FRK 111
An Introduction to the understanding of Accounting
Contents
Chapter 1: Nature and Function of Accounting ....................................................................... 3
1. HISTORY AND DEVELOPMENT .................................................................................... 3
2. WHAT IS ACCOUNTING?............................................................................................ 3
3. WHAT IS AN ENTITY ..................................................................................................... 4
4. FINANCIAL STATEMENTS ............................................................................................. 4
Chapter 2: Financial position as reflected in the Statement of Financial Position .................. 6
1. THE STATEMENT OF FINANCIAL POSITION ................................................................. 6
2. ELEMENTS .................................................................................................................... 6
Chapter 3: Statement of Profit or Loss and other comprehensive income ............................. 8
1. FORMAT ...................................................................................................................... 8
2. ELEMENTS .................................................................................................................... 9
Chapter 4: The Recording Process ............................................................................................ 11
1. CALCULATIONS ........................................................................................................ 11
2. TRANSACTIONS......................................................................................................... 11
3. SOURCE DOCUMENTS.............................................................................................. 14
4. JOURNALS................................................................................................................. 14
5. LEDGERS ................................................................................................................... 14
6. TRIAL BALANCE ........................................................................................................ 15
7. INVENTORY SYSTEM .................................................................................................. 16
Chapter 5: Value added Tax..................................................................................................... 16
1. TERMINOLOGY ......................................................................................................... 16
2. WHAT IS VAT? ........................................................................................................... 17
3.WHO REGISTERS? ...................................................................................................... 17
4. HOW DOES VAT WORK? .......................................................................................... 18
5. CALCULATIONS ........................................................................................................ 18
6. TREATMENT OF VAT .................................................................................................. 19
8. CALCULATING AMOUNT PAYABLE.......................................................................... 20
Chapter 6: Internal Control: Debtors, Creditors and cash ...................................................... 22
1. TERMINOLOGY ......................................................................................................... 22
2. OBJECTIVES OF INTERNAL CONTROL ...................................................................... 22
3. INTERNAL CONTROL TECHNIQUES FOR DIFFERENT ASSETS ..................................... 22
4. RECONCILIATION ..................................................................................................... 24
Chapter 7: Trial Balance and correction of errors ................................................................... 30
By Tanya Hacke :
, 1. INTRODUCTION......................................................................................................... 30
Chapter 8: Adjustments ............................................................................................................. 32
1. TERMINOLOGY ......................................................................................................... 32
2. DEPRECIATION.......................................................................................................... 32
4. ADJUSTMENTS TO INVENTORY ................................................................................. 34
6. PREPAID EXPENSES ................................................................................................... 34
7. EXPENSES PAYABLE .................................................................................................. 34
8. INCOME RECEIVED IN ADVANCE ........................................................................... 35
9. POST-ADJUSTMENT TRIAL BALANCE ........................................................................ 35
Chapter 9: The closing process ................................................................................................. 37
1. INTRODUCTION......................................................................................................... 37
2.1 CLOSING PROCESS FOR TRADING ENTITY (PERIODIC INVENTORY SYSTEM) ....... 39
2.2 CLOSING PROCESS FOR TRADING ENTITY (PERPETUAL INVENTORY SYSTEM) ..... 40
3. PROFIT OR LOSS ACCOUNT ..................................................................................... 41
4. REVERSALS OF ADJUSTMENTS .................................................................................. 42
Chapter 10: Financial statements of a sole trader .................................................................. 44
1. FINANCIAL STATEMENTS ........................................................................................... 44
2.EFFECT OF ADJUSTMENTS ON FINANCIAL STATEMENTS .......................................... 44
2.2 EXAMPLES OF ADJUSTMENTS ................................................................................. 45
3. POST-ADJUSTMENT TRIAL BALANCE ........................................................................ 46
4. STATEMENT OF PROFIT OR LOSS............................................................................... 47
5. STATEMENT OF CHANGES IN EQUITY ....................................................................... 48
6. STATEMENT OF FINANCIAL POSITION ...................................................................... 48
By Tanya Hacke :
,Chapter 1: Nature and Function of Accounting
1. HISTORY AND DEVELOPMENT
Double – entry For each debit transaction there must be a corresponding credit transaction
system
Duality Concept Total funds applied must be equal to total funds generated
Accounting
equation EMPLOYMENT OF FUNDS = GENERATION OF FUNDS
DEBIT CREDIT
(DR) (CR)
ASSETS
DEBIT CREDIT
Transactions that will increase Transactions that will decrease
assets assets
EQUITY
DEBIT CREDIT
Transactions that will decrease Transactions that will increase
equity equity
LIABILITIES
DEBIT CREDIT
Transactions that will decrease Transactions that will increase
liabilities liabilities
Conceptual Financial Information must adhere to South African Standards of Generally
Framework Accepted Accounting Practice (GAAP)
International Accounting Standards Board (IASB) developed accounting
standards
South African accounting bodies must adhere to International Financial
Reporting Standards (IFRS)
Prominent South African accounting bodies:
1. South African Institute of Chartered Accountants (SAICA)
2. South African Institute of Professional Accountants (SAIPA)
Goal of IFRS:
Provide Global Framework for how entities prepare and disclose
financial statements
2. WHAT IS ACCOUNTING?
Definition A continuous scientific process
Involves bookkeeping of transactions
And reporting on economic activities
Through financial statements
Aim of To provide financial info about economic activities
Accounting To current and future interested parties
By Tanya Hacke :
, To enable them to make informed decisions about the entity
Domains of Financial accounting:
Accounting Providing financial information to external parties
Management accounting:
Providing financial and management information to internal users
3. WHAT IS AN ENTITY
Definition Economic unit
That operates separately from other units
Whose financial statements are recorded separately
And is required/chooses to prepare financial statements
Examples Person
Partnership
Close corporation
Company
No-Profit organisation
Legal entity Has authority to:
own property
incur debt
perform legal acts
E.g. Close corporations and companies
4. FINANCIAL STATEMENTS
Objective Provide financial info about the reporting entity
That is useful to investors/lenders/creditors
In making decisions relating to providing resources to the entity
Consists of Statement of profit or loss and other comprehensive income
Statement of changes in equity
Statement of financial position
Statement of cash flows
Notes to financial statements
Users Internal:
Management
Operational Departments
External:
Providers of funds
Investors
Creditors
Customers
Employees and Unions
Government
Public
Underlying Accrual Concept:
Assumptions Transactions must be recorded in financial year it occurs
And not when cash is received/paid
Going Concern Concept:
It is accepted that an entity will be in operation for the foreseeable
future
Qualitative Relevance:
characteristics Financial info that influences decision of users
By helping them evaluate past/present/future events
By Tanya Hacke :
An Introduction to the understanding of Accounting
Contents
Chapter 1: Nature and Function of Accounting ....................................................................... 3
1. HISTORY AND DEVELOPMENT .................................................................................... 3
2. WHAT IS ACCOUNTING?............................................................................................ 3
3. WHAT IS AN ENTITY ..................................................................................................... 4
4. FINANCIAL STATEMENTS ............................................................................................. 4
Chapter 2: Financial position as reflected in the Statement of Financial Position .................. 6
1. THE STATEMENT OF FINANCIAL POSITION ................................................................. 6
2. ELEMENTS .................................................................................................................... 6
Chapter 3: Statement of Profit or Loss and other comprehensive income ............................. 8
1. FORMAT ...................................................................................................................... 8
2. ELEMENTS .................................................................................................................... 9
Chapter 4: The Recording Process ............................................................................................ 11
1. CALCULATIONS ........................................................................................................ 11
2. TRANSACTIONS......................................................................................................... 11
3. SOURCE DOCUMENTS.............................................................................................. 14
4. JOURNALS................................................................................................................. 14
5. LEDGERS ................................................................................................................... 14
6. TRIAL BALANCE ........................................................................................................ 15
7. INVENTORY SYSTEM .................................................................................................. 16
Chapter 5: Value added Tax..................................................................................................... 16
1. TERMINOLOGY ......................................................................................................... 16
2. WHAT IS VAT? ........................................................................................................... 17
3.WHO REGISTERS? ...................................................................................................... 17
4. HOW DOES VAT WORK? .......................................................................................... 18
5. CALCULATIONS ........................................................................................................ 18
6. TREATMENT OF VAT .................................................................................................. 19
8. CALCULATING AMOUNT PAYABLE.......................................................................... 20
Chapter 6: Internal Control: Debtors, Creditors and cash ...................................................... 22
1. TERMINOLOGY ......................................................................................................... 22
2. OBJECTIVES OF INTERNAL CONTROL ...................................................................... 22
3. INTERNAL CONTROL TECHNIQUES FOR DIFFERENT ASSETS ..................................... 22
4. RECONCILIATION ..................................................................................................... 24
Chapter 7: Trial Balance and correction of errors ................................................................... 30
By Tanya Hacke :
, 1. INTRODUCTION......................................................................................................... 30
Chapter 8: Adjustments ............................................................................................................. 32
1. TERMINOLOGY ......................................................................................................... 32
2. DEPRECIATION.......................................................................................................... 32
4. ADJUSTMENTS TO INVENTORY ................................................................................. 34
6. PREPAID EXPENSES ................................................................................................... 34
7. EXPENSES PAYABLE .................................................................................................. 34
8. INCOME RECEIVED IN ADVANCE ........................................................................... 35
9. POST-ADJUSTMENT TRIAL BALANCE ........................................................................ 35
Chapter 9: The closing process ................................................................................................. 37
1. INTRODUCTION......................................................................................................... 37
2.1 CLOSING PROCESS FOR TRADING ENTITY (PERIODIC INVENTORY SYSTEM) ....... 39
2.2 CLOSING PROCESS FOR TRADING ENTITY (PERPETUAL INVENTORY SYSTEM) ..... 40
3. PROFIT OR LOSS ACCOUNT ..................................................................................... 41
4. REVERSALS OF ADJUSTMENTS .................................................................................. 42
Chapter 10: Financial statements of a sole trader .................................................................. 44
1. FINANCIAL STATEMENTS ........................................................................................... 44
2.EFFECT OF ADJUSTMENTS ON FINANCIAL STATEMENTS .......................................... 44
2.2 EXAMPLES OF ADJUSTMENTS ................................................................................. 45
3. POST-ADJUSTMENT TRIAL BALANCE ........................................................................ 46
4. STATEMENT OF PROFIT OR LOSS............................................................................... 47
5. STATEMENT OF CHANGES IN EQUITY ....................................................................... 48
6. STATEMENT OF FINANCIAL POSITION ...................................................................... 48
By Tanya Hacke :
,Chapter 1: Nature and Function of Accounting
1. HISTORY AND DEVELOPMENT
Double – entry For each debit transaction there must be a corresponding credit transaction
system
Duality Concept Total funds applied must be equal to total funds generated
Accounting
equation EMPLOYMENT OF FUNDS = GENERATION OF FUNDS
DEBIT CREDIT
(DR) (CR)
ASSETS
DEBIT CREDIT
Transactions that will increase Transactions that will decrease
assets assets
EQUITY
DEBIT CREDIT
Transactions that will decrease Transactions that will increase
equity equity
LIABILITIES
DEBIT CREDIT
Transactions that will decrease Transactions that will increase
liabilities liabilities
Conceptual Financial Information must adhere to South African Standards of Generally
Framework Accepted Accounting Practice (GAAP)
International Accounting Standards Board (IASB) developed accounting
standards
South African accounting bodies must adhere to International Financial
Reporting Standards (IFRS)
Prominent South African accounting bodies:
1. South African Institute of Chartered Accountants (SAICA)
2. South African Institute of Professional Accountants (SAIPA)
Goal of IFRS:
Provide Global Framework for how entities prepare and disclose
financial statements
2. WHAT IS ACCOUNTING?
Definition A continuous scientific process
Involves bookkeeping of transactions
And reporting on economic activities
Through financial statements
Aim of To provide financial info about economic activities
Accounting To current and future interested parties
By Tanya Hacke :
, To enable them to make informed decisions about the entity
Domains of Financial accounting:
Accounting Providing financial information to external parties
Management accounting:
Providing financial and management information to internal users
3. WHAT IS AN ENTITY
Definition Economic unit
That operates separately from other units
Whose financial statements are recorded separately
And is required/chooses to prepare financial statements
Examples Person
Partnership
Close corporation
Company
No-Profit organisation
Legal entity Has authority to:
own property
incur debt
perform legal acts
E.g. Close corporations and companies
4. FINANCIAL STATEMENTS
Objective Provide financial info about the reporting entity
That is useful to investors/lenders/creditors
In making decisions relating to providing resources to the entity
Consists of Statement of profit or loss and other comprehensive income
Statement of changes in equity
Statement of financial position
Statement of cash flows
Notes to financial statements
Users Internal:
Management
Operational Departments
External:
Providers of funds
Investors
Creditors
Customers
Employees and Unions
Government
Public
Underlying Accrual Concept:
Assumptions Transactions must be recorded in financial year it occurs
And not when cash is received/paid
Going Concern Concept:
It is accepted that an entity will be in operation for the foreseeable
future
Qualitative Relevance:
characteristics Financial info that influences decision of users
By helping them evaluate past/present/future events
By Tanya Hacke :
