Definition:

Keeping Record
Recording financial information

What sort of financial information

- Movements in money
- Transactions
Economic event - Selling, Buying, Receiving Cash, Paying Cash
Between 2 or more parties

Why do need to record the financial information?

- Decision making
- Informations must be made available to users
- Economic decisions
- Having a record assists the decision making process

How do we make this information available

- Financial report
1) Special Purpose Financial report
Valuation Report, Due Dilligence report etc

2) General Purpose financial

Annual Financial Statements

Accounting the process whereby transactions are:

Measured Value on transactions

Classified
Buying/Selling/Receiving Cash/Paying Cash
- Income, Expense, OE, Liability

Recorded Double entry principle

1) Journals
2) General Ledger
3) Balanced General Ledger
4) Trial Balance
Summarised

of Transactions

What will me make available to users?

Financial reports

- special purpose financial report

Due diligence report, valuation report etc

- General use financial report

Annual Financial Statements

5 Financial reports

Statement of Profit/loss
Measure: Profitability
Record: Income and Expenses
Income - Expenses = Profit/Loss
Profit = More Income than Expenses
Loss = More Expenses than Income

Statement of Changes in Equity

Measure: Changes in the Capital Contribution made by the owners
Allocates the Profits/Losses to owners
Measure the value of the Owners Equity
Record: Capital Contribution +/- Profit/loss - Distributions/Drawings

Statement of Financial Position

Measures: Financial Position of a business:
1) Liquidity - Cash - Is there enough money to cover the business' obligations
2) Solvency - If there was no cash - is there enough resources to cover the business obligations
Records Resources = Obligations
Asset = Liabilities + Owners Equity

Statement of Cash Flows

Measures Cash flow in and out of the business

Notes and Policies

Provides information regarding:
1) Assumptions made when recording transactions
2) Accounting policies adopted
3) Provides further details
the business obligations
Assets
is a present economic resource which is controlled by the entity as a result of past events
- economic benefit to flow from the use of the resource
Broken down to:

It can be tangible, intangible or a right that will be use

1) Present economic resource produce future economic benefit
2) Controlled by the entity Control means exerting influence over, doesn’t neces
Control - enjoy the rights/rewards and risk associated

3) Result of a past event Past event is not a date, it is an event which gave con
The use of the economic resource will result in future
economic benefits to flow to the business

The resource will be used to produce future economi

4) Economic benefit could be in cash, profit, income

All four elements must be met before the resource can be identified as an asset

Just because a resource meets the definition doesn’t mean it can be recorded. Therefore we need to apply the recognition crit

1) Can place a value on the resource

2) It is probable that the resource will result in economic benefit

Liabilities

A present obligation which will result in the transfer of economic resources as a result of a past event

Broken down into

1) Present obligation Promise to do something in the future. Duty or a com
2) Transfer of economic resources/(settlement/Payment) Meeting the promise. Usually referred to as settleme
3) Past event It is not a date, it is an event in the past that gave rise

All three must be met to meet the definition

Eventhough the obligation meets the definition of a liability, doesn’t mean it can be recorded. The recognition criteria needs t

1) Can place a value on the obligation

2) Probable that there will be an outflow of resources/is there settlement?

Owners Equity

Residual value of Assets less Liabilities

Funding
 Owners - Capital (Owners have the right to profits gen
Liabilities - Loans (Creditors have not right to the profi
Funding is used to:
Purchase the resources of the Business (Resources =
OE + L = A

A - L = OE

Comprises of:
Capital Contributions = Funds invested by the owners
Distributions/Drawings = Profits that are taken out of
Net Profit (Income minus Expenses)
Income

defined as either: When do we record income?

- earned
1) Increase in assets or - when goods or services changes hands
2) Decrease in liabilities + Income increases
Goods and services changes han
That will result in an increase in Owners Equity 1) Before the receiving of cash
+ Accounts Receivable Asset
2) Receive cash at the same tim
+ Bank

Expense
When do we recorded expenses
defined as either: - incurred
- when the goods/services hav
1) Increase in liabilities or
2) Decrease in assets Expense +
= Increase in liabilities
That will result in a decrease in Owners Equity When you purchase expense on
Accounts Payable Liability (+)

= decrease in assets
Pay cash = outflow money = Ba

Upfront payment of expenses =

= Prepaid expense Asset = good
 tangible or a right that will be used to
omic benefit
ting influence over, doesn’t necessarily mean ownership
ghts/rewards and risk associated with ownership

ate, it is an event which gave control over the resource

used to produce future economic benefit.

uld be in cash, profit, income

need to apply the recognition criteria

hing in the future. Duty or a commitment

e. Usually referred to as settlement or payment
n event in the past that gave rise to the obligation

. The recognition criteria needs to be meet:

wners have the right to profits generated)
editors have not right to the profits but expect payment of the loans + interest)

ces of the Business (Resources = Assets)

s = Funds invested by the owners

ngs = Profits that are taken out of the business by the owners
minus Expenses)

we record income?

oods or services changes hands - Receive cash before delivering the goods
+ Income increases + Bank
Goods and services changes hands + Unearned income liability
1) Before the receiving of cash
+ Accounts Receivable Asset - Date of delivering the goods
2) Receive cash at the same time as providing goods
- Unearned income liability
+ Income

When do we recorded expenses?

- when the goods/services have been delivered

= Increase in liabilities
When you purchase expense on credit
Accounts Payable Liability (+)

= decrease in assets
Pay cash = outflow money = Bank account (asset) = decrease in assets

Upfront payment of expenses = no goods/services have been delivered

= Prepaid expense Asset = goods/services have delivered = decrease
Retail - business
Bought 2 delivery vehicles to deliver goods to customers
Are delivery vehicles an Asset?

Present economic resource? The vehicles are an economic resource, the vehicles will be
used to deliver goods, and this may increase the income

Is the vehicles controlled? The vehicles are owned by the business and therefore the
Business enjoys the rights, rewards and risk of ownership

therefore, the business controls the vehicles

Past event - that control to the eThe past event that gave the business control was the purchase

Will the use of the resource generate economic benefit?

The vehicles will be used to make deliveries, offering deliveries
will increase the income and profits of the business

As the definition of an asset is met, the vehicles are an asset

recoognition criteria

1) Can place a value on the transaction?

Each vehicle will have historic cost. The historic cost is the value of the vehicles.

2) Will there be an economic benefit?

The vehicles will be used for deliveries which could generate more sales

The vehicles will be used for deliveries which could generate more sales
Received as a donation a famous work of art that is priceless. No monies or similar values have changed hands

Marshaleno signs a two year gym contract. Marshaleno agrees to pay R200 pm in monthly installments
In Marschaleno FR, is this a liability?
1) Is there a present obligation?
He agrees to pay a monthly fee of R200 pm in exchange for the use of the gym.

2) Will there be an outflow of economic resources?

The R200 pm payment will be the outflow of economic resources

3) What was the past event?

The signing of the contract gave rise to the obligation

The gym contract would therefore be a liability from Marschaleno's perspective

Recognition criteria

1) Place a value on the obligation

R200 pm x 24 = R4 800

2) There will be an outflow of economic resources

Yes, Marschaleno agreed to pay R200pm for 24 months

lues have changed hands

nthly installments
Starting a business

Each business is started because it has a potential to create wealth

Creating wealth is a result of solving a problem.

To start a business, funding is required.

Sources of funding:

1) From owners
Funding from owners is referred to as Equity/Capital. Capital can be either cash or a resource
Owners have a right to the underlying profits/losses generated by a business.

2) From third parties

Funding from third parties is referred to as Liabilities. The third parties have no right to
the underlying profits/losses only expect the liability to be repaid with interest.

The funding is used to purchase resources. Resources is also known as assets

The assets are used to generate Income.
The use of the assets incurrs a cost, these costs is referred to as expenses

Income less Expenses = Profit/Loss

Profit = Income > Expenses

Loss = Income<Expenses

Types of Entities to operate a business

Non-juristic persons:

Natural persons operating a business as either:

1) Sole Proprietor

2) Partnership

Juristic person

A non-natural person given a legal identity as a result of an Act of Parliament:

3) Company
4) Close Corporations
 Inputs Process

Transactions 1) Classify transaction

- Buying/selling/Rec Cash/Pay Cash
Economic event - Asset, Income, Expense, OE, Liability
2) Value the the transaction/measure
1) External transaction 3) Record transaction
4) Summarising the transactions
- Buying (Credit/Cash)
- Selling (Credit/cash)
- Receiving Cash
- Paying Cash
- Barter transaction

Source document is proof

that an external transaction occurred

Types of documents:

- Proof of a
sale/purchase
Invoice made on credit

- Proof that Cash

Receipt was Received

- Proof that a
Cash Sale was
Cash Register roll made

- Proof that a
debtor's account
Debit Note has been reduced

- Proof that a
debtor's account
has been
Credit Note increased

2) Internal transaction
- Adjustments
 Outputs

Financial Records

Financial Statements Used by users to make economic decisions

Different types of users:
1) Statement of Profit or Loss
Measures: Profitability 1) Primary users/external users
Records: Income and Expenses Includes: Owners, potential owners
Creditors, Customers, Government etc
2) Statement of Changes in Equity
Measures: Changes in owners equity and 2) Secondary users/internal users
allocates profits and losses to the owners Management
Records: Capital Contributions, Net Profit/Losses,
Withdrawals/Distributions It is the responsibility of management to
draft the financial statements
3) Statement of Financial Position
Measures: 1) Liquidity: enough cash to pay
obligations Often Management would not be the same as the owners

2) Solvency: Enough resources to cover obligations

Records:

1) Resources = also known as Assets

2) Obligations = Owners Equity and Liabilities

 Qualitative Characteristics
As management and ownership is not the same
trust that the financial statements is important As explained in the Conceptu
Qualitative Characteristics ar
International financial Report Standards (IFRS) characteristics that enables t
is a uniform set of rules which provides this trust to meet its purpose
(GAAP = General Accepted Accounting Practices)
IFRS is set by the Accounting Standards board 2 Types:
which works under the International Federation of Accountants
Fundamental Qualitative Cha
Conceptual Frame work sets the foundation for what accounting is a) information is relevant
- Information provided has a
It sets the purpose of Financial Accounting: - Information provided is ma
Provide useful information about a business to make decisions

same as the owners Sets the format for Financial Statements b) information is faithfully pr

Defines the various elements of Financial Statements, Information provided is:

these being: Assets, Owners Equity, Liabilities, Income, Expenses - Complete

- Neutral

- Free from error

Enhancing Qualitative Chara

information provided is:
- Comparable
- Verifiable
- Timely
- Understandible
Qualitative Characteristics Underlying Assertion

As explained in the Conceptual Framework If the Financial Statements contain the Qualitative characteris
Qualitative Characteristics are inherent then the information can possibly be trusted
characteristics that enables the financial statements
to meet its purpose As a result there are additional assumptions one can make
without testing their existence. This is refered to as an asserti

1) Entity Principle
Fundamental Qualitative Characteristics Only the transactions relating to the business and that busine
a) information is relevant reported.
- Information provided has a predictive or confirmatory value Private transactions/the owners transactions are not recorde
- Information provided is material No other business' transactions are recorded

b) information is faithfully presented 2) The Cost Principle

the business purchases assets to produce

revenue/income. The business has therefore
Information provided is: recorded the correct cost of the asset

- Complete

3) the objectivity Principle

Information in the financial statements

- Free from error are presented free from biase

Enhancing Qualitative Characteristics 4) realization principle

information provided is: Revenue is recognised when earned
- Comparable
- Verifiable 5) Matching Principle
When revenue is earned, costs associated
- Understandible is offset against the revenue.
Expenses are recorded when incurred
6) Double entry principle
Each transaction has at least two entries
For every debit entry there should be
an equal corresponding credit

7) Going concern principle

Regardless what happens to the owners
and management, the business has the ability to
carryon

8) Accrual Principle
Transaction are recorded when they are
entered into and not when cash is received or paid

Cash basis of accounting requires transactions to be

recorded when cash is either received or paid.

Cash basis of accounting ignores credit and barter

transactions and therefore not a good measure
of profitability

Income - realization principle

- Income is earned
- Only record income in FR when it is earned
- What is earned?
1) Sale takes place
2) When the ownership of goods/services changes hands b
When the seller delivers the goods
- an obligation is created that expects the buyer to pay a

- Expenses are incurred

- Only record expenses when they are incurred
- Incurred?
1) Purchase (buying) takes place
2) When the ownership of goods/services changes hands be
When the buyer of the goods/services takes delivery
- an obligation is created that expects the buyer to pay at
tain the Qualitative characteristics
bly be trusted

assumptions one can make

This is refered to as an assertion

o the business and that business is

s transactions are not recorded

are recorded

o produce
has therefore
e asset
 has the ability to

h is received or paid

es transactions to be
ceived or paid.

s credit and barter

a good measure

Sold R3000 worth of goods.

en it is earned goods were delivered on the same day as cash is received

Is income earned?
ods/services changes hands between the seller and the buyer Yes, income earned as the goods have been delivered

hat expects the buyer to pay at a later date Sold R3000 worth of goods.
goods were delivered on 15 February 2022, cash is received on 1 Februa

hey are incurred When is income earned?

15 February - ? When the goods were delivered

ods/services changes hands between the buyer and the seller Income is earned when the goods are delivered
ds/services takes delivery
at expects the buyer to pay at a later date Sold R3000 worth of goods.
goods were delivered on 1 February 2022, cash is received on 15 Februa

When is income earned?

Income is earned on 1 February when the goods are delivered
cash is received

en delivered

2, cash is received on 1 February 2022

cash is received on 15 February 2022

goods are delivered