FAC1502: FINANCIAL ACCOUNTING CONCEPTS; PROCEDURES AND CONCEPTS

FAC1502: FINANCIAL ACCOUNTING CONCEPTS; PROCEDURES AND CONCEPTS ACCOUNTING - Planning; Recording; Analyzing; Interpreting financial information. PLANNING DECISIONS - Financial information is used to determine future actions. Historical information provided by the accounting process serves as a basis for forecasting. CONTROL - Using financial information to evaluate the results of financial activities. THE FUNCTION OF ACCOUNTING - 1. The value added to the networth of a person/entity during a particular period. 2. The accumulated networth of that person/entity PROFIT ENTITIES - Sole traders; Partnerships; Close Corporations; Companies NON-PROFIT ENTITES - Clubs; Charitable Organisations; Churches; Educational Institutions; Trusts PUBLIC SECTOR - The Government; Provinces; Departments; Boards and Commissions; Municipalities USERS OF FINANCIAL INFORMATION - 1. Investors - Providers of capital. Concerned with the risk involved in their investment. Need information to decide whether to invest, hold, or withdraw funds. 2. Employees - Interested in entity's stability and profitability for benefits and job security. 3. Lenders - Use financial information to determine if loans can be paid back with interest. 4. Suppliers and other trade creditors - Use informations for assurance that amounts owed are paid on time. 5. Customers - Need to know the state of the entity for reliability. 6. Government and their agencies - Use financial information for taxation, policies, and statistical purposes. 7. Public - Entities often contribute to the local economy by employing people and local structures: STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME - Financial results --> Financial Performance (financial period) ---> Financial Position STATEMENT OF CHANGES IN EQUITY - Reflects the profit or total comprehensive income and reflects the capital or equity. STATEMENT OF FINANCIAL POSITION - Reflects the networth of the entity at a specific time. Determined in terms of assets and interests. Affected by the entity's economic resources, structure, liquidity, solvency, capacity to adapt to economic changes. STATEMENT OF CASH FLOWS - The ability to generate cash will determine whether the entity will be able to meet its economic comittments. DOMAINS OF ACCOUNTING - 1. Financial accounting: External users - Creditors; Clients; Banking institutions. 2. Management accounting: Internal users - Management; Personnel ACCOUNTING PRINCIPLES - The techniques used in the practice of accounting. Conceptual and Theoretical. ACCOUNTING POLICY - A set of decisions abut how the entity will handle the same type of transaction in order to achieve consistency. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) - A general framework and accounting concepts; pricinciples; methods and procedures. ACCOUNTING STANDARDS AND STATEMENTS - Aim to encourage widespread use of particular standards to eliminate bad alternatives. GOING CONCERN ASSUMPTION - assumes an entity will remain in operation for the foreseeable future. QUALITIVE CHARACTERISTICS OF FINANCIAL STATEMENTS - Attributes that make the information provided in financial statements useful. Relevance; Faithful Presentation; Comparibility; Verifiability; Timeliness; Understandability ELEMENTS OF FNANCIAL STATEMENTS - Financial Position - Assets; Liabilities; Equity; Financial Performance - Income; Expenses RECOGNITION OF ELEMENTS OF FINANCIAL STATEMENTS - 1. Concept of Profitability - Used in the recognition criteria 2. Reliability of Measure - An item must possess a cost or value that can be measured reliably before it can be recognized. ACCOUNTING ENTITY - Is the organization for with financial data are to be collected. FINANCIAL RESULT - Reported in the financial statements. Statemen of Financial Position; Statement of Profit or Loss and Other Comprehensive Income; Statement of Changes in Equity; A Statement of Cash Flows; Accounting Policies and Notes. FINANCIAL PERIOD - The timeframe used to generate financial statements during the organization's existence. Statements prepared for 6 months or less are usually used for internal management; iplanning or control purposes. Statements prepared annually are used for external parties and internal use. FINANCIAL POSITION - Assets = Equity + Liabilities NET ASSET VALUE - Assets - Liabilities THE DOUBLE ENTRY SYSTEM - BAE : Basic Accounting Equation. Each transaction must be recorded in such a way the equation remains balanced. THE FINANCIAL PERFORMANCE - Income - Expenses Profit or Loss = Income - Expenses INCOME - Revenue and Gains. Income increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity. EXPENDITURE - Normal expenses and losses. Is incurred o earn income. Expenses are decreases in economic benefits during an accounting period, in the forms of outflows. Depletions of assets or incurrences of liabilities which results in decrease in equity. INFLUENCE OF PROFIT OR LOSS ON EQUITY - Income (Profit) increases and expenditure (Losses) decreases the owner's interest. Equity = Capital + Income - Expenses Equity = Capital + Net Profit Equity = Capital - Net Profit STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME - Reflects the financial performance for financial period. The incoe and expenditure accounts are called nominal accounts.