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http://wikistudent.ws/Unisa 1 ACCOUNTING 1 (ACN101- M) STUDY UNIT 1: THE NATURE AND FUNCTION OF ACCOUNTING DEFINITION: • • • Accounting can be defined as the orderly & systematic recording of the monetary values of financial transactions of a business The reporting of results Providing financial information as a basis for decision making 3 main processes define the accounting process: 1. IDENTIFYING: Selecting evidence of economic / financial activity (transactions) 2. RECORDING transactions to provide a permanent history of the businesses financial activities 3. COMMUNICATING the recorded information to interested users by use of accounting reports IE Financial Statements The Nature Of Accounting: Accounting is used to convey the financial situation of an enterprise. It is therefore essential that the recipient of such information is able to understand it. Both words and figures are used to convey this information. “Accounting is a language which is used to convey financial information to users” http://wikistudent.ws/Unisa 2 Forms Of Ownership: 1. 2. 3. 4. 5. Sole Trader / Proprietor Close Corporation Company Partnership Non – profit Organizations Users of Financial Information: Financial information is required / used for analysis by: 1. INVESTORS: The Shareholders with a Financial Interest in the business 2. CREDITORS: The lenders of money, merchandise and services also have a Financial Interest in the business 3. EMPLOYEES: Regarding job security and wage negotiations and predictions for future employment 4. GOVERNMENT: Regarding taxes, and also for statistical purposes. Also used as an indication for MacroEconomic planning 5. MANAGEMENT: In order to plan and set new goals for future economic growth FIELDS OF ACCOUNTING: Financial Accounting VS • Recording transactions and preparing financial statements regarding the entity as a whole • GAAP (Generally Accepted Accounting Practices) standards ensure comparability of financial statements between businesses Management Accounting • Provides financial information for specific purposes • Used by management for decision making • Used to assist management reach financial goals http://wikistudent.ws/Unisa 3 STUDY UNIT 2: THE NATURE OF ACCOUNTING THEORY p.13 ACCOUNTING PRINCIPLES: 1. Accrual Principle: (WHEN?) The transaction must be recorded in the financial period it occurs, whether or not the cash has been received or paid 2. Consistency: (SAME) Once a method has been chosen it must be maintained. If said policy is changed, this must be reflected in the financial statements of the business 3. Prudence: (MODERATION) When there is uncertainty about the value of an element of event, use the effect that has the most Unfavorable effect on the business 4. Materiality: (SEPARATE MATERIAL TRANSACTIONS) All material transactions should be recorded separately in the financial statements. Immaterial transactions must be aggregated. (Material means substantial / of relatively large importance.) IE: Buying a building = Material Transaction Buying a stapler = Immaterial Transaction 5. Matching: This refers to the Double Entry system Expenses that create an income (IE – buying goods for resale), must be recorded in the same financial period. 6. Realisations: An income / expense / transaction, should only be brought into account once it is relatively certain that that the collectability / payability of that transaction is certain. ACCOUNTING POLICY & DISCLOSURE THEREOF: A set of decisions that determine how the enterprise will treat the same type of transactions to achieve consistency, which has to be disclosed in the financial statements. EG: The enterprise needs to disclose on which basis it deals with the depreciation of property and equipment etc. GENERALLY ACCEPTED ACCOUNTING PRACTICE (GAAP) This is a foundation that acts as a general framework to encompass accounting concepts, principles, methods and procedures. http://wikistudent.ws/Unisa According to GAAP there are two main statements: 4 underlying assumptions with regards to financial 1. The Accrual Basis* 2. The Going Concern * The four main qualitive characteristics are: 1. 2. 3. 4. Understandability Relevance Reliability Comparability The elements of financial statements are: • • Elements to measure FINANCIAL POSITION: 1. Assets 2. Liabilities Balance Sheet Accounts 3. Equity Elements to measure PROFITABILITY / FINANCIAL RESULT 1. Incomes Nominal Accounts (Expenditure Accounts) 2. Expenses http://wikistudent.ws/Unisa 5 STUDY UNIT 3: THE FINANCIAL POSITION p.21 THE FINANCIAL POSITION: The Assets & Interests of the entity at a GIVEN TIME (BALANCE SHEET) ASSETS = INTEREST 1. EQUITY + “Owners financial interest” .:. 2. LIABILITIES “Creditors financial interest” ASSETS = EQUITY + LIABILITIES AND EQUITY = ASSETS - LIABILITIES NET WORTH: The enterprises NET WORTH is the difference between the values of the assets owned, less the liabilities it has incurred. ASSETS – LIABILITIES = NET WORTH (“EQUITY”) http://wikistudent.ws/Unisa 6 STUDY UNIT 4: THE FINANCIAL RESULT p.29 THE FINANCIAL RESULT: The PROFIT or LOSS incurred by the enterprise OVER A SPECIFIC PERIOD. (INCOME STATEMENT) FINANCIAL RESULT = INCOME – LESS EXPENDITURE = NET PROFIT / LOSS ASSETS = EQUITY + (Capital + Income – Expenditure) LIABILITIES http://wikistudent.ws/Unisa 7 STUDY UNIT 5: THE DOUBLE ENTRY SYSTEM p.39 ENTERING INFORMATION INTO THE LEDGER: 1. What is the effect of the transaction going to be on the BAE? 2. Identify the accounts involved 3. Determine which should be credited and which should be debited 4. Ensure the debited amount = credited amount 5. Indicate date of transaction 6. Indicate name if CONTRA ledger account 7. Indicate the folio number of the subsidiary journal TRANSACTIONS AFFECTING ASSETS & INTERESTS: p40 • Capital Contributions: T.Tom draws 13 000 from his personal bank a/c and deposits as capital for Fix N Mat ASSETS Bank +130 000 • LIABILITIES = = = EQUITY Capital + + + LIABILITIES Loan: ABC Bank +25 000 Equipment +100 000 = = = EQUITY Capital + + LIABILITIES Loan: ABC Bank Buying goods on credit: Fix N Mat bought furniture on Credit from Joc Limited, R2000 ASSETS Bank • + Purchase of Assets for Cash: Fix N Mat bought Equipment from XY Furnishers for R100 000, paid by cheque ASSETS Bank -100 000 • EQUITY Capital +130 000 Acquisition of Loans: Fix N Mat obtains a loan from ABC Bank for R25 000 ASSETS Bank +25 000 • = = = Furniture +2 000 = = = EQUITY Capital Payments to Creditors: Fix N Mat paid Joc Ltd ‘s account of R2 000 ASSETS = EQUITY Bank Furniture = Capital -2 000 = + + LIABILITIES (Loan: ABC Bank + + LIABILITIES (Loan: ABC Bank + Joc Ltd) +2 000 + Joc Ltd) -2 000 http://wikistudent.ws/Unisa 8 TRANSACTIONS AFFECTING INCOME & EXPENDITURE: P46 • Income: CASH Fix N Mat provided services for client S. Silver and received cash cheque of R1 000 ASSETS Bank + 1 000 • Furniture EQUITY + LIABILITIES (Income / Expenditures) + 1 000 Income: CREDIT Fix N Mat provided services worth R6 000 to C.Canon on credit ASSETS Debtors Control C. Canon + 6 000 • = = = = = = = EQUITY + LIABILITIES (Income / Expenditures) + 6 000 Expenditure: CASH Fix N Mat provided services worth R6 000 to C.Canon on credit ASSETS Debtors Control C. Canon + 6 000 • = = = = EQUITY + LIABILITIES (Income / Expenditures) + 6 000 Expenditure: CREDIT Fix N Mat placed an advert in the paper R200, payment due in 30 days ASSETS Debtors Control • = = = = EQUITY + (Income/ Expenditures) + Advertising - 200 + LIABILITIES Creditors Cape Ads +200 Payments received from Debtors C. Canon settled his account in part, R2 000 ASSETS (Bank + 2 000 + Debtors) C.Canon - 2000 = = EQUITY + (Income/ Expenditures) + LIABILITIES Creditors http://wikistudent.ws/Unisa 9 BASIC FORM OF A BALANCE SHEET p50 FIX N MAT BALANCE SHEET AT 28 FEB 20.1 ASSETS R Fixed Assets Equipment Furniture R Equity 100 000 2 000 Current Assets Debtors Bank INTERESTS Capital Net profit Withdrawals Fixed Liabilities Loan: ABC Bank 4 000 54 200 160 200 Current Liabilities Creditors 130 000 6 000 (1 000) 135 000 25 000 200 160 200 http://wikistudent.ws/Unisa 10 STUDY UNIT 6: THE ACCOUNTING PROCESS p.59 The basic form of a T- Account: DR DATE DETAILS NAME OF ACCOUNT FOL AMOUNT DATE DETAILS CR FOL AMOUNT CLASSIFYING LEDGER ACCOUNTS INTO GROUPS: • ASSETS: “A resource controlled by the enterprise from which future economic benefits are expected to flow” NON CURRENT (Not be converted into cash within the next financial year) - Property, Plant and Equipment - Professional Library - Investments CURRENT ASSETS - Debtors - Inventory sold - Petty Cash - Bank - Prepaid Expenses - Accrued Income (Income earned but not yet received in cash) • INTERESTS “ Investors and Creditors financial stake in the enterprise” EQUITY (The owners financial interest) - Capital - Net profit / Loss - Drawings LIABILITIES FIXED LIABILITIES: (Payable over MORE than a year) - Mortgage loans - Banks Loans - Vehicle Finance CURRENT LIABILITIES: (Payable within one year) - Trade creditors - Bank Overdrafts - Accrued expenses (Expenses owed but not yet paid) - Prepaid income