What you'll learn
- What makes a company different from a sole trader or a partnership
- The meaning of share capital, retained income and shareholders' equity
- The full format of the Income Statement (Statement of Comprehensive Income)
- The full format of the Balance Sheet (Statement of Financial Position)
- How profit and dividends link the two statements through equity
- The classic errors that lose marks in the Grade 12 examination
1. The company as a business form
A company is a separate legal person. It can own assets, incur debts and be sued in its own name. The owners are the shareholders, and their liability is limited to the amount they have contributed. This is different from a sole trader or partnership, where the owner or partners are personally liable for the debts of the business.
Two features dominate the Grade 12 work:
- Share capital — the money shareholders contributed when they bought shares. Ordinary shares carry voting rights and share in dividends; preference shares normally receive a fixed dividend before ordinary shareholders.
- Retained income — profits kept in the business instead of being paid out as dividends. It accumulates from year to year and forms part of shareholders' equity.
| Term | Meaning |
|---|---|
| Share capital | Capital raised by issuing ordinary shares, recorded at the amount the company received. |
| Retained income | Accumulated profits not distributed as dividends; the closing balance is carried to the next year. |
| Shareholders' equity | Share capital plus retained income — the owners' claim on the business. |
| Dividends | Distributions of profit to shareholders; they become a liability once declared. |
| Current assets | Assets expected to be turned into cash within 12 months (inventories, trade receivables, cash). |
| Non-current liabilities | Debts due after 12 months, for example a long-term loan. |
| Company tax | Tax levied on company profits; the standard South African rate used in Grade 12 is 27%. |
2. Income Statement format
The Income Statement (Statement of Comprehensive Income) measures the performance of the business for a period. It works down from sales to profit after tax.
| Income Statement for the year ended ... | R |
|---|---|
| Sales | xxx |
| Less: Cost of sales | (xxx) |
| Gross profit | xxx |
| Add: Other operating income | xxx |
| Gross income | xxx |
| Less: Operating expenses | (xxx) |
| Operating profit | xxx |
| Less: Finance cost (interest expense) | (xxx) |
| Profit before tax | xxx |
| Less: Company tax | (xxx) |
| Profit after tax | xxx |
Operating expenses are the day-to-day costs of running the business: salaries and wages, rent of premises, advertising, depreciation, insurance, stationery, telephone and bank charges. They never include the cost of buying the goods that were sold (that is cost of sales) or the interest on loans (that is the finance cost).
3. Worked example 1 — preparing the Income Statement
Case: Bhambatha Ltd for the year ended 28 February 2026.
You are given the following balances:
- Sales: R1 200 000,00
- Cost of sales: R720 000,00
- Rent income: R30 000,00
- Profit on sale of equipment: R20 000,00
- Operating expenses (administration and selling): R300 000,00
- Finance cost (interest expense): R40 000,00
- Company tax is calculated at 27% of profit before tax
Step 1 — Gross profit. Sales minus cost of sales: R1 200 000,00 − R720 000,00 = R480 000,00.
Step 2 — Other operating income. Rent income plus profit on sale of equipment: R30 000,00 + R20 000,00 = R50 000,00.
Step 3 — Operating profit. Gross profit plus other operating income minus operating expenses: R480 000,00 + R50 000,00 − R300 000,00 = R230 000,00.
Step 4 — Profit before tax. Operating profit minus finance cost: R230 000,00 − R40 000,00 = R190 000,00.
Step 5 — Company tax. 27% of R190 000,00: R190 000,00 × 27 ÷ 100 = R51 300,00.
Step 6 — Profit after tax. R190 000,00 − R51 300,00 = R138 700,00.
| Income Statement for the year ended 28 February 2026 | R |
|---|---|
| Sales | 1 200 000,00 |
| Less: Cost of sales | (720 000,00) |
| Gross profit | 480 000,00 |
| Add: Other operating income | 50 000,00 |
| Gross income | 530 000,00 |
| Less: Operating expenses | (300 000,00) |
| Operating profit | 230 000,00 |
| Less: Finance cost | (40 000,00) |
| Profit before tax | 190 000,00 |
| Less: Company tax | (51 300,00) |
| Profit after tax | 138 700,00 |
4. Worked example 2 — the retained income note
Retained income is where the Income Statement meets the Balance Sheet. The opening balance comes from last year, profit after tax is added, and dividends are subtracted.
Bhambatha Ltd had an opening retained income of R120 000,00 on 1 March 2025. During the year it declared ordinary dividends of R50 000,00. Profit after tax was R138 700,00 (from Worked example 1).
Step 1 — Add profit for the year: R120 000,00 + R138 700,00 = R258 700,00. Step 2 — Subtract dividends: R258 700,00 − R50 000,00 = R208 700,00 closing balance.
| Retained income note | R |
|---|---|
| Opening balance (1 March 2025) | 120 000,00 |
| Add: Profit after tax | 138 700,00 |
| Less: Ordinary dividends | (50 000,00) |
| Closing balance (28 February 2026) | 208 700,00 |
5. Worked example 3 — preparing the Balance Sheet
The Balance Sheet (Statement of Financial Position) shows the financial position at a single date. Assets are listed first; equity and liabilities follow. The two totals must always be equal.
Using the same case, the following balances are available at 28 February 2026:
- Non-current assets (carrying value): R900 000,00
- Inventories: R120 000,00
- Trade receivables: R180 000,00
- Cash and cash equivalents: R108 700,00
- Ordinary share capital: R800 000,00
- Retained income (from Worked example 2): R208 700,00
- Non-current liabilities (loan): R180 000,00
- Trade payables: R90 000,00
- Income tax payable: R30 000,00
Step 1 — Total assets. Non-current assets plus current assets: R900 000,00 + (R120 000,00 + R180 000,00 + R108 700,00) = R900 000,00 + R408 700,00 = R1 308 700,00.
Step 2 — Total equity. Share capital plus retained income: R800 000,00 + R208 700,00 = R1 008 700,00.
Step 3 — Total liabilities. Non-current plus current: R180 000,00 + (R90 000,00 + R30 000,00) = R180 000,00 + R120 000,00 = R300 000,00.
Step 4 — Check. Equity plus liabilities: R1 008 700,00 + R300 000,00 = R1 308 700,00, which equals total assets. The statement balances.
| Statement of Financial Position at 28 February 2026 | R |
|---|---|
| ASSETS | |
| Non-current assets | 900 000,00 |
| Current assets | 408 700,00 |
| Inventories | 120 000,00 |
| Trade receivables | 180 000,00 |
| Cash and cash equivalents | 108 700,00 |
| Total assets | 1 308 700,00 |
| EQUITY AND LIABILITIES | |
| Ordinary share capital | 800 000,00 |
| Retained income | 208 700,00 |
| Total equity | 1 008 700,00 |
| Non-current liabilities | 180 000,00 |
| Current liabilities | 120 000,00 |
| Trade payables | 90 000,00 |
| Income tax payable | 30 000,00 |
| Total equity and liabilities | 1 308 700,00 |
Common mistakes
- Putting interest expense with operating expenses. It belongs on its own line below operating profit as the finance cost.
- Calculating company tax on operating profit instead of on profit before tax.
- Forgetting to add other operating income before gross income.
- Showing dividends on the Income Statement. Dividends are a distribution of profit, so they appear in the retained income note, not as an expense.
- Treating a bank overdraft as a non-current liability. It is a current liability.
- Forgetting that the closing retained income figure is carried to the equity section of the Balance Sheet.
Quick summary / cheat sheet
| To work out | Do this |
|---|---|
| Gross profit | Sales − cost of sales |
| Gross income | Gross profit + other operating income |
| Operating profit | Gross income − operating expenses |
| Profit before tax | Operating profit − finance cost |
| Profit after tax | Profit before tax − company tax |
| Company tax | Profit before tax × 27% |
| Closing retained income | Opening balance + profit after tax − dividends |
| Total assets | Non-current assets + current assets |
| Total equity | Share capital + retained income |
| Balance check | Total assets = total equity + total liabilities |
Practice questions
- Sales are R900 000,00 and cost of sales is R540 000,00. Calculate the gross profit.
- A company has an operating profit of R150 000,00 and a finance cost of R25 000,00. Calculate profit before tax.
- Using your answer to question 2, calculate the company tax at 27% and the profit after tax.
- Opening retained income is R80 000,00, profit after tax is R95 000,00 and dividends declared are R30 000,00. Calculate the closing retained income.
- Current assets are R350 000,00 and current liabilities are R200 000,00. Calculate total assets if non-current assets are R700 000,00.
- Total equity is R900 000,00 and non-current liabilities are R250 000,00. If total assets are R1 350 000,00, calculate current liabilities.
Answers
- R900 000,00 − R540 000,00 = R360 000,00.
- R150 000,00 − R25 000,00 = R125 000,00.
- Tax = R125 000,00 × 27% = R33 750,00. Profit after tax = R125 000,00 − R33 750,00 = R91 250,00.
- R80 000,00 + R95 000,00 − R30 000,00 = R145 000,00.
- Total assets = R700 000,00 + R350 000,00 = R1 050 000,00.
- Equity plus non-current liabilities = R900 000,00 + R250 000,00 = R1 150 000,00. Current liabilities = R1 350 000,00 − R1 150 000,00 = R200 000,00.
Official EduRank Team notes. Always cross-check with your textbook and teacher.