Assessment 1 Summary notes

STUDY UNIT 1: THE BASIC CONCEPTS, PRINCIPLES AND OBJECTIVES OF ACCOUNTING

WHAT IS ACCOUNTING? OBJECTIVE OF ACCOUNTING:
• Identifying transactions from • Provides financial information to
source documents (eg. Receipts, users.
credit notes etc) • Enables the users of financial
• Recording the money value of information to see the financial
those transactions in the results and financial position of
relevant journals and ledgers. the business/entity easily.
• Reporting the recorded
information from the journals
and ledgers to the Financial
Statements.
• It is a specialised medium for
communication financial
information.
BOOKKEEPING: THE NATURE OF ACCOUNTING:
• The recording of the money • Accounting is a specialised
value of financial transactions in means of communication that
the relevant journals and conveys a specialised message
ledgers. about an entity’s finances.
• Accounting includes
bookkeeping, but bookkeeping
does NOT include accounting.




FINANCIAL ACCOUNTING REPORTS USER DECISION
INFORMATION SYSTEM




FINANCIAL INVESTING,
Cash Journals,
STATEMENTS, APPROVING
Trail Balance,
SPECIAL REPORTS, LOANS,
General Ledger
TAX RETURNS, ASSESSING TAXES,
etc.
REGULATORY NEGOTIATING,
REPORTS, LABOUR
MANAGERIAL CONTRACTS,
REPORTS. ESTABLISHING
BUDGETS.

, THE FINANCIAL ACCOUNTING CYCLE



TRANSACTION DATA
INPUT:


RECORDED ON



SUBSIDIARY
SOURCE DOCUMENTS UPDATE
LEDGER



SUBSIDIARY JOURNALS




POST TO




PROCESSING: GENERAL LEDGER




TRIAL BALANCE




FINANCIAL STATEMENTS ANALYSE AND DECISION MAKING
OUTPUT: INTERPRETATION BY MANAGEMENT.

, • SA GAAP – SOUTH AFRICAN STATEMENTS OF GENERALLY ACCEPTED ACCOUNTING
PRACTICE
• IFRS – INTERNATIONAL FINANCIAL REPORTING STANDARDS
• FRSC – FINANCIAL REPORTING STANDARDS COUNCIL
3 ACTIVITIES OF ACCOUNTING:
1. Identify the economic activity (transactions) relevant to the entity
2. Record the money value in the subsidiary journals and ledgers.
3. Communication and reporting of the recorded information on financial statements
to be presented to interested users.
DIFFERENT TYPES OF FINANCIAL STATEMENTS:

• Statement of Financial Position
• Statement of Profit or Loss and other comprehensive income (Income Statement)
• Statement of Changes in Equity
• Statement of Cash Flow
• Notes to the financial statements


UNIVERSAL ACCOUNTING DENOMINATOR:

• MONEY – Common unit of measurement in accounting.
• 2 Important limitations to money:
1. Not ALL events can be expressed in monetary terms
2. The value of money is unstable and is influenced by many factors such as
inflation.
2 TYPES OF BUSINESS ENTITIES:
1. SERVICE ENTITIES – Sells their skills and knowledge (provides a service) e.g. Salon,
plumbers, storage, repairman, taxis etc.
2. TRADING ENTITIES – Buys and sells merchandise e.g. florists, clothing shops, pick n
pay, grocers, butchery, bakery etc.
FORMS OF OWNERSHIP:

• Sole Trader
• Partnership
• Close Corporation
• Profit Companies – State Owned Company (SOC Ltd) ; A Private Company (PTY) Ltd ;
Personal Liability Company (Inc) ; Public Company (Ltd).
• Non-Profit Company (NPC)

, USERS OF FINANCIAL INFORMATION:

USER INFORMATION NEEDS
Clients/Customers of an entity Need accounting information to access the
ability of the entity to continue as a going
concern.
Employees Need accounting information to assess the
ability of their employer to provide stable
employment and remuneration.
Government and its agencies Need accounting information to regulate
activities of the entity, to compile statistics
and to determine resource allocation and
tax policies.
Investors Need accounting information to assess the
risk of investing in an entity and the
expected return on their investment.
Suppliers and other creditors Need accounting information to assess the
ability of the entity to pay amounts owing.
Lenders Need accounting information to assess the
ability of an entity to pay interest on loans
and to repay loans.
Management of an entity Need accounting information for planning
purposes, determining future actions to be
taken. To exercise control, evaluating the
current situation of the entity and taking
corrective steps.
The Public Requires information such as a particular
entity’s contribution to the economy, the
creation of work opportunities, taxes and
charitable causes.


2 FIELDS OF ACCOUNTING:
1. FINANCIAL ACCOUNTING – Concerns itself with the recording of business
transactions and the reporting of these results by way of financial statements to
EXTERNAL users. The reports focus on past events from the previous financial years
and must be verified for accuracy. The Statements focus on the organisation as a
whole and must comply with relevant laws and legal requirements such as the
Companies Act, IFRS and GRAP etc.

2. MANAGEMENT ACCOUNTING – Concerns itself with the internal affairs of the
organisation. Reports compiled by the management accountant is presented to
INTERNAL managers of the various departments to use for strategic decision making.
These reports contain past and future relevant information and have no legal
requirements.