Accounting

• Conceptual Framework


  Sets out the concepts that underlie the preparation and presentation of financial statements for external users
• Accounting is based on laws, standards, assumptions and certain qualitative characteristics of financial information
• Business or Separate Entity Concept

  The financial affairs of the business or the owners are separate and distinct from the financial affairs of the business unit
• Legal Entity Concept


  The business entity is formed by a process of law. It can sue or be sued
• Measurement or Monetary Concept

  All transactions in a business must be recorded in money terms
• Historical Cost Concept


  Business transactions are recorded in terms of their original cost at the time the transaction occurred
• Current Cost Accounting Concept

  Assets and expenses are recorded in the books of accounts at the prevailing or current market price
• Going Concern Concept


  The business is going to continue its operations indefinitely and is not likely to be liquidated in the foreseeable future
• Accounting Period Concept


  The life of the business is divided into arbitrary time periods
• Realisation Concept


  The profit on any given transaction is included in the account of the period when the profit is realised
• Matching Concept


  In an accounting period, costs are matched with related income
• Accrual Concept


  Revenues and expenses are recognised and included in the profit and loss account as they are accrued or earned or incurred and not as they are paid or received
• Conservatism or Prudence Concept


  Revenues and profits are not anticipated but they are recognised by inclusion in the profit and loss account only when realised in the form of cash
• Consistency Concept


  There is consistency of accounting treatment of like items within each accounting period and from one period to another
• Materiality Concept


  Only relevant information must be presented to the very wide range of users of accounting data
• Dual Aspect or Double Entry Concept


  For all transactions, every debit in an account should match equally by corresponding credit(s) entries in the contra account
• Disclosure Concept


  All relevant information should be disclosed in the financial statements
• Accounting standards are principles that guide and standardise accounting practices
• The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) agreed in a joint programme to have harmonised accounting standards
• International Financial Reporting Standards (IFRS)


  A single set of accounting standards, developed and maintained by IASB with the intention of it being applied globally. It enables the end users of financial statements to compare the financial performance of publicly listed companies internationally
• Fiji adopted the International Financial Reporting Standards (IFRS) since 2007. Prior to the adaptation, Fiji was following the Fiji Accounting Standards
• It is mandatory for the publicly listed companies in Fiji to follow the IFRS accounting standards while preparing financial reports to have a fair and transparent reporting
• Fiji Institute of Accountants (FIA)


  A legal and professional body that regulates the accounting profession and members practicing in Fiji
• Other Functions of FIA

  • Regulates the accounting profession in Fiji
  • Registers, deregisters and trains accountants
  • Foster public confidence in the accounting profession by upholding the public interest
  • Determine the qualification of persons for admission to membership
  • Monitor and enforce compliance with accounting standards
• Partnership


  The relation which exists between persons carrying on a business in common view to make profit
• Reasons for sole traders to form partnership

  • Improves financial stability
  • Rise in cash flow leading to expansion and purchase of assets
  • Combining two or more existing businesses reduces competition and increases market share
  • Sharing risk of decision making
• Advantages of partnership


  • More capital is contributed than sole trader business
  • Business run by two or more people will bring more specialised skills
  • Easy to manage the business in case of absence of partners due to sickness or holidays
  • It is possible to share workloads between the partners
  • It is less expensive to form than a company
  • The business is not liable to pay tax on its profit. Partners are taxed personally
• Disadvantages of partnership


  • Partnership has limited life, i.e. it is dissolved on the death of a partner
  • The business has unlimited liability. As the partnership is not a separate legal entity, the owners are liable for partnership debts. In the event of bankruptcy of the partnership, the partner's private assets can be used to settle debts
  • Conflicts and disagreements can arise between the partners
  • Profits are shared between the partners unlike sole trader
• Partnership Act


  A legal document passed by the parliament that sets out the rules, obligations and duties of partners
• Rules in Partnership Act if no partnership agreement

  • Partners will share equally in profits and losses of the business
  • A partner is not entitled to remuneration for working in the business
  • All partners must consent before a new partner is introduced
  • A majority decision by partners is required on ordinary business matters
  • Partners are entitled to interest on advances (other than capital) to the partnership
  • Mutual agency exists, ie. each partner can act on behalf of the firm in normal business transactions
  • On the death of the partner the partnership is dissolved
  • A partner is not entitled to interest on capital subscribed to the partnership
  • All partners may take part in the management of the partnership
• Partnership Agreement


  A written agreement drawn by the partners themselves setting out their rights, liabilities and duties
• Clauses in Partnership Agreement

  • Names of partners
  • Name of firm
  • Objectives of the partnership
  • Rights, duties and liabilities of partners
  • Capital introduced by each partner
  • How profits and losses are to be divided
  • Whether drawings, salaries to partners, interest on drawings, interest on capital and interest on advances are to be allowed
  • Voting and decision making procedures to be followed
  • Procedures to be followed on death or retirement of partners
• Partnership formation


  Amalgamation/Merger of two or more partnership firms to form a new partnership firm, carrying on the same type of business
• Types of partnership formation

  1. Partners contributing cash and personal assets

  2. Partners contributing cash

  3. Partners contributing skills

  4. Combining two or more existing businesses to form partnership

  5. Two individuals coming together to form a partnership business
• Accounting entries for formation of Vinod and Viliane's business

  1. Capital-Vinod (To record Vinod's capital contribution)

  2. Cash (To record Vinod's cash contribution)

  3. Motor Vehicle (To record Vinod's motor vehicle contribution)

  4. Building (To record Vinod's building contribution)

  5. Capital-Viliane (To record Viliane's capital contribution)
• Statement of Financial Position

  • Shows the financial position of the partnership business
• Revaluation of Assets


  Assets are generally taken over at fair sale or market value by the partners, not the book values
• Accounts Receivable and Liabilities are recorded at original cost and not revalued</b>
• Goodwill


  It is the future benefits from those assets that are not capable of being identified and specifically recorded in the books of account or difference between agreed value and fair value
• Accounting entries for formation of Makeli and Mele Enterprises

  1. Capital-Makeli (To record Makeli's capital contribution)

  2. Cash (To record Makeli's cash contribution)

  3. Accounts Receivable (To record Makeli's accounts receivable)

  4. Inventories (To record Makeli's inventories)

  5. Premises (To record Makeli's premises)

  6. Plant (To record Makeli's plant)

  7. Goodwill (To record goodwill arising on formation)