This document contains a summary of chapters 1 to 10 from the textbook An Introduction to the understanding of accounting for different entities by Bezuidenhout, Cloete, Joynt and Van Pletsen
Contents
Chapter 1: Non-current assets ....................................................................................... 3
1. Terminology .............................................................................................................. 3
2. Initial recognition of cost ......................................................................................... 5
3. Measurement after recognition ............................................................................. 5
4. Recording depreciation.......................................................................................... 5
5. Depreciation methods ............................................................................................ 6
6. Asset realisation ....................................................................................................... 6
7. Amortisation ............................................................................................................. 7
8. Impairment ............................................................................................................... 8
Chapter 2: Inventory ..................................................................................................... 10
1. Terminology ............................................................................................................ 10
2. Measurement of closing inventory ....................................................................... 10
3. Net realisable value............................................................................................... 11
4. Insurance against inventory losses ....................................................................... 12
5. Trading Statement ................................................................................................. 12
6. Nature of inventory in manufacturing entity ....................................................... 13
7. Disclosure of inventory........................................................................................... 15
1. Terminology ............................................................................................................ 17
2. Accounting treatment .......................................................................................... 17
3. Disclosure of liabilities ............................................................................................ 18
Chapter 4: Administration of salaries ........................................................................... 19
1. Terminology ............................................................................................................ 19
2. Introduction ............................................................................................................ 19
3. Administrative requirements ................................................................................. 20
4. Costs involved in employment ............................................................................. 20
5. Deductions ............................................................................................................. 21
6. Information contained on salary advice/ pay slip ............................................. 22
7. Administration of payroll ....................................................................................... 22
8. Accounting procedure for recording transactions relating to payroll
administration ............................................................................................................ 23
Chapter 5: Presentation of financial statements ........................................................ 25
1. Introduction ............................................................................................................ 25
2. Qualitative characteristics of information in financial statements .................... 25
3. Statement of profit or loss and other comprehensive income .......................... 26
1
, 4. Statement of changes in equity ........................................................................... 27
5. Statement of financial position............................................................................. 27
6. Notes to financial statement ................................................................................ 28
Chapter 6: Analysis and interpretation of financial statements................................ 31
1. Purpose of analysis of financial statements ......................................................... 31
2. Advantages/ Disadvantages of financial ratio analysis..................................... 31
3. Liquidity ratios ......................................................................................................... 31
4. activity ratios .......................................................................................................... 32
5. Profitability ratios .................................................................................................... 32
6. Solvency ratios ....................................................................................................... 33
Chapter 7: Partnerships ................................................................................................ 34
1. Introduction ............................................................................................................ 34
2. Basic types of partnerships.................................................................................... 34
3. Advantages of a partnership ............................................................................... 35
4. Disadvantages of a partnership ........................................................................... 35
5. A partnership’s general ledger accounts ............................................................ 35
6. Profit or loss ratios ................................................................................................... 37
7. Loans to partners ................................................................................................... 40
8. Loans from partners ............................................................................................... 40
9. Financial statements of partnership ..................................................................... 40
Chapter 8: Companies ................................................................................................. 42
1. Terminology ............................................................................................................ 42
2. Companies Act No 71 of 2008 .............................................................................. 42
3. Differentiating characteristics of a company ..................................................... 42
4. Shares ..................................................................................................................... 43
5. Appropriation of profits ......................................................................................... 45
6. Reserves .................................................................................................................. 47
7. Financial Statements ............................................................................................. 47
Chapter 9: Non-profit entities ....................................................................................... 50
1. Terminology ............................................................................................................ 50
2. Nature of entity ...................................................................................................... 50
3. Accumulated fund and other funds .................................................................... 51
4. Accounting entries unique to non-profit entities................................................. 51
5. Financial statements and disclosure .................................................................... 53
Chapter 10: Statement of cash flows .......................................................................... 56
1. Terminology ............................................................................................................ 56
2
, 2. Introduction ............................................................................................................ 57
3. Users of the statement of cash flows .................................................................... 57
4. Cash flows for sole proprietor ............................................................................... 57
5. Cash flows of a close corporation ....................................................................... 59
6. Cash flows of company ........................................................................................ 59
Chapter 1: Non-current assets
1. TERMINOLOGY
Assets present economic resource
controlled by entity
as result of past events
Recognition criteria:
Relevance: must be certain economic resource exists
right to this asset belongs to entity
certainty that the use of it will lead to inflow of benefits
faithful representation: asset needs to be measured
reasonably/ consistently
Non-current Expected to be controlled by entity for longer than next 12
Asset months.
Will not be converted into cash within next financial year
o Land
o Buildings
o Vehicles
o Furniture
o Machinery
o Equipment
Intangible non-current asset:
Identifiable non-monetary asset
without physical substance
separable from entity
arising from contractual/ legal right
Relevance: Probability of future economic benefits
Faithful representation: amount at which asset is recognised
should be reliably measured
For development costs to be considered an asset:
expenses related to it should be measured reliably
technical feasibility of product should be demonstrated
entity should have intention to sell it
Usefulness should be demonstrated by existence of market
Sufficient resources should be available to complete
development of product
Tangible non-current asset
Property, plant, equipment
Can experience it with natural sources
Excludes:
o biological assets
o mining rights
o mineral reserves
Current Asset Expected to be controlled by entity for period shorter than
next 12 months
Will be converted into cash within next financial year
o Inventory
o Cash and cash equivalents
o Debtors
o Income receivable
o Prepaid expenses
Depreciation Systematic allocation
of depreciable amount of non-current asset as an expense
over its estimated life
to be recognised with income it helped earn
Recognised as expense in statement of PLOCI
Depreciable cost – residual value
amount amount on which depreciation will be calculated
Residual estimated amount asset will be worth at end of useful life
value estimated when asset is ready for use
Accumulated Total of depreciation provided over asset’s useful life
depreciation Carrying amount = cost – Accumulated depreciation
Amortisation Systematic allocation
of intangible asset’s historical cost
over its estimated life
Expense
Intangible assets decline in value due to passing of time – not
wear and tear
Asset Scrapping
realisation Selling
Trading-in of asset
4
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