TOPICS 1 AND 2 – NATURE AND FUNCTIONS OF ACCOUNTING AND
ACCOUNTING CONCEPTS:
The definition of accounting:
o What is accounting, why do we do accounting, what is the purpose of it?
o Who uses accounting?
o Types of entities available if you want to operate an attorneys practice, the business forms
available.
o Accounting or bookkeeping in an attorneys practice: definitions of trust money and more
specifically the legislation and rules regulating bookkeeping and trust money within an
attorneys practice – high risk of theft – that’s why it is regulated in such a strict manner.
o Very Basic Definition of Accounting:
it’s a language in which financial information is described in monetary terms and
communicated to its users.
Financial information is transactions which take place those transactions must be
described in monetary terms – you need to give those transactions a rand value, you
need to record it and that information must then be communicated to users in order
to enable them to make decisions for example – bookkeeping, accounting generates
financial information that is useful for its users.
Different users have different purposes with the information that is being generated.
It’s about financial information, financial information comes from transactions – we
are going to focus on the transactions of an attorneys practice.
Attorneys practice renders or delivers service which has particular types of
transactions associated with it –
If we just take a retailer for example a coffee shop or a restaurant in the
Neelsie – types of transactions
o In order to start a business you need capital or money to start, buy
equipment, will be contributed by the owner or by a loan from the
bank
o Money will be entering the business, it’s also going to mean an
amount is due to the bank if you got your capital loaned from the
bank.
Money which is an asset and a loan which is a liability.
As you start your business you will need to buy a computer – buy on accounts
or pay for it.
Pay rent – expense, buy trading stock – goods going to sell have to be bought,
have to make a profit on the sale of your goods – pay salaries, telephone
accounting, electricity account, have income from sale of goods, expenses,
those expenses can be paid for or they can be expenses on credit.
Expense not yet settled if an account isn’t paid.
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, All these things have to be recorded or entered into an accounting system so that all
the information can be processed or eventually can be produce information which is
of use to the users of the specific system.
o What is the objective of doing all of this?
Why do we need accounting systems – what you want to achieve:
Financial performance:
Profit or a loss within a financial year – determined over a period of time –
during the course of a financial year.
Income less its expenses. Either give you a profit or a loss.
Communicated in your income statement.
Financial position of the business:
Net worth of the business
Determined at a specific point in time.
Value of the business: what are its assets minus its liabilities?
Recorded in your balance sheet.
o Accounting takes place for a financial year, not necessarily associated with a calendar year,
can start on the 1st of April, can end on the 31st of March.
The transactions for that year needs to be recorded in order for us to know what the
financial performance was during the course of the year.
Financial performance is whether you made a profit or a loss within a financial year.
o Transactions recorded in a specific way – financial performance and financial position of a
business, why do we have a need for that information?
Many reasons for this – if you are the owner of a business you might want to
determine whether your objectives have been reached, usually before the financial
year you set up a budget – predict what the following year what is going to happen,
at the end of the year, you need actual numbers in order to determine whether you
have been successful – you have planned and budgeted for certain things you need
the actual information to find out your overall profit or loss.
There are many uses of financial information – SARS will need the information, if you
apply for a loan at the bank the bank will need the information.
It needs information on its financial performance and position in order to make
informed decisions.
You need information to know if your firm can afford to employ a candidate
attorney, if there enough profits to pay the salary of an employee, able to
afford new equipment.
You need accurate financial information for this purpose.
It is a process of identifying, classifying, measuring and capturing transactions.
Was there a sale?
Was there a lease?
Was there a donation?
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, Was there a contract?
Classify – did I buy an asset, did I pay for an expense? Did I repay a loan?
You need to classify what the transaction is about, need to measure it, give it
a rand value, and record and capture it in the accounting records.
This first part of the definition is what is accounting – it’s a process of these
four things with a transaction.
o Accounting is done in a systematic manner:
You capture transactions – how do you do it in a systematic manner?
You are going to do it on a daily basis.
You are going to group certain transactions together within your accounting
records, when you write fees for the legal work you do, write up fees in a
specific accounting book, when you pay expenses – write it up in another
book.
Deal with trust money belonging to clients – a separate set of records.
Numerically
Daily
To provide information which can be analyzed and interpreted and leads to effective
decision making.
o Users of financial information:
Investors:
What is the financial performance and financial position of business is, have
you made a good investment – are you happy with the proceeds of your
investment or would you like to withdraw your investment?
Management:
You need this kind of information to determine whether you have met your
budget.
The profits or losses made, the bonus you will earn at the end of the financial
year.
Creditors:
Need for this kind of information to know whether the amount which is due
to you will indeed be paid.
Employees:
To know whether you have job security
Government:
SARS: need for information in order to assess your taxes.
Clients:
Clients of a business are interested in the financial position and performance
of a business – goods and services will be utilized in the future – is the
business going to exist in future – is it profitable enough that I as a client are
going to be able to make use of goods and services in the future.
o Transactions have to be recorded ito the financial system according to certain rules:
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, Those theories and rules have to be followed in order for financial information to be
consistent, reliable and transparent.
Eventually, the output of a financial accounting system is your financial statement.
You have your financial statements, which in basic terms your income statement and
your balance sheet – report on your financial performance – in the balance sheet
you report on your financial position.
These financial statements must be consistent, reliable and transparent, in order to
achieve that need to follow rules in accounting
e.g. debit and credit – consistency is required in order to compare results –
you must be able to compare one financial year with another, in order to do a
comparison, you must be comparing similar things.
Compare different businesses for example – this is why accounting records have to
be kept in a consistent manner
Have to reliable and transparent – you can’t hide things, cant classify
something as an asset if it’s not.
Rules we follow in that regard:
Used to be SA General Accepted Accounting Practice (GAAP) – now known as
IFRS & IAS (Companies Act).
Now we follow International Financial Reporting Standards (IFRS).
Together bound by the International Accounting Standards (IAS).
All companies in SA have to follow these rules when writing up transactions
in their accounting records ito the Companies Act.
If your business whether it is any other form, if your business operates a legal
practice you are bound by the legal practice rules to follow the IFRS.
Legal practice rules by the SA Legal Practice Council (LPC) Rule 54.7.1.
Principles of accounting are based on international rules.
Attorneys practices are required to follow IFRS irrespective of what type of
business form you use.
o More info in paragraph 1.6. of the notes.
o Types of entities suitable for an attorneys practice:
A sole proprietor:
A single person operating a business in his or her own personal name, only
one person, no separate legal person.
o You are the debtor of the liabilities, you pay tax in your own personal
name on the profits you make.
o It is a business type available for an attorney – its lawful and is
allowed to operate an attorneys practice in your own name, just you
practicing.
Can use as an entity to conduct an attorney’s practice.
Partnership:
Two or more persons practicing together with the aim of making a profit.
Look at 1.6.
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