Accounting 1
LECTURER:
Business acumen
Business acumen is the knowledge employees need to differentiate their
company from competitors and provide value to customers. Employees with
business acumen understand:
- How the organisation operates, creates value, and gains a competitive
advantage.
- The business strategy, market, customers, and financial drivers of profit.
Business acumen is the ability to make quick, correct, and strategic
decisions. Requires evaluating business models based on the use of
six capitals to create value over time.
Understanding Business Jargon
Knowing business language helps interpret and communicate economic
events. Key terms include economy, market, business, and risk. Learning
methods include the use of textbooks, dictionaries, or course notes. Explore
business websites or research via Google Scholar. Consult professionals or
business owners.
Why Use Multiple Sources?
Different sources offer varied perspectives on terms.
Cross-referencing ensures accuracy and deeper understanding.
Key Business Terms Defined
Economy: A system allocating scarce resources to produce goods/services to
meet consumer needs. Goals include maximise benefits and minimise costs.
Market: A platform for transactions between buyers and sellers. Share prices
are determined by supply, demand, and perceptions.
Business: An organisation using resources to produce goods/services, aiming
to generate surplus after costs.
Risk: The likelihood of an action leading to unexpected, undesirable
outcomes.
The business or economic
environment
Before you develop an understanding of accounting, it is necessary to
understand the world of business in which accounting is used. Once you
understand this environment better, the need for an accounting system, the
information required by the accounting system and the important role that
accounting plays in a business will become clearer.
The purpose of an economic
system
- Within society, individuals, businesses, and governments desire a wide range of goods and
services to meet their needs and wants. However, the resources needed to fulfill these desires
are limited, creating a fundamental challenge. Humanity’s unlimited needs and wants contrast
sharply with the finite availability of resources, requiring thoughtful decision-making about how
resources are allocated.
- When resources are abundant, such as with an infinite supply of money, people can satisfy all
their desires without constraints. In contrast, when resources are limited, such as having only
R10 000 per month to spend, people must prioritize their needs and wants, adjusting their
consumption patterns accordingly. This highlights how scarcity influences choices and behavior
in society.
- Economics is grounded in two key principles: people have unlimited wants, and there are limited
resources to meet these wants. This fundamental imbalance drives the need for resource
allocation and decision-making, shaping economic activities and interactions at all levels.
The purpose of an economic
system
The purpose of an economic
system
The financial system
In an economic system, goods and services are exchanged for money, and
some of this money is saved for future use. This saved money represents an
excess supply for its holders, known as savers. Savers include businesses that
generate more revenue than they incur in costs and individuals who save or
inherit money, creating a surplus of cash beyond their immediate needs.
Conversely, borrowers are those who lack sufficient funds to meet their needs,
such as businesses seeking to expand operations, individuals buying homes
or goods, and governments funding infrastructure or social benefits. Surplus
money from savers is often deposited with financial institutions, where it
earns interest.
The financial system
These institutions act as intermediaries, pooling the excess funds from savers
and lending them to borrowers. A portion of the deposits is kept as a reserve
to meet savers’ withdrawal demands, while the rest is either loaned out or
invested in income-generating assets. Borrowers use these funds to fulfill their
financial needs and are required to pay interest on the borrowed amounts for
the time they remain outstanding. This process creates a cycle where savers
earn returns on their surplus money, and borrowers gain access to the funds
they need to meet their goals, driving economic activity and growth.
The financial system
The financial system - videos
Where does business occur?
Economic and financial systems involve participants known as economic
decision-makers, who use resources to produce or consume goods and
services. These participants include individuals, businesses, and
governments. The economy is divided into sectors based on the roles of these
participants: the private sector, comprising households (individuals) and
businesses, and the public sector, which includes various levels of
government, such as national or local (municipal) entities. Households are the
primary suppliers of resources to the economy. In exchange for their
contributions, they earn income in forms such as wages, rent, interest,
salaries, or dividends. These resources are essential for businesses to operate
and produce goods and services that satisfy consumer demands.
Where does business occur?
Businesses are established by individuals to supply goods and services,
employing resources to generate a surplus through their operations. This
surplus can be reinvested to grow the business or distributed to the owners.
The private sector includes a diverse range of businesses, which can be
classified by their activities, industry, size, ownership structure, or legal form,
offering a wide variety of goods and services to consumers.
Business classifications
Refer to the activity on page 7 of the prescribed textbook.
Business classification by size
Businesses are classified as micro, small, medium, or large based on:
1. Total full-time equivalent of paid employees.
2. Total annual turnover (sales income).
Classification thresholds vary by industry.
Business classification by size
The Revised Schedule 1 of the National Definition of Small Enterprise in South Africa
provides criteria for businesses in industries such as:
Agriculture Retail and Motor Trade
Mining and Quarrying Wholesale, Catering, and
Accommodation
Manufacturing
Transport, Storage, and
Electricity,
Communications
Gas, and Water
Finance and Business Services
Construction
Community, Social, and
Personal Services
Business classification by size
Employee Criteria (applicable to all industries):
Micro: 0–10 employees
Small: 11–50 employees
Medium: 51–250 employees
Ownership structure
Businesses in the private sector can operate with varying levels of formality
and regulation. Less formal structures include sole traders and partnerships,
while more formal and regulated entities include private and public
companies. The choice of ownership form depends on factors such as the
amount of funding needed and the owners' preference for limited liability.
Limited liability protects owners' personal assets from being at risk if the
business incurs debt or goes bankrupt.
A sole trader is an example of an informal structure where the business is not
considered a separate legal entity from the owner. Legally, the owner and the
business are the same, meaning the owner is personally liable for business
debts. Sole traders are only required to register with the South African
Revenue Service (SARS) for tax purposes, making it a simpler and less
regulated business form.
The parts
that make
up the
whole (of
the
business)
Setting up a business
When starting a business, several key factors need to be considered:
Location: Deciding where the business operations will be based is essential for accessibility, cost, and market
reach.
Capital Requirement: It's crucial to determine the amount of money needed to start the business and cover
daily operating costs.
Sources of Finance: Identifying where the initial capital will come from, such as savings, loans, or investors, is
important for funding the business.
Capital Structure: Deciding how much capital will be borrowed versus how much the owner(s) will contribute
determines the business's financial foundation.
Staff: Estimating the number of employees required and the skills they need helps in planning the workforce.
Legal Requirements: Businesses must fulfill legal obligations, including registering with relevant authorities
like the Registrar of Companies, the labour department, and SARS, especially if it's a company.
Setting up a business
When starting a business, several key factors need to be considered:
Location: Deciding where the business operations will be based is essential for accessibility, cost, and market
reach.
Capital Requirement: It's crucial to determine the amount of money needed to start the business and cover
daily operating costs.
Sources of Finance: Identifying where the initial capital will come from, such as savings, loans, or investors, is
important for funding the business.
Capital Structure: Deciding how much capital will be borrowed versus how much the owner(s) will contribute
determines the business's financial foundation.
Staff: Estimating the number of employees required and the skills they need helps in planning the workforce.
Legal Requirements: Businesses must fulfill legal obligations, including registering with relevant authorities
like the Registrar of Companies, the labour department, and SARS, especially if it's a company.
Integrated thinking
Integrated thinking is a decision-making approach that considers all relevant
information, using a broad, interconnected set of data that is more forward-
looking than traditional financial analysis, which relies on historical financial
data. It involves understanding the factors that drive value creation within
the organization, including the business model, inputs, outcomes, and the
external environment. By considering both internal and external factors,
integrated thinking aims to provide a holistic view of value creation.
Integrated thinking
To apply integrated thinking, businesses must understand the inputs that drive
their business model, including the six types of capital (natural, human, social,
manufactured, intellectual, and financial). It is important to consider all relevant
inputs, even those not owned by the organization, such as reputational factors in
the supply chain, as they can impact value creation. Integrated thinking also
involves evaluating the outcomes or effects of the business model, assessing
how much value has been created or destroyed through the use of these capitals.
Furthermore, integrated thinking helps identify risks that could prevent value
creation and highlights opportunities to enhance value. By understanding these
factors, businesses can make informed decisions that optimize value creation in
the short, medium, and long term. This approach allows businesses to consider
all aspects that influence their success and sustainability.
The six capitals
Organizations depend on various forms of capital to achieve success, and the
Integrated Thinking Framework identifies six key capitals: financial,
manufactured, intellectual, human, social and relationship, and natural.
These capitals represent stocks of value that can be increased, decreased, or
transformed through the organization’s activities and outputs..
The six capitals
Financial capital refers to the funding available for producing goods or services.
Manufactured capital encompasses physical assets used in business operations, such as
buildings or machinery.
Intellectual capital involves intangible assets like knowledge and intellectual property.
Human capital pertains to the skills, competencies, and experience of employees.
Social and relationship capital reflects the business’s connections with stakeholders.
Natural capital includes the environmental resources the business relies on.
It is important to understand the distinction between human and intellectual capital. For
example, an employee's coding skills (human capital) are applied to develop a new software
program (intellectual capital), highlighting how human expertise can transform into valuable
intangible assets for the business
What is accounting?
Once a business is operational, various events occur that have financial implications,
known as transactions. Examples of such transactions include buying goods from
suppliers, paying employees, selling goods to customers, delivering services to clients,
and paying for utilities like rates, water, and telephone bills. By recording these
transactions, the business owner can assess the financial performance of the business.
The process of presenting financial information in a way that aids economic decision-
making is called reporting. Accounting serves as a system for communicating the
financial effects of business decisions, which involves reporting on recorded
transactions. These decisions result in the creation of products or services, and
accounting measures their financial impact. Accounting ensures that the financial
outcomes of business decisions are transmitted through financial reports to
stakeholders. These stakeholders use the financial information to make informed
economic decisions, as they have a vested interest in understanding how business
activities affect the financial health of the organization.
Why is it necessary to create a
record of transactions in a
business?
Records of transactions and reports of the results of business operations
provide information, which is useful for making economic decisions.
Who are the economic decision
makers?
Business Owners/Shareholders: The business owner invests capital in the business and expects a
return on investment (ROI). If alternative investments offer higher returns, they may consider
switching. In the case of a new business, owners may prioritize long-term growth and profitability
over short-term gains.
Creditors and Lenders: Creditors evaluate the business's creditworthiness before lending money.
They assess the likelihood of the business being able to repay loans. If the business defaults,
creditors can claim business assets to recover their funds, particularly if the business is not a
separate legal entity.
Management: Managers, when different from owners, need financial information to make
decisions that ensure sustainable profit generation. They are responsible for running the business
and making choices that benefit the owners.
Employees: Employees contribute skills and knowledge to the business and are compensated for
their labor. They need to assess whether their pay is adequate and whether the business can
continue to afford their employment.
Who are the economic decision
makers?
SARS (Government): The government monitors the financial activities of
businesses and individuals for tax purposes. Tax rates depend on income
levels, and businesses are taxed separately. The government assesses
financial activities to determine the amount of tax owed.
Financial Analysts, Investors, and Financial Institutions: These stakeholders
rely on financial reports to decide whether to retain or withdraw investments.
Financial analysts evaluate business operations and forecast future
performance. Financial institutions may invest based on anticipated returns.
Other Stakeholders: These may include the local community and the
environment, who are affected by the business's operations and may have an
interest in its financial and ethical practices.
What information helps people
make economic decisions?
Business Owners/Shareholders: Owners/shareholders need information on the
business’s profitability, the value of resources controlled, outstanding debts, cash
balance, expenditure, and cash flow generation by various activities.
Managers: Managers require data on resource purchases, profitability, borrowing
costs, future borrowing needs, future resource purchases, operational costs, and
the timing of cash flows to ensure efficient business operation.
Employees: Employees need to know if the business is profitable, the total
expenses, the percentage spent on wages, and the available cash in the business.
Creditors and Lenders: Creditors need information on the business's profitability,
existing loan repayments, interest expenses, and available funds after covering
operational costs.
What information helps people
make economic decisions?
SARS (Government): The government requires information on the income
earned by the business and the related expenses incurred to generate that
income for taxation purposes.
Financial Analysts, Investors, Financial Advisors, and Financial Institutions:
These stakeholders need data on cash flows, profitability, and the total value
of resources controlled by the business to assess its financial health and
potential for returns.
Other Stakeholders: These may include the local community and
environmental groups who need information about the business's impact on
social and environmental factors.