Accounting Term 1 Grade 11
Generally Accepted Accounting Practice ( GAAP)
- The GAAP principles arose from the need for reliable and comparable financial
statements that resorts on the financial position and performance of an entity.
- General framework to report on financial activities.
- Issued by the accounting practices committee and harmonised with the IFRS
- Entity rule: THe financial affairs of the partners should kept separate from those of
the business they are two separate entities. Eg; The business has its own bank
account and the partners each have their own bank accounts.
- Historical cost concept: Assets should be entered at its historical cost; this is the
amount that was originally paid for them. Eg; Land and buildings purchased for
R500000 will be entered at that amount in the books, even if the business can
received a lot more for ut after a couple of years.
- Going concern concept: The financial statements of a business are prepared with the
assumption that the business will continue operating in the foreseeable future. Eg If a
business had stationery printed in the name of the business to the value of R5000
and it is unused at the end the financial period, it will be shown at the value in the
financial statements as a current asset.However if the business will be closing down
in the next financial period, this stationery will have no value.
- Matching concept: Income and expenses must be accounted for in the correct time
period ( the one in which they were incurred).Eg; the telephone account for Feb 2015
must be taken into account for the financial period ending 28 Feb 2015, even though
the account will only be paid in mar 2015
- Prudence concept: Financial results are reflected in a conservative manner. Eg; If the
business expects to make a profit of R 100 000 on the sale of part of the building, it
will not be entered in the books until the transfer of the land has been concluded.
- Concept of materiality: MAterial items must be shown in the financial statements, but
the immaterial items need not be highlighted.INterest on overdraft must be shown in
a specific account, while consumables may be included in the sundry expenses
account as it is material to know what the finance cost on the overdrafts is.
International FInancial Reporting Standards ( IFRS)
- Are standards based on principles, along with interpretations and the framework
adopted by the international accounting standards board ( IASB)
Stock turnover rate / stock on hand:
- Ratio shows how often stock is replenished / purchased
- Increase will have a positive effect on the liquidity of the business.
- Also helps to check the stock control policy, operating efficiency and sale volume
moving out of the business.
Stock holding period:
- The number of days/ months stock on hand will vary from one business to the next,
depending on the type of business and products they sell.
- Too much stock on hand lead to over investment in stock - neg effect on liquidity
- Too little stock on hand can neg effect sales, when customers rather purchase from
competitors bc their stock is more readily available.
, Avg debtors collection period:
- Compares the previous year and shoe how often debtors are turned into cash (how
long debtors take to settle their debt)
- Decrease in the debtors collection period generally shows better credit control.
- Try to collect debtors within 30 days.
- Could improve the collection of debtors by screening new debtors, charging interest
and settling credit limits.
Avg creditors payment period:
- SHow how long it takes the business to pay creditors
- Should negotiate 60-90days payment period with creditor
- Ensure they are paid on time to prevent interest charged on overdue accounts.
- Increase in the amount of days a business takes to pay creditors could indicate that
the business has liquidity problems.
Debt : equity ratio :
- Gives indication of how the business is financed
- Capital provided by the patterns = own capital
- Funds borrowed from other institutions= foreign capital
- Business that relies mainly on own capital is often seen as a low risk business and
would more easily obtain a loan
- One can assume that a business with a debt: equity ratio under 0,5 : 1 is low geared
and credit worthy which a business with a ratio above 1: 1 is high geared.
Partners’ earnings:
- If a current account has a debit balance it is subtracted in the calculations
- The ratio indicates how much return partners personally earned on his investment
- Might seem high in comparison to alternative investments, as it includes the salary
earned by the partners
- It should be co pared to pervious years' figures.
Return on partners equity:
- How much return the owners earned on the capital they invested in the business
- Allows owners to compare the rate of return in the business with the rate of return on
alternative investments, such as a fixed deposit
- Several factors that could be influence this ratio
1. How long the business has been running
2. The current economic climate
3. Whether the owner increased his capital during the year
- Commenting on ratio:
● State whether the ratio increase or decreased in comparison to the previous year.
QUOTE FIGURES.
● State the reasons the decrease / increase could of been.
● Reach a conclusion on the company's performance: its liquidity, profitability, solvency,
gearing or return on investment.
Generally Accepted Accounting Practice ( GAAP)
- The GAAP principles arose from the need for reliable and comparable financial
statements that resorts on the financial position and performance of an entity.
- General framework to report on financial activities.
- Issued by the accounting practices committee and harmonised with the IFRS
- Entity rule: THe financial affairs of the partners should kept separate from those of
the business they are two separate entities. Eg; The business has its own bank
account and the partners each have their own bank accounts.
- Historical cost concept: Assets should be entered at its historical cost; this is the
amount that was originally paid for them. Eg; Land and buildings purchased for
R500000 will be entered at that amount in the books, even if the business can
received a lot more for ut after a couple of years.
- Going concern concept: The financial statements of a business are prepared with the
assumption that the business will continue operating in the foreseeable future. Eg If a
business had stationery printed in the name of the business to the value of R5000
and it is unused at the end the financial period, it will be shown at the value in the
financial statements as a current asset.However if the business will be closing down
in the next financial period, this stationery will have no value.
- Matching concept: Income and expenses must be accounted for in the correct time
period ( the one in which they were incurred).Eg; the telephone account for Feb 2015
must be taken into account for the financial period ending 28 Feb 2015, even though
the account will only be paid in mar 2015
- Prudence concept: Financial results are reflected in a conservative manner. Eg; If the
business expects to make a profit of R 100 000 on the sale of part of the building, it
will not be entered in the books until the transfer of the land has been concluded.
- Concept of materiality: MAterial items must be shown in the financial statements, but
the immaterial items need not be highlighted.INterest on overdraft must be shown in
a specific account, while consumables may be included in the sundry expenses
account as it is material to know what the finance cost on the overdrafts is.
International FInancial Reporting Standards ( IFRS)
- Are standards based on principles, along with interpretations and the framework
adopted by the international accounting standards board ( IASB)
Stock turnover rate / stock on hand:
- Ratio shows how often stock is replenished / purchased
- Increase will have a positive effect on the liquidity of the business.
- Also helps to check the stock control policy, operating efficiency and sale volume
moving out of the business.
Stock holding period:
- The number of days/ months stock on hand will vary from one business to the next,
depending on the type of business and products they sell.
- Too much stock on hand lead to over investment in stock - neg effect on liquidity
- Too little stock on hand can neg effect sales, when customers rather purchase from
competitors bc their stock is more readily available.
, Avg debtors collection period:
- Compares the previous year and shoe how often debtors are turned into cash (how
long debtors take to settle their debt)
- Decrease in the debtors collection period generally shows better credit control.
- Try to collect debtors within 30 days.
- Could improve the collection of debtors by screening new debtors, charging interest
and settling credit limits.
Avg creditors payment period:
- SHow how long it takes the business to pay creditors
- Should negotiate 60-90days payment period with creditor
- Ensure they are paid on time to prevent interest charged on overdue accounts.
- Increase in the amount of days a business takes to pay creditors could indicate that
the business has liquidity problems.
Debt : equity ratio :
- Gives indication of how the business is financed
- Capital provided by the patterns = own capital
- Funds borrowed from other institutions= foreign capital
- Business that relies mainly on own capital is often seen as a low risk business and
would more easily obtain a loan
- One can assume that a business with a debt: equity ratio under 0,5 : 1 is low geared
and credit worthy which a business with a ratio above 1: 1 is high geared.
Partners’ earnings:
- If a current account has a debit balance it is subtracted in the calculations
- The ratio indicates how much return partners personally earned on his investment
- Might seem high in comparison to alternative investments, as it includes the salary
earned by the partners
- It should be co pared to pervious years' figures.
Return on partners equity:
- How much return the owners earned on the capital they invested in the business
- Allows owners to compare the rate of return in the business with the rate of return on
alternative investments, such as a fixed deposit
- Several factors that could be influence this ratio
1. How long the business has been running
2. The current economic climate
3. Whether the owner increased his capital during the year
- Commenting on ratio:
● State whether the ratio increase or decreased in comparison to the previous year.
QUOTE FIGURES.
● State the reasons the decrease / increase could of been.
● Reach a conclusion on the company's performance: its liquidity, profitability, solvency,
gearing or return on investment.
