STUDY UNIT 1: THE NATURE AND FUNCTION OF ACCOUNTING
DEFINITION: • • • Accounting can be defined as the orderly & systematic recording of the monetary values of financial transactions of a business The reporting of results Providing financial information as a basis for decision making
3 main processes define the accounting process: 1. IDENTIFYING: Selecting evidence of economic / financial activity (transactions)
2. RECORDING transactions to provide a permanent history of the businesses financial activities 3. COMMUNICATING the recorded information to interested users by use of accounting reports IE Financial Statements
The Nature Of Accounting: Accounting is used to convey the financial situation of an enterprise. It is therefore essential that the recipient of such information is able to understand it. Both words and figures are used to convey this information. “Accounting is a language which is used to convey financial information to users”
Forms Of Ownership: 1. 2. 3. 4. 5. Sole Trader / Proprietor Close Corporation Company Partnership Non – profit Organizations
Users of Financial Information: Financial information is required / used for analysis by: 1. INVESTORS: The Shareholders with a Financial Interest in the business 2. CREDITORS: The lenders of money, merchandise and services also have a Financial Interest in the business 3. EMPLOYEES: Regarding job security and wage negotiations and predictions for future employment 4. GOVERNMENT: Regarding taxes, and also for statistical purposes. Also used as an indication for MacroEconomic planning 5. MANAGEMENT: In order to plan and set new goals for future economic growth
FIELDS OF ACCOUNTING: Financial Accounting VS Management Accounting • Provides financial information for specific purposes • Used by management for decision making • Used to assist management reach financial goals
• Recording transactions and preparing financial statements regarding the entity as a whole • GAAP (Generally Accepted Accounting Practices) standards ensure comparability of financial statements between businesses
STUDY UNIT 2: THE NATURE OF ACCOUNTING THEORY p.13
ACCOUNTING PRINCIPLES: 1. Accrual Principle: (WHEN?) The transaction must be recorded in the financial period it occurs, whether or not the cash has been received or paid 2. Consistency: (SAME) Once a method has been chosen it must be maintained. If said policy is changed, this must be reflected in the financial statements of the business 3. Prudence: (MODERATION) When there is uncertainty about the value of an element of event, use the effect that has the most Unfavorable effect on the business 4. Materiality: (SEPARATE MATERIAL TRANSACTIONS) All material transactions should be recorded separately in the financial statements. Immaterial transactions must be aggregated. (Material means substantial / of relatively large importance.) IE: Buying a building = Material Transaction Buying a stapler = Immaterial Transaction 5. Matching: This refers to the Double Entry system Expenses that create an income (IE – buying goods for resale), must be recorded in the same financial period. 6. Realisations: An income / expense / transaction, should only be brought into account once it is relatively certain that that the collectability / payability of that transaction is certain.
ACCOUNTING POLICY & DISCLOSURE THEREOF: A set of decisions that determine how the enterprise will treat the same type of transactions to achieve consistency, which has to be disclosed in the financial statements. EG: The enterprise needs to disclose on which basis it deals with the depreciation of property and equipment etc.
GENERALLY ACCEPTED ACCOUNTING PRACTICE (GAAP) This is a foundation that acts as a general framework to encompass accounting concepts, principles, methods and procedures.
According to GAAP there are two main statements: 1. The Accrual Basis* 2. The Going Concern * The four...