Week 0
What is Accounting?
Accounting is the process of collecting, processing and presenting financial information about a business to assist users in making financial
decisions.
Accounting is concerned with the design of the system of records, the preparation of reports based on the recorded data, and the
interpretation of the reports.
The accountant must possess a higher level of knowledge, conceptual understanding, and analytical skill than is required of a bookkeeper.
Accounting Def: the systematic identification and recording of values of the economic transactions of an entrepreneur or a business, the
reporting on the results of transactions and submitting financial statements, which information is used for decision-making.
Bookkeeping is a small part of accounting and is the recording of business data in a prescribed manner. Much of the work of the
bookkeeper is clerical in nature.
Function of accounting
The main function: capture financial information about a business and its financing activities so it can be reported to decision-makers,
both inside and outside the business.
Objective of financial statements
The objective: provide useful information about the financial performance, financial position, and changes to financial position to enable
users to make economic decisions
financial information is reflected in financial statements.
Financial statements disclose the financial effects of past events
Financial statements consist of:
Statement of financial position
Statement of profit or loss and other comprehensive income
Statement of changes in equity
Statement of cash flows
Notes to the financial statements
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Underlying Assumption in Financial Reporting
Going Concern Concept
Financial reports should be prepared on the assumption that the business is a going concern without cutting down on any of its
operations. (it will continue in operation for the foreseeable future - at least one year)
Financial performance
reflects the profit made or loss incurred over a specific period.
reported in a statement of profit or loss and other comprehensive income.
A statement of profit or loss and other comprehensive income reports revenue that was earned and expenses incurred to earn the
revenue.
Financial performance = Income – Expenses
Profit or loss = Income – Expenses
Financial position
determined at the end of the period, i.e after the financial performance for that period has been determined through the statement of
profit or loss and other comprehensive income.
The financial position reflects the net worth of the entity at a specific point in time.
The financial position is reflected in a financial report known as a statement of financial position.
Cash flows
Without cash, no entity can survive. Therefore, the ability to generate cash will eventually determine whether the entity will be able to
meet its commitments, such as the ability to pay its employees, suppliers, to make interest payments, repay loans and make distributions
to its owners.
Users are better able to evaluate this ability to generate cash and cash equivalents if they are provided with information that focuses on
the financial position, performance, and changes in cash flow of the entity.
Users of financial information
The users (decision-makers) of financial information:
1. Investors:
the providers of capital. They are concerned with the risk involved in their investment and the return (interest or dividends) they will
receive on their investment.
They need information to decide whether they should invest (buy), hold, or withdraw (sell) shares.
2. Employees:
Employees are interested in information about the stability and profitability of the business. They also want to know whether the
entity will be able to pay remuneration and retirement benefits and whether there are any employment opportunities.
3. Lenders:
Lenders need information to determine whether their loans and interest on the loans will be paid on due dates.
4. Suppliers and other trade creditors:
These users need information that will assure them that amounts owed to them will be paid when due.
5. Customers:
Customers want to know whether the business will continue to exist, especially when they will be involved with the entity for a long
time or are dependent on it.
6. Government and their agencies:
These users are interested in the allocation of resources and therefore in the activities of the entity. They also need information to
regulate the activities of entities, determine taxation policies and use the information as a basis for national income and similar
statistics.
7. Public:
Members of the public are affected in several ways. Entities often contribute to the success of the entity
The accounting processes
As soon as transactions and events have been recognised and measured, they are recorded in the accounting records.
The design of the accounting records and accounting system is very important as the information recorded is processed in the accounting
records by collecting, classifying, sorting and summarising it into a format in which it will serve as useful information.
The cycle of the accounting process can be summarised in the figure below.
STEP 1: ENTERING TRANSACTIONS ON SOURCE DOCUMENTS
This is the evidence (proof) of authorisations and the initial recording evidence which is used to enter the relevant transaction into the
accounting book of prime entry.
The main documents used in accounting are:
1. Sales invoice
When goods are sold on credit, the seller completes a sales invoice. The seller keeps a copy and gives the original to the customer.
2. Purchases invoice
When goods are bought on credit, the supplier will issue an invoice. The suppliers keep the duplicate invoice, and the purchaser
receives the original.
3. Cash sale slips (Cash register slips)
When goods are sold for cash, either a receipt is issued, or the cash register prints a till slip.
4. Receipts
The business completes a receipt in duplicate for all the money that it receives. The duplicate is kept by the business, and the original
is issued to the customer.
5. Cheques/cheque counterfoils
Payments could be made by cheques up to the end of 2020. Banks have since been phasing out cheques due to the fraud that has
taken place regarding cheques.
The cheque counterfoil is the source document to record these payments.
6. Proof of Electronic Funds Transfer (EFT)
Payments are mostly made by EFT transfers, via the internet, from one bank account to another. When such a transaction is made the
bank can provide a proof of the transaction.
7. Bank deposit slips
When money is deposited at the bank, the business must keep a copy of the deposit slip which will be stamped by the teller at the
bank.
Information from the source documents must be entered in the accounting records via subsidiary journals. The original source
documents received and duplicate copies of those issued must be safely filed away and kept for the following reasons:
Source documents form a permanent record of events and should be easily accessible in case of enquiries.
Auditors rely on source documents to check the entries made and accounting records, therefore the documents must be available for
this purpose.
STEP 2 - 6: WILL BE EXPLAINED IN LATER WEEKS!!
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Forms of business ownership
The various forms of business are summarised below:
Sole proprietorship
A sole proprietorship is a single-owner enterprise. Its owner must be a living natural person but need not have legal capacity. There are
certain restrictions, however, for unrehabilitated insolvents.
Partnerships
A partnership is a relationship between people, arising out of an agreement. In a legal and commercial sense, "partnership" refers to an
association of two or more persons who carry on as co-owners of a business for profit.
The Companies Act, No. 71 of 2008 ensures that the regulatory framework for enterprises of all types and sizes promotes growth,
employment, innovation, stability, good governance, confidence, and international competitiveness. It provides for two categories of
companies, namely Not for Profit and Profit companies.
Not for Profit Companies
Not for Profit companies take the place of companies limited by guarantee and section 21
Not for Profit companies are characterised by the following:
They are incorporated for a “public benefit purpose”.
Income and property may not be distributed to the incorporators, members, directors, or officers of a Not-for-Profit company,
except for reasonable compensation for services rendered by them.
A minimum of three persons, called incorporators, must complete, and sign the Memorandum of Incorporation (MoI).
A minimum of three directors must be appointed.
All the company’s assets and income must be used to advance its stated objects, as set out in its MoI.
A special set of fundamental rules for Not-for-Profit companies is set out in Schedule 1 of the Companies Act, 2008.
Profit Companies
Profit companies are categorised as
a) Companies without restrictions on the transferability of their shares and that do not prohibit offers to the public, i.e. larger public
companies, and
b) Companies that do contain restrictions on the transferability of their shares and that prohibit offers to the public, i.e. smaller private
companies.
They may take one of four different forms:
A personal liability company,
A state-owned company,
A public company and
A private company.
Personal Liability Companies
A personal liability company is comparable to companies contemplated in section 53(b) of the Companies Act, 2008. Its name must end
with the word “Incorporated” or its abbreviation “Inc.”.
State-Owned Companies
State-owned companies were registered under the Companies Act, 2008 but were not recognised in that Act as requiring separate
legislative treatment
The name of a state-owned company must end with the expression “SOE Ltd.”.
Public Companies
Public companies are comparable to companies of the same status under the Companies Act, 2008 They are characterised by the
following:
Their MoI permits them to offer shares to the public but restricts, limits, or negates their right of pre-emption.
The name of a public company must end with the word “Limited” or its abbreviation, “Ltd.”.
The incorporators of a public company must consist of at least one person. The word “person” includes a juristic person, as provided
under section 1 of the Act.
A public company must have at least three directors.
Private Companies
Private companies are comparable to companies of the same status under the Companies
Act, 2008 They are characterised by the following:
They are subject to fewer disclosure and transparency requirements.
prohibited from offering its shares to the public and the transferability of its shares will be restricted, but it may have more than 50
shareholders.
The name of a private company must end with the expression “Proprietary Limited” or its abbreviation “(Pty) Ltd.”
The board of a private company must comprise at least one director, or any other minimum number as stipulated in its MoI. Each
incorporator is a first director of the company.
In a further effort to create a more flexible regime, the Bill makes exceptions for companies of which
All the shares are owned by related persons, so that there is less needing to protect minority shareholders; or
All the shareholders are directors, so that there is less needing to seek shareholder approval for certain board actions.