Accounting

• Accounting

  Identifying, measuring, recording, reporting, and interpreting financial information
• Purpose of accounting


  • To provide financial information regarding the economic activities of an entity to the users of financial statements in order for them to make informed business decisions
• Financial results


  • Financial position (shown in the Statement of Financial Position)
  • Financial performance (shown in the Statement of Profit and Loss)
  • Financial period (the period between the measurement of one financial position and the next)
• Users of financial statements

  • Controlling Interests / Owners (Shareholders)
  • Investors
  • Creditors
  • Customers
  • Potential Employees/ Trade Unions
  • The community (reliant on businesses for donations)
  • State Institutions
• Domains of accounting


  • Financial Accounting (External users)
  • Management Accounting (Internal users)
• Financial Accounting


  The process of recording financial information and reporting that information to users, most of whom are external to the entity
• Management Accounting


  The process of reporting financial information to internal users, specifically the entity's management
• Information required by management

  • Relative product profitability
  • Potential market expansion
  • Product performance evaluation
  • Area comparative performance evaluation
  • Alternative suppliers / costs analysis
  • Relative success of different marketing strategies
  • Analysis of business risks related to operating activities of different divisions
• Financial Management


  An analysis of the financial risks associated with a specific business entity, and analysing the financial operations of a company in order to have a deeper understanding of the existing and potential investment decisions and finance decisions
• Differences between Financial Accounting and Management Accounting

  • Users
  • Report format
  • Types of reports
  • Detail of reports
  • Frequency
  • Orientation
  • Type of information
• Types of businesses


  • Sole Proprietor
  • Partnership
  • Close Corporation
  • Private Company
  • Public Interest Company
  • Non-Profit Entities
• Sole Proprietor


  One owner, capital supplied by owner, no legal formalities, profits taxed in hands of owner, no separate legal entity
• Advantages of Sole Proprietor

  • Independence, owner directly involved, decisions taken quickly, adaptable to change, able to take advantage easily / spot the gap
• Limitations of Sole Proprietor

  • Limited access to capital thwarting growth, owner personally liable, skills / versatility, lack of continuity
• Partnership


  Legal structure / agreement, capital supplied by partners, limited to maximum of 20 partners, profits taxed in hands of partners, no separate legal entity
• Advantages of Partnership


  • New partners bring in additional capital and ideas, partners specialize in different areas, increased capital and division of labour
• Limitations of Partnership


  • Expansion / growth, partners jointly and severally liable, profits taxed in hands of partners, limited continuity
• Close Corporation


  Separate legal entity / juristic person incorporated i.t.o the Close Corporations Act, capital supplied by members, limited to maximum of 10 members (mostly natural persons), profits taxed in CC at company tax rate
• Advantages of Close Corporation

  • Registration simple and relatively affordable, not subject to legal requirements as contained in Companies Act, increased continuity, income distributed to members exempt from normal income tax, more access to capital, liability of debts limited, easy and inexpensive to change Founding Statement, management responsibility of members, member's interest not proportional to capital contribution, can acquire shares in a Company
• Limitations of Close Corporation

  • Maximum membership of 10 may hamper growth, members can be held personally liable, banks may require audited financial statements, all members must agree to dispose of a member's interest, bound by actions of each member, cannot be part of a group structure, certain major decisions require 75% membership, taxed at company tax rate
• Private Company


  Formed under the Companies Act, distinguish between 'profit companies' and 'non-profit companies', (Pty) Ltd Companies between 1 and 50 shareholders, separate legal entity / juristic person, shareholders enjoy limited liability, capital supplied by members / shareholders, shares not traded publically, shares not state-owned
• Close Corporation


  A type of business entity that has certain limitations and is taxed as a company
• Limitations of a Close Corporation

  • Certain major decisions concerning the Close Corporation have to be made by members who hold at least a 75% membership of the entity
  • A Close Corporation is taxed as if it were a Company. This is significantly higher than a personal tax rate (in most cases)
• Private Company


  A company formed under the Companies Act (61 of 1973) that is distinguished between 'profit companies' and 'non-profit companies'
• Private Company


  • (Pty) Ltd Companies between 1 and 50 shareholders
  • Separate legal entity / juristic person
  • Shareholders enjoy limited liability
  • Capital supplied by members / shareholders
  • Shares not traded publically
  • Shares not state-owned
• Private Company Profits


  Taxed in company at company tax rate (28%)
• Private Company


  • Has suffix (Proprietary) Limited = (Pty) Ltd
  • Managed by an elected board of directors headed by a CEO
  • Enjoys perpetual succession, meaning it may continue to exist irrespective of what happens to its shareholders
• Advantages of a Private Company

  • Relative ease of raising capital
  • Shareholders do not need to be directly involved in management of business
  • Separate legal entity and limited liability, subject to exceptions
  • Transfer of ownership in a public company is simple
  • Voting rights in (Pty) Ltd Company regulated by Memorandum of Incorporation
  • Not required to file AFS's with CIPC
• Limitations of a Private Company

  • Many formalities to comply with i.t.o of the provisions of the Companies Act
  • Prohibited from offering its shares to the public since it is not be listed on JSE the transfer of its shares is restricted
  • Subject to a constant rate of tax, irrespective of level of income
  • Double taxation applies: Normal Company tax on profits, thereafter shareholders are taxes on their dividends
• Accounting and disclosure requirements for a Private Company

  • AFS's must be prepared annually
  • AFS's must be audited by a member of the Public Accountants and Auditors Board annually
  • AFS's must comply with international accounting standards
• Public Company


  A company that is a separate legal entity / juristic person, with capital supplied by members / shareholders, where shares may be traded publically and are not state-owned, and profits are taxed in the company at the company tax rate (28%)
• Advantages of a Public Company

  • Separate Legal Entity
  • Listed on the Johannesburg Securities Exchange (JSE)
  • Management report to shareholders
  • Must comply fully with IFRS
  • Audit is required, increased credibility
  • Increased continuity and flexibility as shares may be sold privately or publically
  • Perpetual succession
• Limitations of a Public Company

  • Audit requirements lead to high audit fees
  • Large number of shareholders make decisions more cumbersome
• Conceptual Framework


  Established to provide financial information about the reporting entity which is useful to existing and potential investors, lenders and other creditors
• Reasons the Conceptual Framework exists

  • Limit the differences and diversity between financial statements of different entities
  • Eliminate undesirable alternatives
  • Avoid being too strict
  • Achieve faithful representation
• Components of the Financial Statements

  • Statement of financial position
  • Statement of Profit and Loss and other Comprehensive Income
  • Statement of changes in equity
  • Explanatory Notes
  • Statement of Cash Flow (not studied in this course)
• Asset


  A resource controlled by the entity as a result of a past event, from which future economic benefits are expected to flow to the entity
• Liability


  A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits
• Equity


  The residual interest in the assets of the entity after deducting all its liabilities
• Income


  Increases in economic benefits, in form of inflows or increases in assets, or outflows or decreases in liabilities, which result in an increase in equity other than from contributions from equity participants