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Lecture Notes for ACC1006f
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What is accounting?The scoring system for business
Two basic activities for accounting:
- Recording
- Reporting
-
What is recording?
Writing down the effects of business transactions or “bookkeeping”
What is reporting?
Preparing reports to show these effects
What is financial reporting?
Preparing financial statements
There are 4 statements that businesses prepare:
- Statement of comprehensive income
- Statement of financial position
- Statement of changes in equity
- Statement of cash flows
,How does business work?
What objectives might a business have?
To serve customers, take care of employees, protect the environment, contribute to the community.
What is the defining objective of business?
To make the owner more wealthy
How does a business achieve its defining object?
By making 4 decisions:
1. Financing (obtains funding)
2. Investing (acquires assets)
3. Operating (how uses and sells assets)
4. Distribution (distributes/retain increases in wealth)
The Accounting Equation:
What is financial accounting?
A scoring system for recording the effects of a business transactions and reporting them in its
financial statement
Who are the financial statements for?
- Existing investors
- Potential investors
- Leasers
- Creditors
Which objective do these stakeholders care about most?
The defining object: Making the owner(s) wealthier
Equity:
Is what we call the owner’s wealth in the business or the owner’s claim on the business
How is equity measured?
Equity= Assets-Liabilities
Assets:
Resources of the business with the potential to increase economic benefits in the future
,Liabilities:
Obligations of the business with the potential to decrease economic benefits in the future.
The total of the business’ assets are equal to the totals of the equity and liabilities that have funded
the assets
The entity concept & the effects of financing decisions:
CIPR- Companies Intellectual Property Commission of South Africa
WE ARE FOCUSING ON SOLE TRADERS: they do no register with cipr
Sole Traders:
Single legal entity, legal organisation onto self
Owns personal assets and owes personal debts & at same time has business assets and liabilities
Entity Concept:
The owner’s personal transactions are not recorded/ reported by the business, EXCEPT, drawings
and capital
Income:
An increase in equity not due to a transaction with the owner(s)
Expense:
A decrease in equity not due to a transaction with the owner
Profit:
- Income less expense
- A net change in equity not due to a transaction with the owner
Net Asset Value: (Equity)
Asset- Liabilities
, Accrual Accounting:
IFRS- International Financial Reporting Standard
Depicts the effect of transactions in the period in which these effects occur even if the resulting
cash flows occur in a different period
Recognise income when it’s earned & expense when they’re incurred
Five Elements of Accounting:
- Liabilities
- Equity
- Assets
- Income
- Expense
Terminology:
What is a reporting period?
• The period of time up to the reporting date which contains the transactions whose
affects are reported on the SOCI, SOCF and SOCE
What is the reporting date?
• The date on which the financial statements are prepared
• Assets, equity and liabilities on the SOFP are reported as at the reporting date
Reporting period= financial period
12 month reporting period= financial year
Financial year can start at any beginning of month
Profit:
Earning more income than expenses incurred
A statement of changes in equity:
- Changes due to t transactions with the owner
- Changes not due to transactions with the owner
Two statements of financial performance
- Income and expenses
- Cash inflows and outflows
Equity, profit, income and expense are not “real”
Journal:
- A book of first entry
- Can record repetitive entries
- Allows for specialisation
- An instruction to the bookkeeper regarding what should be recorded in the general ledger
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