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Summary FIN ACC 178 YEAR NOTES
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Financial Accounting 178 NotesFINANCIAL ACCOUNTING 178
Topics:
1. The Accounting Cycle (integrated with other
topics)
2. Conceptual Framework (IFRS, definition,
recognition criteria of elements)
3. VAT
4. Property, Plant and Equipment
5. Inventory
6. Inventory on Consignment
7. Introduction to Group Statements
8. Companies
9. Close Corporations
10.Liquidations
11.Partnerships
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,Financial Accounting 178 Notes
1. The Accounting Cycle
Transactions and their respective journals: (new ones)
Bad debts
Writing off of bad debts:
Dr Bad Debts (P/L)
Cr Debtors Control (SFP)
Recovering bad debts (if the debt was written off and then subsequently recovered in the
current financial period)
Dr Bank (SFP)
Cr Bad Debts (P/L)
Recovering bad debts (If the debt was written off in a previous period and then recovered in
the current financial period)
Dr Bank (SFP)
Cr Bad Debts Recovered (P/L)
Allowance for credit losses of debtors
Increase in allowance:
Dr Movement in allowance for credit losses of debtors (P/L)
Cr Allowance for credit losses of debtors (SFP)
Decrease in allowance:
Dr Allowance for credit losses of debtors (SFP)
Cr Movement in allowance for credit losses of debtors (P/L)
Bank reconciliation
Entries are compared to ensure:
Complete and accurate recording of cheques
Complete and accurate recording of deposits
The recording of bank charges, interest and other sundry items
Writing back of stale cheques. A cheque is stale when it has not been cashed after six
months. Entry: Dr Bank, Cr Creditor or expense
Unpaid cheques are written back: Dr Debtor or income, Cr Bank
Stop orders are recorded
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,Financial Accounting 178 Notes
Differences between the bank account and the bank statement balances must be adjusted. If
the error is in the cash receipt or cash payment journals, it must be corrected in the general
journal. An error made by the bank remains a reconciling item until the bank does the
correction.
A debit bank balance in the entity’s books is a positive balance (asset), while a credit balance
indicates an overdrawn balance. The bank statement is the opposite: a debit balance is an
overdraft and a credit balance is an asset.
The steps to be followed when a bank reconciliation is done are:
1. Check whether the previous month’s corrections were done.
2. Check the bank statement for errors, for example cheques not written out by the entity,
items incorrectly cast instead of subtracted and vice versa.
3. Compare the entries on the bank statement, bank account and the journals one-by-one.
Example:
Favourable balance Overdraft balance
Balance per bank statement 500 (500)
Outstanding cheques (100) (100)
Outstanding deposits 200 200
Balance per bank account 600 (400)
Creditors’ Reconciliation
The total of the creditor list from the creditor ledger is reconciled with the balance of the
creditor control account. If there are any differences, the necessary adjustments must be
made.
An additional control measure is the monthly reconciliation between the creditor monthly
statement and the creditor account in the creditor ledger. The balances on these two
accounts should agree, except for goods already invoiced by the creditor but not yet received
or payments to the creditor not yet received. If the reconciliation indicates any errors in the
entity’s books, it must be corrected. Errors in the creditor’s books will be reconciling items.
The steps to be followed when a creditor reconciliation is done are:
1. Check the castings in the creditor ledger, as well as in the monthly statement.
3
,Financial Accounting 178 Notes
2. Inspect the creditor ledger and the monthly statement, confirm that the items appearing
there are appropriate and whether they have been cast or subtracted correctly as
necessary.
3. Compare the items in the monthly statement and the ledger one by one.
Example
Reconciliation (Creditor's books):
dr cr Balance
Balance per statement 2 500 dr
Purchases not yet recorded on statement 100
Returns not yet recorded on statement 200
Payment made, not yet deducted 1 000
Trade discount mistakenly not deducted from statement 10 .
Balance per creditor ledger 1 390 dr
Reconciliation (Entity’s books)
dr cr Balance
Balance per statement 2 500 cr
Purchases not yet recorded on statement 100
Returns not yet recorded on statement 200
Payment made not yet deducted 1 000
Trade discount mistakenly not deducted on statement 10
.
Balance per creditor ledger 1 390 cr
4
,Financial Accounting 178 Notes
2. Conceptual Framework
Important acronyms regarding the framework:
– IFRS series: International Financial Reporting Standards
– IAS series: International accounting standards
– SIC: Standards Interpretations Committee
– IFRIC: International Financial Reporting Interpretations Committee
– AC500 series: South African interpretations (VAT, BEE)
– ED’s: exposure drafts
Purpose:
a. Sets out concepts underlying the preparation of financial statements for
external users
b. Supports IASB in
i. the development/review of accounting standards and
ii. promoting harmonisation
c. Supports national standard setting bodies in developing national standards
d. Supports preparers of financial statements in the application of IFRS and
treatment of items not covered by IFRS
e. Supports auditors to form an audit opinion on whether financial statements
comply with IFRS
f. Supports users of financial statements in the interpretation thereof
What are the objectives of general purpose financial statements?
The objective of general purpose financial reporting is to provide financial information
about the reporting entity that is useful to existing and potential investors, lenders and
other creditors in making decisions about providing resources to the entity.
Decisions= buying, selling or holding/ providing or settling loans and other forms of
credit.
This all depends on expected returns, being:
- dividends,
- market price
- providing or settling loans / interest receive/payable
• Expected returns depend on assessment of the amount, timing and uncertainty of
future net cash inflows
Assess information about the resources of the entity, claims against the entity
Primary users to whom general purpose financial statements directed at:
Existing and potential investors
Lenders and other creditors
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,Financial Accounting 178 Notes
However, general purpose financial statements cannot provide all the
information users need. Therefore users will also need to take the following
into account:
general economic conditions and expectations,
- political events and political climate,
- Industry outlooks
- company outlooks
Accrual Accounting
- depicts the effects of transactions and other events and circumstances on
economic resources and claims in the periods in which those effects occur, even
if the resulting cash receipts and payments occur in a different period
Previous cash flows
- assess the entity’s ability to generate future net cash inflows.
- Indicates
- how entity obtains and spends cash
- information about its borrowing and repayment of debt,
- cash dividends or distributions to investors,
- other factors that may affect the entity’s liquidity or solvency.
- help users
- understand entity’s operations
- evaluate its financing and investing activities
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,Financial Accounting 178 Notes
Qualitative characteristics of useful financial information
• The fundamental qualitative characteristics are
• Relevant
- Information is relevant to users if it can influence their economic decisions
- Financial information is capable of making a difference in decisions if it has
predictive value, confirmatory value or both.
- Predictive value = if it can be used as an input to processes employed by
users to predict future outcomes.
- Confirmatory value = if it provides feedback about (confirms or changes)
previous evaluations.
Therefore useful information must also be material.
- Information is material if omitting it or misstating it could influence decisions that users
make on the basis of financial information about a specific reporting entity. (entity-specific,
because what is material to one entity may not be material to another.)
7
,Financial Accounting 178 Notes
• Faithful representation
- Financial reports represent economic phenomena in words and numbers. To be useful,
financial information must not only represent relevant phenomena, but it must also
faithfully represent the phenomena that it purports to represent.
- three characteristics of faithful representation:
• complete (include all necessary information)
• neutral (impartial)
• free from error (description and process to produce information)
• Information must be both relevant and faithfully represented if it is to be useful.
• Process for applying
- Identify an economic phenomenon that has the potential to be useful to
users of the reporting entity’s financial information
- Identify the type of information about that phenomenon that would be most
relevant if it is available and can be faithfully represented.
- Determine whether that information is available and can be faithfully
represented.
• Enhancing qualitative characteristics:
• Comparability:
- Information is useful if it is comparable with other entities, or similar information of
the same entity for another period or another date.
- Don’t confuse with uniformity; uniformity helps to achieve comparability
• Verifiability:
- Verifiability helps assure users that information faithfully represents the economic
phenomena it purports to represent. It means that different knowledgeable and
independent observers could reach consensus.
- Verification can be direct (observation: by counting cash) or indirect (checking the
inputs formula and recalculating the outputs)
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, Financial Accounting 178 Notes
Timeliness
having information available to decision-makers in time to be capable of influencing
their decisions.
• Understandability
- Classifying, characterising and presenting information clearly and concisely makes it
understandable.
- Include inherently complex information, otherwise reports will be incomplete and
potentially misleading.
- Financial reports are prepared for users who have a reasonable knowledge of business and
economic activities and who review and analyse the information diligently. May need help
from advisers.
The underlying assumption on which financial statements are prepared:
• GOING CONCERN
- Entity will continue in operation for the foreseeable future
AND
- Entity has no intention or need to materially curtail or liquidate its operations
The Elements of Financial Statements
(Statement of financial position)
1. Assets
An asset is:
- A resource
- Controlled by the entity
- As a result of a past event
- From which future economic benefits
- Are expected to flow to the entity
Recognition criteria:
- Probable that future economic benefits will flow to the entity
- The cost/value can be measured reliably
2. Liability
A liability is:
- A present obligation
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