FAC1503 Summary Guide

FAC1503
Summary Guide

,LEARNING UNIT 1: THE NATURE AND FUNCTION OF ACCOUNTING

Learning Outcomes

After completing this learning unit, the learner should be able to:

 explain the nature and purpose of accounting;
 identify the main users of financial information and explain their information
needs;
 distinguish between financial accounting and management accounting;
 explain the meaning and importance of internal controls;
 describe built-in control measures relevant to a law practice;
 explain internal control procedures used within a law practice;
 explain the meaning of IFRS, IASB, FRSC and SAICA;
 explain why accounting standards are developed;
 describe the purpose and role of the Conceptual Framework;
 identify the financial reporting frameworks recognised under the Rules of the
Attorneys’ Profession;
 explain the assumptions underlying the preparation of financial statements in
accordance with the Conceptual Framework;
 discuss the qualitative characteristics of useful financial information; and
 explain relevant IAS 1 concepts, including fair presentation, going concern,
accrual accounting, materiality and aggregation, offsetting and reporting
frequency.

Key Concepts

The main concepts covered in this learning unit include:

 Conceptual Framework
 Underlying assumptions
 Qualitative characteristics
 Components of financial statements

,  Internal controls
 Built-in control measures
 Internal control procedures

1.1 What Is Accounting?

1.1.1 Definition

Accounting can be understood as a process through which economic activities are
identified, recorded and communicated to people who require financial information.

The process involves three main activities.

First, economic transactions are identified.
This involves recognising events that provide evidence of economic activity and that are
relevant to a particular business or entity.

Second, the transactions are measured and recorded.
The monetary value of relevant economic events is recorded systematically. This
creates a lasting record of the financial activities of the entity. During this process,
transactions are classified, organised and summarised.

Third, financial information is communicated.
The recorded information is presented to interested users through accounting reports.
Financial statements are among the most important reports used for this purpose.

1.2 The Nature of Accounting

Accounting serves as a specialised form of communication because it conveys
information about the financial affairs of an entity. For financial information to be useful,
the people receiving it need to understand what the information represents.

Accounting communicates financial information using both numerical information and
specific terminology. As learners develop their accounting knowledge, they become

, familiar with the concepts, principles and procedures used to interpret financial
information.

Financial information is relevant to virtually everyone involved in an organisation.
Accounting knowledge is also useful for managing personal finances because financial
resources are limited and therefore need to be planned and managed carefully.

Accounting can therefore be regarded as a financial language through which
information about an entity is communicated to interested users.

1.3 Forms of Ownership and Users of Financial Statements

The major forms of business ownership identified in this learning unit are:

 sole proprietorships;
 partnerships;
 close corporations; and
 companies.

Different groups require financial information for different decision-making purposes.
Common users of financial information include:

 investors;
 creditors;
 employees;
 government; and
 management.

1.4 Fields of Accounting

Users of financial information can broadly be divided into two groups.

Internal users are people within the entity, such as managers and employees.