 000 + 23 000)
119 000
Operating profit
289 700
Interest income
12 000
Interest expense
(45 500)
Net profit before tax
256 200
Income tax
(69 174)
Net profit after tax
187 026
💡 EASY MARK
Whenever net profit before tax is given (or already calculated), income tax is one multiplication away: tax rate × net profit before tax. Here, 27% × R256 200 = R69 174. Never leave this line blank even under time pressure, it is a guaranteed low-order mark.
Worked example: the notes
Note 3: Ordinary share capital
400 000 shares in issue on 1 March 2025
2 000 000
Issued: 100 000 shares at R7.00 on 1 July 2025
700 000
500 000 shares, running balance
2 700 000
Repurchased: 50 000 shares at the average price of R5.40 (2 700 000 ÷ 500 000)
(270 000)
450 000 shares in issue on 28 February 2026
2 430 000
⚠️ COMMON MISTAKE
The 50 000 repurchased shares leave the Ordinary Share Capital note at the average price (R5.40), never at the R6.00 actually paid in cash. The R30 000 premium (50 000 × (6.00 - 5.40) = R30 000) does not touch the share capital note at all, it reduces Retained Income instead. Mixing this up is one of the most common errors in this topic.
Note 4: Retained income
Balance at 1 March 2025
385 000
Net profit after tax
187 026
Premium paid on share buy-back above average price
(30 000)
Ordinary share dividends
(425 000)
Interim, paid 31 August 2025 (40c × 500 000 shares then in issue)
(200 000)
Final, declared 28 February 2026 (50c × 450 000 shares in issue)
(225 000)
Balance at 28 February 2026
117 026
🔥 FREQUENTLY TESTED
Share buy-backs are almost never asked as pure mechanics alone. A common linked scenario: a director engineers a buy-back that pushes their own shareholding above 50%, regaining control cheaply at the other shareholders' expense. The mechanical note preparation above is exactly what carries the marks, but be ready to also comment briefly on whether this treats all shareholders fairly, a corporate governance judgement, not a calculation.
Note 2: Trade and other receivables
Trade debtors
186 000
Provision for bad debts (5% × 186 000)
(9 300)
Net trade debtors
176 700
Prepaid expenses (insurance)
4 800
SARS: Income tax (80 000 paid - 69 174 owed, a debit balance so SARS owes the company)
10 826
Total
192 326
Note 5: Trade and other payables
Trade creditors
142 000
Accrued expenses (water and electricity 6 000 + interest on loan 45 500)
51 500
Shareholders for dividends (final dividend)
225 000
Total
418 500
Note 1: Tangible assets
Land & buildings
Vehicles
Equipment
Carrying value: 1 March 2025
1 850 000
288 000
132 000
Cost
1 850 000
480 000
220 000
Accumulated depreciation
-
(192 000)
(88 000)
Additions
-
-
40 000
Depreciation for the year
-
(96 000)
(23 000)
Carrying value: 28 February 2026
1 850 000
192 000
149 000
Cost
1 850 000
480 000
260 000
Accumulated depreciation
-
(288 000)
(111 000)
Worked example: the Balance Sheet
MARULA BAY TRADERS LTD
Balance Sheet at 28 February 2026
ASSETS
Note
R
NON-CURRENT ASSETS
2 341 000
Tangible assets
1
2 191 000
Financial assets: fixed deposit
150 000
CURRENT ASSETS
1 054 526
Inventory
314 500
Trade and other receivables
2
192 326
Cash and cash equivalents
547 700
TOTAL ASSETS
3 395 526
EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY
2 547 026
Ordinary share capital
3
2 430 000
Retained income
4
117 026
NON-CURRENT LIABILITIES
380 000
Mortgage bond (430 000 - 50 000 current portion)
380 000
CURRENT LIABILITIES
468 500
Trade and other payables
5
418 500
Current portion of loan
50 000
TOTAL EQUITY AND LIABILITIES
3 395 526
⭐ EXAM FAVOURITE
Total assets (R3 395 526) equals total equity and liabilities (R3 395 526). That final balance check is the single most reassuring thing you can do in the exam room: if your two totals do not match, an adjustment was processed on only one side of the equation somewhere above, go back and find it before moving on.
Connections to other topics
Cash Flow Statement: the same depreciation, dividend and loan repayment figures reappear there, reconciling net profit to the actual change in cash
Analysis and interpretation: every ratio in that topic (solvency, liquidity, gearing, return on equity) is calculated directly from this Income Statement and Balance Sheet
Corporate governance: share buy-backs, dividend policy and related-party dealings feed the short scenario judgement questions there
🧠 ACTIVE RECALL
A company records an expense in the financial year it relates to, even though it will only be paid in cash next year. Which GAAP principle is being applied?(2)
Marula Bay Traders Ltd bought its land for R1 850 000 in 2015. An estate agent now values it at R3 200 000, but the Balance Sheet still shows R1 850 000. Which GAAP principle explains this?(2)
At year end a company raises its provision for bad debts to 5% of debtors so that debtors are not shown at more than the company realistically expects to collect. Which GAAP principle is being applied?(2)
A director pays her personal home insurance from her own bank account and it is not recorded anywhere in the company's books. Which GAAP principle is being applied?(2)
A tenant pays R9 000 rent in February 2026 for March 2026. The company's year ends on 28 February 2026, and it records the R9 000 as income received in advance rather than as this year's rent income. Which GAAP principle is being applied?(2)
Which figure actually appears in the Shareholders' Equity section of the Balance Sheet?(2)
Kalkbaai Fisheries Ltd's Memorandum of Incorporation allows it to issue 1 000 000 ordinary shares. So far it has sold 600 000 shares. How many shares are reported as issued share capital on the Balance Sheet?(2)
A company is authorised to issue 800 000 shares. So far 500 000 shares have been issued at an average price of R4.00 each. What amount appears as Ordinary share capital on the Balance Sheet?(2)
Which statement about authorised share capital is CORRECT?(2)
A company's authorised share capital is 1 000 000 shares. It had 650 000 shares in issue on 1 March 2025 and issued another 150 000 shares on 1 July 2025. How many shares can it still legally issue after 1 July 2025?(2)
A company declares a final dividend on the last day of its financial year but has not yet paid it. How is this dividend classified on the Balance Sheet?(2)
A company paid an interim dividend of R200 000 on 31 August 2025. At its year end on 28 February 2026, how is this interim dividend treated?(2)
Shareholders for dividends of R225 000 appears at year end. Under which Balance Sheet note is this amount disclosed?(2)
A final dividend of 50 cents per share is declared on 450 000 shares on the last day of the financial year. What is the effect on the accounting equation?(2)
How is an ordinary share dividend treated in a company's financial statements?(2)
Kalkbaai Fisheries Ltd bought equipment for R80 000 on 1 March 2025, the first day of its financial year. Equipment is depreciated at 15% p.a. on cost, straight-line. What is the depreciation expense for the year ended 28 February 2026?(2)
A company with a 28 February 2026 year end bought a delivery vehicle for R150 000 on 1 September 2025. Vehicles are depreciated at 20% p.a. on cost. What is the depreciation on this vehicle for the year ended 28 February 2026?(2)
Equipment on 28 February 2026 has a total cost of R300 000, which includes new equipment of R60 000 bought on 1 November 2025. Equipment is depreciated at 10% p.a. on cost. What is the total depreciation on equipment for the year ended 28 February 2026?(2)
Machinery costing R120 000 was bought on 1 June 2025 by a company whose financial year ends on 28 February 2026. Machinery is depreciated at 25% p.a. on cost. What is the depreciation for the year ended 28 February 2026?(2)
A company owns vehicles costing R480 000, with accumulated depreciation of R192 000 on 1 March 2025. Vehicles are depreciated at 20% p.a. on cost and none were bought or sold during the year. What is the carrying value of the vehicles on 28 February 2026?(2)
Which one of these year-end adjustments REDUCES a recorded expense on the Income Statement?(2)
Which one of these year-end adjustments INCREASES a recorded expense on the Income Statement?(2)
Consumable stores bought during the year cost R18 500 and the trial balance shows this full amount. Stationery worth R2 500 was still unused at year end. What is the consumable stores expense on the Income Statement?(2)
A company with a 28 February 2026 year end paid an insurance premium of R36 000 on 1 March 2025 covering 15 months to 31 May 2026. What amount is prepaid on 28 February 2026?(2)
The trial balance shows water and electricity of R54 000 paid. The February 2026 account of R6 000 was only paid in March 2026. What amount appears for water and electricity on the Income Statement for the year ended 28 February 2026?(2)
Rent income earned in February but only received in March is an example of accrued income. How is it classified at year end?(2)
A tenant paid March 2026 rent of R8 000 to the company on 25 February 2026. The company's year ends on 28 February 2026. How is the R8 000 classified at year end?(2)
Interest of R45 500 on a mortgage bond for the year had not been entered in the books or paid by year end. Where does the R45 500 appear on the Balance Sheet?(2)
Insurance of R4 800 paid this year relates to the next financial year. How is the R4 800 classified on the Balance Sheet at year end?(2)
During the year a company made provisional income tax payments of R60 000 to SARS. Income tax for the year was calculated at R72 000. How does SARS: Income tax appear on the Balance Sheet?(2)
Kalkbaai Fisheries Ltd's Retained income was R120 000 on 1 March 2025. Net profit after tax for the year was R310 000. The company paid an interim dividend of R45 000 and declared a final dividend of R60 000. There was no share buy-back this year. Calculate the closing Retained income balance on 28 February 2026, showing all workings.(6)
Opening balance plus net profit after taxThe Retained income note starts with the opening balance and adds the year's net profit after tax; the subtotal R430 000 proves both were used.
Interim dividend deductedThe interim dividend was paid during the year and reduces retained income; the examiner wants to see it taken off, not ignored because it is already paid.
Final dividend deductedA declared final dividend is an appropriation of retained income the moment it is declared, so it is deducted here and shown as Shareholders for dividends.
Closing balance R325 000The closing balance is the figure that carries forward to the Balance Sheet, so it earns the final answer marks.
Opening balance 120 000 plus net profit after tax 310 000 = 430 000.Less interim dividend: 430 000 - 45 000 = 385 000.Less final dividend: 385 000 - 60 000.Closing Retained income on 28 February 2026 = R325 000.
Explain why shares bought back by a company are removed from the Ordinary Share Capital note at the average price, rather than at the actual cash price paid to the shareholder who sold them.(4)
Average issue price of all shares in issueThe note records what the company received for its shares, so shares leave it at the average of what was received, not at what was paid to buy them back.
Fair, consistent value for the shares still in issueRemoving shares at the average keeps the value per share of the remaining shares unchanged, which is fair to the shareholders who did not sell.
Premium goes to Retained incomeThe premium is an extra payout of profit to the selling shareholder, so it is an appropriation of retained income, which is why it never touches the share capital note.
Shares removed from the note are valued at the average issue price of all shares in issue (total share capital divided by the number of shares), which is what the company actually received for its shares, not the cash paid to buy them back.This keeps the note showing a fair, consistent average value per share for the shares still in issue.Any premium paid above that average is an extra payout to the selling shareholder, so it is shown separately as a deduction in the Retained income note, not as a change to share capital.
A director of a company arranges for the company to repurchase shares mainly from one shareholder, in a deal that pushes the director's own shareholding above 50%. State ONE corporate governance concern this raises and explain your answer.(5)
Control of the company shifts to the directorThe concern must be named: the buy-back is being used to change who controls the company, at the company's expense.
Not all shareholders treated fairly or equallyGood governance means every shareholder gets the same opportunity on the same terms; a private deal with one seller breaks that.
Conflict of interest: the director benefits personallyA director must act in the company's interest; a decision that grows their own stake is a personal benefit taken from a company decision.
What good governance would requireThe explanation is stronger when it says what should have happened: disclosure, an independent valuation, and an open offer to everyone.
The concern is that the director is using the company's own money to shift control of the company to themselves, gaining a majority shareholding.Not every shareholder was given a fair, equal chance to sell on the same terms, so the minority shareholders are disadvantaged by a deal arranged around one seller.There is a conflict of interest: the director benefits personally from a decision they helped the company make.Good governance would require full disclosure of the director's interest, an independent valuation of the shares, and the same buy-back offer being made to all shareholders.
Explain it to a Grade 8: why must a company's Balance Sheet always balance, with assets exactly equal to equity plus liabilities?
Everything owned came from somewhereThe whole idea rests on this: an asset cannot appear out of nowhere, so its money trail always leads to one of the two sides.
Equity is the shareholders' money and kept profitOne source of every asset is the owners: what they paid for shares plus the profit the company kept for them.
Liabilities are what is borrowed or still owedThe other source is other people's money: loans and unpaid bills that must be paid back one day.
Everything the business owns had to come from somewhere.Either the shareholders put money in and left profit in the business, which is equity,or the business borrowed it or still owes someone for it, which is liabilities. Because every asset can be traced back to one of those two sources, the two sides can never disagree, the same way your pocket money always equals what you were given plus what you still owe someone.
Explain it to a Grade 8: why is depreciation charged on a delivery van every year, even though the company does not pay anyone any money for it?
The van wears out and loses valueDepreciation exists because an asset is used up slowly; a Grade 8 must see that the van is really being consumed.
The cost is spread over the years it is usedThis is the matching principle in plain words: the year that uses the van should carry part of its cost.
No cash moves: it lowers profit and the book valueThe learner must separate the bookkeeping effect (lower profit, lower carrying value) from a cash payment, which never happens.
A delivery van wears out and loses value the longer it is driven, even if nobody sends the company a bill for that.Depreciation spreads the cost of the van over the years the company actually uses it, so each year carries a fair share of that cost instead of the year it was bought carrying all of it.No cash leaves the business; the charge simply lowers this year's profit and lowers the van's carrying value on the Balance Sheet, so the book value slowly drops towards what the van is really worth.
Explain it to a Grade 8: what a final dividend is, and why it counts as a liability at year end even though the shareholders have not received a cent yet.
A dividend is a share of the profit for shareholdersBefore the liability makes sense, the learner must say what a dividend actually is: profit going to the owners.
Declaring it is a promise, so the company owes itThe liability arises on declaration, not on payment; the promise is the debt.
Current liability, taken off retained income, not an expenseThe examiner wants the classification: paid within a year, so current, and an appropriation of profit rather than a cost of earning it.
A dividend is the part of the year's profit the company hands to its shareholders as a reward for owning shares.When the directors declare a final dividend on the last day of the year, they are making a promise: the company now owes that money to every shareholder, even though the cash only goes out a few weeks later.Because it will be paid within the next year, it sits under current liabilities as Shareholders for dividends, and it comes off retained income rather than being an expense, because it is profit being handed out, not a cost of earning it.
Explain it to a Grade 8: why is an insurance premium paid this year for months that fall in next year not counted as this year's expense?
Only the months used up belong to this yearThis is the matching principle: the cost goes with the period that received the benefit, not the period that paid.
The rest is paid ahead, a prepaymentThe learner must name what the leftover amount is: money paid before the benefit arrives.
Shown as a current asset the insurer still owesA prepayment is something the company is owed, so it belongs on the asset side, not as an expense.
An expense belongs to the year it relates to, so only the months of cover the company actually used up this year count as this year's insurance expense.The rest is prepaid: the company paid ahead for cover it has not received yet, like paying for a gym membership in February that only starts in March.That prepaid amount is a current asset on the Balance Sheet, under Trade and other receivables, because the insurer still owes the company those months of cover; it becomes an expense next year, when the months are used.
Explain it to a Grade 8: what is retained income, and why does it go up with profit but down with dividends?
Profit kept inside the businessThe learner must say what retained income is before explaining how it moves: profit that stayed in the company.
Profit after tax is added each yearThe upward movement has one cause: this year's profit after tax joining the pile.
Dividends hand part of the profit to shareholdersThe downward movement is the appropriation: profit that leaves the company as a dividend cannot stay in retained income.
Retained income is the profit the company has kept inside the business over the years instead of handing it all out, like a piggy bank that belongs to the shareholders.Every year the profit after tax is added to it, so a good year makes the pile bigger.A dividend is a slice of that profit paid out to the shareholders, so whatever is handed out leaves the pile and the balance drops. The closing balance is simply the opening pile, plus this year's profit, minus what was paid out.
ONE-MINUTE SUMMARY
Company equity is Ordinary share capital plus Retained income, and Assets = Equity + Liabilities must hold before and after every adjustment. Process depreciation, accruals, prepayments, the provision for bad debts adjustment, income tax, and dividends, then build the Income Statement from Sales down to Net profit after tax. That net profit feeds the Retained Income note (opening balance, plus net profit, minus dividends, minus any share buy-back premium), and the Retained Income and Ordinary Share Capital note balances feed straight into the Balance Sheet, which must balance to the same total on both sides. Shares removed on a buy-back always use the average price, never the actual cash paid.
IN THE EXAM
Expect one continuous question worth around 55 marks: a set of balances plus additional information, then REQUIRED to process adjustments, complete notes, and prepare the Income Statement and/or Balance Sheet, all in one go.
"Show ALL calculations" is not optional wording, method marks are most of this question's marks, so every working must appear on the page, not just in your head.
Own-figure marking protects you: if an early adjustment is wrong but everything after it uses that wrong figure correctly and consistently, later marks are still earned.
Always finish by checking that total assets equals total equity and liabilities before moving to the next question, catching an imbalance here is far cheaper than losing the marks silently.
🔒 CASH FLOW STATEMENT
🔒 ANALYSIS & INTERPRETATION
🔒 CORPORATE GOVERNANCE & ETHICS
🔒 RECONCILIATIONS & INTERNAL CONTROL
🔒 COST ACCOUNTING
🔒 BUDGETING
🔒
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