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Chapter 1: Partnership Formation
Class notes Introduction To Business Principles of Accounting Volume 1 - Financial Accounting
Class notes Introduction To Business Principles of Accounting Volume 1 - Financial Accounting
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FAC1502 - Financial Accounting Principles, Concepts And Procedures (FAC1502)
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Accounting FAC1502
Bookkeeping involves the identification and recording of economic events only; therefore it is just one part of
the accounting process.
Accounting can be defined as the orderly and systematic identification and recording of the monetary values of
the economic transactions of an individual entrepreneur (person) or a business enterprise (entity or
institution) the reporting on the results of these transactions, and the provision of financial information by
submitting financial statements, which information is used as a basis for decision making. Accounting therefore
include bookkeeping.
Accounting is therefore a process consisting of the following three activities:
- Identifying those events that are evidence of economic activity (transactions) relevant to the
particular business or entity
- Recording the monetary value of the economic events (transactions) in order to provide a permanent
history of the financial activities of a business. Recording involves keeping a chronological diary of
measured events in an orderly and systematic manner and classifying and summarising economic
events
- Communicating the recorded information to interested users. This information is communicated
through the preparation and distribution of accounting reports, the most common of which are
known as financial statements.
Golden rule 1: Accounting records transactions in order to provide useful information for decision making.
The nature of accounting: accounting is a specialised means of communication which is used to convey a
specialised message about an entity’s finances. The recipient of this specialised message (the user of financial
information) must understand it otherwise the information that is conveyed has no value. Accounting is
therefore a language.
The common unit of measurement in accounting is money and in RSA, the currency is known as the Rand. All
an entity’s transactions are converted into monetary values before being processed. Using money as the
common denominator, however, gives rise to two important limitation:
- Not all events can be expressed in monetary terms
- The value of money is unstable and is influenced by many economic factors such as inflation.
Knowledge of accounting is needed on two levels:
- By the users of financial information, and
- By the prepares of financial information.
AFS – Annual Financial Statements
o The format for these is provided by IFRS (International Financial Reporting Standards)
GAAP – Generally Accepted Accounting Practices
IFRS – International Financial Reporting Standards – this foundation is a general framework and encompasses,
in broad terms, accounting concepts, principles, methods and procedures collectively
The objective of creating accounting standards for particular issues (e.g. for the treatment of taxation in
financial statements) is to limit the variety of available accounting practices, but without striving for strict
, uniformity or creating a set of rigid rules for all circumstances. The ultimate aim of accounting standards is to
encourage widespread use of particular standards in financial reporting and to eliminate undesirable
alternatives.
The requirements of the Companies Act and Schedule 4 thereto are taken into account in the preparation of
GAAP (Companies Act, No 61 of 1973 as amended, sections 285A (a) and (b))
The function of accounting is to provide financial information to all interested parties on the results of the
economic activities of a particular individual or institution (entity).
A person performs economic activities by working and earning a salary. The income from this salary is added to
the assets of the person at the moment that person earns the income. The increased assets are now available
for use by that person.
A trading entity purchases merchandise which is sold at a price higher than the purchase price plus other
related costs. The difference between the purchase price and costs on the one hand, and the higher selling
price on the other, is called a profit.
The financial results of economic activities therefore have two aspects:
- The value added to the net worth of a person or an entity during a particular period, and
- The accumulated net worth of that person or entity.
In terms of paragraph 10 of IAS (International Accounting Standards) (AC 101), a complete set of financial
statements must consist of:
- A statement of financial position as at the end of the period;
- A statement of comprehensive income for the period;
- A statement of charges in equity for the period;
- A statement of cash flows for the period;
- Notes, comprising a summary of significant account policies and other explanatory information, and
- A statement of financial position as at the beginning of the earliest comparative period when an
entity applies an accounting policy retrospectively or makes a retrospective restatement of items in
its financial statements, or when it reclassifies items in its financial statements.
An entity is an economic unit whose financial results are determined on its own.
Accounting reports on the financial results and position of an entity.
The accounting process treats an accounting entity as a unit independent of its owner. A business owned by a
particular person in thus regarded as being separate from the business.
In the private sector, there are mainly four types of business organisations with profit motives which can be
considered as individual entities:
- Sole traders (or sole proprietors);
- Partnerships;
- Close corporations;
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