Question 14

Transaction Classification as Income

• Definition of Income:

  • Income is to be classified based on the increase in assets or the decrease in liabilities, leading to an increase in equity, excluding contributions from equity holders.

• Core Requirement:

  • Only one of the two criteria (increase in assets or decrease in liabilities) must be met to classify as income.

Analyzing the Case

• Input VAT Impact:

  • Resulted in an increase in the bank account by 24,000, indicating an increase in assets.

• Identification of Increased Asset:

  • Specify which asset increased (e.g., bank account, debtors, investments).

• Resulting Increase in Equity:

  • Determine if there was an increase in equity due to the transaction.

Journal Entry Consideration

• Accountant's Original Recording:

  • Debit: Bank (due to the tax refund)

  • Credit: Bank Control (relinquishing claims to future economic benefits)

• Common Mistake:

  • Incorrectly recording credit sales, leading to the need for correction.

• Corrected Journal Entry:

  • Debit Bank, Credit Bank Control (input VAT).

Conceptual Framework Implications

• Asset Changes:

  • Input VAT increases bank assets but reflects a decrease in another asset, thus not increasing equity.

• Equity Result Conclusion:

  • Since there is an increase and a decrease in assets of the same value, no increase in equity occurs.

  • Therefore, this transaction does not classify as income.

Contributions and Equity Claims

• Input VAT Source:

  • Represents an amount from SARS, which is not a holder of equity claims.

• Clarification Needed:

  • While SARS is a tax authority, it is not involved in providing equity contributions to the business.

Conclusion of Analysis

• Input VAT does not meet the definition of income due to no resultant increase in equity from the transaction.

• A mistake was made in recognizing the effects of input VAT and it must be corrected.