Financial accounting 188 summary

FINANCIAL ACCOUNTING 188 NOTES:

NATURE AND OBJECTIVE OF ACCOUNTING:

• An entity will require the following information;
- The amount of money the entity owes;
- The amount of money owed to the entity;
- Value of assets;
- Amount of expenses;
- Amount of income;
- Profit or loss.
• Accounting process:
Financial position on day 1 > financial accounting activities > financial position at year
end
• Purpose of financial accounting:
- Measure financial position
- Measure any change in financial position
- Result of entity’s financial position
- Report on entities financial position and activities.
• Users of accounting information:
- investors
- employees
- bank/lenders
- suppliers
- customers
- government
- public
• Forms of entities:
Sole proprietor Partnerships Close corporations Company
1 owner 2 or more partners 1 – 10 members Shareholders
Not a separate Not a separate Separate legal Separate legal;
legal entity legal entity entity entity
No act No act Close corporation Companies Act of
act 2008
Profits belong to Profits distributed Profits allocated to Profits belong to
owner in ratio to partners members the company and
dividends paid out
to shareholders

, CONCEPTUAL FRAMEWORK:

• Fundamental qualitative characteristics: qualitative characteristics are feautures
that make information in financial statements useful to users.
1. Relevance: information is relevant to users if it can influence their decisions.
- Predictive value: information can be used by users to make their own predictions.
- Confirming value: information provides feedback about previous evaluations.
2. Faithful representation
- Completeness: material omissions can result in information being false and
misleading.
- neutrality: information is presented not to achieve a predetermined result.
- freedom from error: information must be free from error in terms of description
and the process to produce information.
• Enhancing qualitative characteristics: usefulness of financial information is
enhanced if it has the following characteristics:
1. Verifiability: helps ensure users that information faithfully represents the economic
events.
2. Compatibility: users want comparable information to judge tendencies over time
and between similar entities.
3. Timeliness: information must be available on a timely basis for users to influence
their decisions.
4. Understandibility: information must be reasonably understandable.
• Underlying assumptions:
1. Going concern: financial statements are prepared with the assumption that the
entity will continue to be in business in the foreseeable future.
2. Accrual basis: transactions and other events are accounted for when they occur
and not as late as the date on which cash is received or paid.
• Elements of financial statements:
1. Assets: an asset is a resource that is controlled by the entity as a result of past
event from which future economic benefits will flow to the entity.
o Non current: > 12 months (property, plant, equipment)
o Current: < 12 months (cash, debtors, inventory)
2. Liabilities: a liability is a present obligation of an entity arising from a past event,
the settlement of which is expected to result in an outflow of resources from the
entity.
o Non current: > 12 months (long-term loans)
o Current: < 12 months (creditors, bank overdraft, short-term loans)
3. Equity: equity is the residual interest in the assets of the entity after deducting all
its liabilities. (Assets – Liabilities = Equity)
4. Income: income is the increase in economic benefits during the accounting period,
in the form of inflows or enhancements of assets or decreases in liabilities, that
result in the increase in equity, other than interest relating to contributions by equity
participants.
5. Expenses: expenses are decreases in economic benefits during the accounting
period in the form of outflow of assets or incurrence of liabilities, that result in a
decrease in equity, other than those relating to distributions to equity participants.

,• Recognition elements:
1. It is probable economic benefits will flow TO or FROM the entity; AND
2. The item has a cost or the cost can be measured reliably.

, ACCOUNTING EQUATION AND FINANCIAL STATEMENTS:

• Assets +capital withdrawals + expenses = capital contributions + income + liabilities
• Objective of financial statements: to provide information on the financial position,
performance and cash flow of the entity which is useful when making economic
decisions.
• Components of financial statements:
- Balance sheet
- Income statement
- Statement of changes in equity
- Cash flow statement
- Notes to financial statements.