Accounting FAC1502
Bookkeeping involves the identification and recording of economic events only; therefore it is just one part of
the accounting process.
Accounting can be defined as the orderly and systematic identification and recording of the monetary values
of the economic transactions of an individual entrepreneur (person) or a business enterprise (entity or
institution) the reporting on the results of these transactions, and the provision of financial information by
submitting financial statements, which information is used as a basis for decision making. Accounting
therefore include bookkeeping.
Accounting is therefore a process consisting of the following three activities:
- Identifying those events that are evidence of economic activity (transactions) relevant to the
particular business or entity
- Recording the monetary value of the economic events (transactions) in order to provide a permanent
history of the financial activities of a business. Recording involves keeping a chronological diary of
measured events in an orderly and systematic manner and classifying and summarising economic
events
- Communicating the recorded information to interested users. This information is communicated
through the preparation and distribution of accounting reports, the most common of which are
known as financial statements.
Golden rule 1: Accounting records transactions in order to provide useful information for decision making.
The nature of accounting: accounting is a specialised means of communication which is used to convey a
specialised message about an entity’s finances. The recipient of this specialised message (the user of financial
information) must understand it otherwise the information that is conveyed has no value. Accounting is
therefore a language.
The common unit of measurement in accounting is money and in RSA, the currency is known as the Rand. All
an entity’s transactions are converted into monetary values before being processed. Using money as the
common denominator, however, gives rise to two important limitation:
- Not all events can be expressed in monetary terms
- The value of money is unstable and is influenced by many economic factors such as inflation.
Knowledge of accounting is needed on two levels:
- By the users of financial information, and
- By the prepares of financial information.
AFS – Annual Financial Statements
o The format for these is provided by IFRS (International Financial Reporting Standards)
GAAP – Generally Accepted Accounting Practices
IFRS – International Financial Reporting Standards – this foundation is a general framework and encompasses,
in broad terms, accounting concepts, principles, methods and procedures collectively
The objective of creating accounting standards for particular issues (e.g. for the treatment of taxation in
financial statements) is to limit the variety of available accounting practices, but without striving for strict
,uniformity or creating a set of rigid rules for all circumstances. The ultimate aim of accounting standards is to
encourage widespread use of particular standards in financial reporting and to eliminate undesirable
alternatives.
The requirements of the Companies Act and Schedule 4 thereto are taken into account in the preparation of
GAAP (Companies Act, No 61 of 1973 as amended, sections 285A (a) and (b))
The function of accounting is to provide financial information to all interested parties on the results of the
economic activities of a particular individual or institution (entity).
A person performs economic activities by working and earning a salary. The income from this salary is added to
the assets of the person at the moment that person earns the income. The increased assets are now available
for use by that person.
A trading entity purchases merchandise which is sold at a price higher than the purchase price plus other
related costs. The difference between the purchase price and costs on the one hand, and the higher selling
price on the other, is called a profit.
The financial results of economic activities therefore have two aspects:
- The value added to the net worth of a person or an entity during a particular period, and
- The accumulated net worth of that person or entity.
In terms of paragraph 10 of IAS (International Accounting Standards) (AC 101), a complete set of financial
statements must consist of:
- A statement of financial position as at the end of the period;
- A statement of comprehensive income for the period;
- A statement of charges in equity for the period;
- A statement of cash flows for the period;
- Notes, comprising a summary of significant account policies and other explanatory information, and
- A statement of financial position as at the beginning of the earliest comparative period when an
entity applies an accounting policy retrospectively or makes a retrospective restatement of items in
its financial statements, or when it reclassifies items in its financial statements.
An entity is an economic unit whose financial results are determined on its own.
Accounting reports on the financial results and position of an entity.
The accounting process treats an accounting entity as a unit independent of its owner. A business owned by a
particular person in thus regarded as being separate from the business.
In the private sector, there are mainly four types of business organisations with profit motives which can be
considered as individual entities:
- Sole traders (or sole proprietors);
- Partnerships;
- Close corporations;
, - Companies
Organisations in the private sector with various objectives, without a profit motive are non-profit
organisations.
The Framework sets out the directives and concepts that underlie the preparation and presentation of
financial statements. The purpose of the framework is to assist (Framework 1)
- In the development of future accounting standards and the review of existing accounting standards;
- In promoting the harmonising of regulations, accounting standards and procedures relating to the
presentation of financial statements, by providing a basis for reducing the number of alternative
accounting treatments permitted by accounting standards;
- National standard-setting bodies in developing national accounting standards;
- Auditors in forming an opinion regarding whether financial statements are in line with international
accounting standards, and;
- Users of financial statements in interpreting and evaluating the information disclosed in financial
statements.
Planning decisions are sometimes very simple, for example in the case of routine activities, or are sometimes
very complex, for example decisions regarding the financial strategy and planning of an entity for the next
financial year.
Control decisions entail using financial information to evaluate the results of financial activities.
Users of financial information:
- Investors: these are the providers of capital. They are concerned with the risk involved in their
investment and the return (interest or dividends) they will receive on their investment. They need
information to decide whether they should invest (buy), hold or withdraw (sell) share.
- Employees: employees are interested in information about the stability and profitability of the
business. They also want to know if the entity will be able to pay remuneration and retirement
benefits, and whether there are any employment opportunities.
- Lenders: lenders need information to determine whether their loans and the interest on the loan will
be paid on due dates.
- Suppliers and other trade creditors: these users need information that will assure them that amounts
owed to them will be paid when due.
- Customers: they want to know if the business will continue to exist, especially when they are involved
for a long time or when they are dependent on the entity.
- Government and their agencies: they are interested in the allocation of resources and therefore in
the activities of the entity. They also need information in order to regulate the activities of entities,
determine taxation policies and use the information as a basis for national income and similar
statistics.
- Public: members of the public are affected in several ways. Entities often contribute to the local
economy by employing people and supporting local suppliers.
Users of financial information can be subdivided into the following two categories:
- Internal users – for example, management and employees
- External users – for example, investors, creditors and government
, According to paragraph 12 of the Framework, the objective of financial statements is to provide useful
information about the financial performance, financial position and changes in financial position, which
information is useful to a wide range of users in making economic decisions.
The financial results of an entity consist of economic activities which are measured in two ways: firstly, the
financial performance for a particular period and, secondly, the financial position at a particular point in time.
The financial performance reflects the profit made or the loss incurred by the entity over a specific period of
time. The financial performance is reported in a statement of comprehensive income.
A statement of comprehensive income reports the two elements of financial performance, i.e. revenue that
was earned, and expenses that were incurred to earn the revenue.
The difference between the revenue and the expenses results in the profit of loss for that specific period.
Statement of changes in equity forms a link between the statement of comprehensive income (reflecting the
profit/total comprehensive income for the year) and the statement of financial position (reflecting the capital
or equity) of the entity.
The financial position reflects the net worth of the entity at a specific point in time. The financial position is
reflected in a financial report that is known as a statement of financial position. The financial position of an
entity is affected by:
- The economics resources it controls;
- Its financial structure;
- Its liquidity;
- Its solvency, and;
- Its capacity to adapt to changes in the environment in which it operates.
The first part of the statement of financial position reflects the assets of the entity, while the second part
reflects the sources from which the assets were financed. Two main types of sources of finance are
distinguished, namely equity and liabilities. The contribution by the owner is the equity which represents the
interest of the owner(s) in the assets of the entity. Liabilities are the amounts owing to creditors, for purchases
or services received which are to be paid for at a later stage, or financial institutions from which the entity
borrowed money. Liabilities reflect the claim of creditors against the assets of the entity.
Golden rule 3: the following are elements of financial statements:
- Elements that measure the financial position: (ASSETS = EQUITY + LIABILIITY)
o (1) Assets
o (2) Liabilities
o (3) Equity
- Elements that measure profitability (profit or loss = increase or decrease in equity):
o (4) income
o (5) expenses
An asset is a resource controlled by the entity as result of past events and from which future economic
benefits are expected to flow to the entity.
A liability is a present obligation of the entity arising from past events, the settlement of which is expected to
result in an outflow from the entity of resources embodying economic benefits.
Equity is the residual interest in the assets of the entity after deducting all its liabilities.
Bookkeeping involves the identification and recording of economic events only; therefore it is just one part of
the accounting process.
Accounting can be defined as the orderly and systematic identification and recording of the monetary values
of the economic transactions of an individual entrepreneur (person) or a business enterprise (entity or
institution) the reporting on the results of these transactions, and the provision of financial information by
submitting financial statements, which information is used as a basis for decision making. Accounting
therefore include bookkeeping.
Accounting is therefore a process consisting of the following three activities:
- Identifying those events that are evidence of economic activity (transactions) relevant to the
particular business or entity
- Recording the monetary value of the economic events (transactions) in order to provide a permanent
history of the financial activities of a business. Recording involves keeping a chronological diary of
measured events in an orderly and systematic manner and classifying and summarising economic
events
- Communicating the recorded information to interested users. This information is communicated
through the preparation and distribution of accounting reports, the most common of which are
known as financial statements.
Golden rule 1: Accounting records transactions in order to provide useful information for decision making.
The nature of accounting: accounting is a specialised means of communication which is used to convey a
specialised message about an entity’s finances. The recipient of this specialised message (the user of financial
information) must understand it otherwise the information that is conveyed has no value. Accounting is
therefore a language.
The common unit of measurement in accounting is money and in RSA, the currency is known as the Rand. All
an entity’s transactions are converted into monetary values before being processed. Using money as the
common denominator, however, gives rise to two important limitation:
- Not all events can be expressed in monetary terms
- The value of money is unstable and is influenced by many economic factors such as inflation.
Knowledge of accounting is needed on two levels:
- By the users of financial information, and
- By the prepares of financial information.
AFS – Annual Financial Statements
o The format for these is provided by IFRS (International Financial Reporting Standards)
GAAP – Generally Accepted Accounting Practices
IFRS – International Financial Reporting Standards – this foundation is a general framework and encompasses,
in broad terms, accounting concepts, principles, methods and procedures collectively
The objective of creating accounting standards for particular issues (e.g. for the treatment of taxation in
financial statements) is to limit the variety of available accounting practices, but without striving for strict
,uniformity or creating a set of rigid rules for all circumstances. The ultimate aim of accounting standards is to
encourage widespread use of particular standards in financial reporting and to eliminate undesirable
alternatives.
The requirements of the Companies Act and Schedule 4 thereto are taken into account in the preparation of
GAAP (Companies Act, No 61 of 1973 as amended, sections 285A (a) and (b))
The function of accounting is to provide financial information to all interested parties on the results of the
economic activities of a particular individual or institution (entity).
A person performs economic activities by working and earning a salary. The income from this salary is added to
the assets of the person at the moment that person earns the income. The increased assets are now available
for use by that person.
A trading entity purchases merchandise which is sold at a price higher than the purchase price plus other
related costs. The difference between the purchase price and costs on the one hand, and the higher selling
price on the other, is called a profit.
The financial results of economic activities therefore have two aspects:
- The value added to the net worth of a person or an entity during a particular period, and
- The accumulated net worth of that person or entity.
In terms of paragraph 10 of IAS (International Accounting Standards) (AC 101), a complete set of financial
statements must consist of:
- A statement of financial position as at the end of the period;
- A statement of comprehensive income for the period;
- A statement of charges in equity for the period;
- A statement of cash flows for the period;
- Notes, comprising a summary of significant account policies and other explanatory information, and
- A statement of financial position as at the beginning of the earliest comparative period when an
entity applies an accounting policy retrospectively or makes a retrospective restatement of items in
its financial statements, or when it reclassifies items in its financial statements.
An entity is an economic unit whose financial results are determined on its own.
Accounting reports on the financial results and position of an entity.
The accounting process treats an accounting entity as a unit independent of its owner. A business owned by a
particular person in thus regarded as being separate from the business.
In the private sector, there are mainly four types of business organisations with profit motives which can be
considered as individual entities:
- Sole traders (or sole proprietors);
- Partnerships;
- Close corporations;
, - Companies
Organisations in the private sector with various objectives, without a profit motive are non-profit
organisations.
The Framework sets out the directives and concepts that underlie the preparation and presentation of
financial statements. The purpose of the framework is to assist (Framework 1)
- In the development of future accounting standards and the review of existing accounting standards;
- In promoting the harmonising of regulations, accounting standards and procedures relating to the
presentation of financial statements, by providing a basis for reducing the number of alternative
accounting treatments permitted by accounting standards;
- National standard-setting bodies in developing national accounting standards;
- Auditors in forming an opinion regarding whether financial statements are in line with international
accounting standards, and;
- Users of financial statements in interpreting and evaluating the information disclosed in financial
statements.
Planning decisions are sometimes very simple, for example in the case of routine activities, or are sometimes
very complex, for example decisions regarding the financial strategy and planning of an entity for the next
financial year.
Control decisions entail using financial information to evaluate the results of financial activities.
Users of financial information:
- Investors: these are the providers of capital. They are concerned with the risk involved in their
investment and the return (interest or dividends) they will receive on their investment. They need
information to decide whether they should invest (buy), hold or withdraw (sell) share.
- Employees: employees are interested in information about the stability and profitability of the
business. They also want to know if the entity will be able to pay remuneration and retirement
benefits, and whether there are any employment opportunities.
- Lenders: lenders need information to determine whether their loans and the interest on the loan will
be paid on due dates.
- Suppliers and other trade creditors: these users need information that will assure them that amounts
owed to them will be paid when due.
- Customers: they want to know if the business will continue to exist, especially when they are involved
for a long time or when they are dependent on the entity.
- Government and their agencies: they are interested in the allocation of resources and therefore in
the activities of the entity. They also need information in order to regulate the activities of entities,
determine taxation policies and use the information as a basis for national income and similar
statistics.
- Public: members of the public are affected in several ways. Entities often contribute to the local
economy by employing people and supporting local suppliers.
Users of financial information can be subdivided into the following two categories:
- Internal users – for example, management and employees
- External users – for example, investors, creditors and government
, According to paragraph 12 of the Framework, the objective of financial statements is to provide useful
information about the financial performance, financial position and changes in financial position, which
information is useful to a wide range of users in making economic decisions.
The financial results of an entity consist of economic activities which are measured in two ways: firstly, the
financial performance for a particular period and, secondly, the financial position at a particular point in time.
The financial performance reflects the profit made or the loss incurred by the entity over a specific period of
time. The financial performance is reported in a statement of comprehensive income.
A statement of comprehensive income reports the two elements of financial performance, i.e. revenue that
was earned, and expenses that were incurred to earn the revenue.
The difference between the revenue and the expenses results in the profit of loss for that specific period.
Statement of changes in equity forms a link between the statement of comprehensive income (reflecting the
profit/total comprehensive income for the year) and the statement of financial position (reflecting the capital
or equity) of the entity.
The financial position reflects the net worth of the entity at a specific point in time. The financial position is
reflected in a financial report that is known as a statement of financial position. The financial position of an
entity is affected by:
- The economics resources it controls;
- Its financial structure;
- Its liquidity;
- Its solvency, and;
- Its capacity to adapt to changes in the environment in which it operates.
The first part of the statement of financial position reflects the assets of the entity, while the second part
reflects the sources from which the assets were financed. Two main types of sources of finance are
distinguished, namely equity and liabilities. The contribution by the owner is the equity which represents the
interest of the owner(s) in the assets of the entity. Liabilities are the amounts owing to creditors, for purchases
or services received which are to be paid for at a later stage, or financial institutions from which the entity
borrowed money. Liabilities reflect the claim of creditors against the assets of the entity.
Golden rule 3: the following are elements of financial statements:
- Elements that measure the financial position: (ASSETS = EQUITY + LIABILIITY)
o (1) Assets
o (2) Liabilities
o (3) Equity
- Elements that measure profitability (profit or loss = increase or decrease in equity):
o (4) income
o (5) expenses
An asset is a resource controlled by the entity as result of past events and from which future economic
benefits are expected to flow to the entity.
A liability is a present obligation of the entity arising from past events, the settlement of which is expected to
result in an outflow from the entity of resources embodying economic benefits.
Equity is the residual interest in the assets of the entity after deducting all its liabilities.
