Pratiksha Ranchod

Introduction to Accounting In the 15 th century Luca Pacioli developed the 1 st method of recording business transactions. Accounting is a language used to record financial transactions. Users of financial information

Users of Financial Information Financial institutions Owners Management Employees Suppliers Investors Government Community Customers

Uses of accounting information Financial condition of the business Profit or loss Departmental performance Which activities or products made profits Make or buy? Cost of production Impact of existing and new policies What changes should be made

Uses of accounting information Increased volume of transactions ◦Accounting records eliminate the need to remember all the transactions Enables business to compare results Taxation authorities are able to rely on the information prepared Proper record keeping  good evidence Financial records  basis for negotiations

Generally Accepted Accounting Practice GAAP – framework of accounting standards, rules and procedures IFRS – International Financial Reporting Standards – used to be IAS APB – Accounting Practices Board – official accounting standard setter in South Africa

The Balance Sheet Assume we bought a house (property) with a cost of R 750,000 We obtained a home loan to finance the purchase of the property for R 500,000 How much did we have to contribute towards the purchase of this property?

The Balance Sheet The Balance Sheet therefore represents  What we OWN  What we OWE  Owner  Third Parties

Accounting Equation What we

Accounting Equation What we Assets =Owner’s Equity + Liabilities

Accounting Equation What we Assets =Owner’s Equity + Liabilities R 750,000 = R 250,000 + R 500,000

Accounting Equation Assets =Owner’s Equity + Liabilities Owner’s Equity = Assets - Liabilities Liabilities = Assets – Owner’s Equity

Introduction to Financial Statements There are three basic financial statements which are important to understand how a business is performing. ◦Statement of Financial Position, ◦Statement of Comprehensive Income

GAAP Principles The business entity principle The continuing “going” concern concept The materiality principle The principle of prudence The objectivity principle The time period concept

GAAP Principles The revenue recognition convention The matching principle The cost principle The consistency principle The full disclosure principle

PrinciplesDefinition 1Business entityAUsually record income when invoice is issued 2Continuing concern BOutstanding lawsuits, disputes, pending mergers, etc. should be included in the notes to the financial statements. 3MaterialityCThe way/method in which something has been measured, has remained the same from one period to the next. 4Principle of Prudence DCost of sales relating to sales it helped to generate, must be recorded in the same period as such sales 5Objectivity Principle EAccountant may leave out an adjustment in the books if it will make no significant difference to the stakeholders’ interpretation of the financial results. 6Revenue Recognition FVehicles purchased by a business must be brought into the books at the actual cost price – even if the asset was bought at a price much lower than market value. 7Time period concept GAnother accountant would have arrived at more or less the same financial result. 8Matching Principle HThe assumption is made that the business will continue to operate indefinitely. 9Cost PrincipleIVehicle registered in sole trader’s personal name should not be listed in the books of the business 10ConsistencyJFinancial results should always be subjective KRather understate the value of assets & income, and overstate liabilities & expenses LFinancial year could be different from calendar year MThe assumption is made that the business will not be sold in the foreseeable future

Business Forms Legal personality Starting procedures Obtaining capital Ownership & management Distribution of profits Income tax Sole Trader / Proprietor

Financial Accounting vs Management Accounting Financial accountingManagement accounting Reports to stakeholders outside the organisation: Owners, lenders, SARS, regulators Reports to stakeholders inside the organisation – planning, controlling, directing, motivation & performance evaluation Emphasis is on summaries of financial consequences of past events Emphasis is on decisions affecting the future of the organisation Data must be objective & verifiable Data must be relevant and flexible Precision of information is requiredTimeliness of information is required Summarised for the entire orgDetailed segment reporting MUST follow GAAP/IFRS/IASNot necessary MUST report using AFSNo specific requirements

Management Accounting MGT Planning Organising Leading Controlling

Transactions take place Source Documents summarise the transactions The Trial Balance summaries the general ledger Journals summarise the source documents The general ledger summarises the journals