First year Accounting summary that would be suitable for both BCom Accounting and Accounting Science.
This summary got me through first year and can assist you in not only understanding accounting with in-depth explanations but can help you on your quest to getting an A.
It has different co...
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1. How a business works
Owners of a business, investors, contribute to funding of business (Equity).
Further funding obtained by borrowing money from lenders (liabilities)
o Used to buy assets, the resources of business PPE, [Property Plant (helps company to produce goods/services)
Equipment], goods for resale (inventory) & cash remaining in bank.
Management uses the resources to earn income – during this, expenses are incurred.
Profit (Income – Expenses) reverts to investors as increase in equity.
2. Intro to business entities
Business/Reporting Entity – organisation that uses economic resources for primary goal of maximising profit.
o Formed by 1+ entrepreneurs (set up business w goal of generating profit using skills & factors of
production – resources, labour & capital) to produce goods/services for demand from customers.
Non-business Entity – concerned with providing a service to members (club) or others (charity).
2.1. Forms of business ownership – Incorporated/ Unincorporated Entity
Unincorporated – not formed/incorporated as a legal entity through legislation
→ Sole proprietorship
Owned by 1 person – not separate legal & taxable entity from owner
Owner benefits from all profits & also held liable for all debt incurred
No formal procedures required to set up
Expansion limited by funding to the owner
→ Partnership
Legal relationship between 2-20 persons – not separate legal & taxable entity
Partners benefit from all profits and are liable for debts incurred
No legislation in S.A to control partnerships – principles of common law applicable
Incorporated – legal entity distinct from persons who own it
o owners = shareholders, do not personally own assets
o No direct claim on profits & limited liability (limited to their investment)
o Non-profit & profit companies
→ Private Co. – may be formed & managed by one person – sole shareholder/director
Typically used for micro-businesses
Owner/s & management typically same group of persons and Companies Act of 2008 not require
them to be audited – may require independent review
→ Public Co. – must have at least 1 shareholder & 3 directors
Typically used by larger business entities, often listed on stock exchange
Owners = shareholders & management, in form of board of directors
Owners and management typically different group of people, Companies Act of 2008 requires all
public companies to be audited on annual basis
Close corporation – legal entity which is less complex and more easily administered than a co.
o Enables smaller undertakings to acquire corporate status with legal personality distinct from its
members -
o Provides limited liability & perpetual succession – members may lose limited liability (Close
Corporations Act 69 of 1984)
o No distinction envisaged between owners and management
o Profits belong to corporation and not members until declared as distribution
o Companies Act of 2008 allows existing ones to continue but not formation of any new ones
, Chapter 1 – Accounting Environemnt 3
2.2. Types of business entities
Type of business Activity Income Example
Service entity Provides service to clients Sales Lawyers/ Accountants
Retail entity Buys & sells goods to public Sales Supermarket
Wholesaler Buys & sells goods to retailer Sales Fresh produce market
Manufacturer Manufactures goods for resale Sales Car manufacturer
Agent Performs service on behalf of someone Commission Estate agent
else
Financial institution Loans funds to individuals & bus. Fees & Bank
entities. Accepts funds for investments interest
3. Decision-making and users of information
o Accounting is concerned with identifying, recording & reporting of financial information to make economic
decisions. Entity is any individual, business or organisation with its own identity.
o Accounting provides info about an entity to users for decision-making purposes.
Users categorised as Primary users (external) & Management (internal).
o Financial accounting – concerned with providing useful info about bus. entities for primary users.
Management accounting – concerned with providing useful info related to deployment of resources &
exploitation of opportunities for management.
Primary users Entity Management
Interested in info Interested in info
about entity for about entity, has
decision-making access to all info
Financial reports needed
Provides info (about entity) Prepares
4. The Conceptual Framework and the Objective of Financial Reporting
o Conceptual framework – Doc. issued by International Accounting Standards Board (IASB)
o Objective of General-Purpose Financial Reporting is to provide information about the reporting entity that is
useful to users in making decisions about providing resources to the entity
To make these decisions, users of financial statements asses the prospects for future net cash flows to
entity and managements stewardship of the entity’s economic resources. Both needed to provide useful
info for decision-making. ( Stewardship = responsibility of management to carefully & responsibly
manage resources entrusted to entity on behalf of investors)
4.1. Users and their information needs:
o Primary users (as defined by Conceptual Framework) o Management
→ Investors – Ownership interest → Responsible for preparing
financial information, rather
→ Lenders – Financial, but not an ownership interest
than a recipient
→ Other creditors – Financial, but not an ownership interest (Board of Directors)
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