Accounting Amd Business Theory Flashcards
What is the purpose of accounting
Useful for ecos decisions
Serves as a way of communication
Who are the users of the financial info generated by accounting
Owners Creditors Management Auditors- establish if the firm is a going concern Academics and analysts - investment opportunity Employees Government Trade unions Environmentalists Asset managers Customers
How is acc knowledge usually made available
Periodic financial statements
Explain the difference between internal and external statements
Internal - prepared for internal users only - management. Used to assist management in achieving their goals and to carry out responsibilities - management accounting - used to make internal bus decisions
External - used by the pther previously mentioned users - they don’t show intimate business details and they aren’t customised - external bus decisions
What is the input of the fin states
Daily monetary transactions recorded on source documents between the entity nd external parties
Objective of the fin states
Useful fin info
Provide information on Corp social responsibility and corporate governance
Portray past events
Specialised journals
GJ GL TV adjustments Annual fin states
What is an accounting for financial entity
Involved in using scarce ecos recourses to achieve a purpose - decrease input and increase output
Has an identity of its own
Of interest to one or more individuals for decision making
Manufacturing concern vs retail conxern
Make products
Buy and sell a product or service
How to classify organisations
Non business organisations - not for profit
Business organisations - for profit
What is a sole trader?
One natural person in charge of business
Advantages of sole trader
Easy to form Finance from owners or bank Tax concessions No perpetual succession Pay as u earn, - register with sars for helpful things
Disadvantages of sole trader
Limited growth
Owner is personally liable for debts
Doesn’t require audit
What is a partnership?
2-20 people
Advantage of partnership
Easy to form
Not subjected to legal requirements with public and private companies
More capital in the form of assets and skills than sole trader
Regulated by legal agreements between partners
Doesn’t require audit
disadvantage of partnership
- limited to 20 natural persons
no perpetual succession ((partnership is dissolved when partner retires, dies and a new
partnership is formed with the remaining partners))
regulated by legal partnership agreement
limited growth
partners can be held jointly and severally liable for debts for the same proportion that they share in profit
what is a closed corporation and how is it treated?
1-10 members
According to the New Companies Act 71 of 2008 no new close corporations can be
registered from 1 May 2011 and existing ones at that date will continue indefinitely. They
will be treated as private companies, and the Close Corporations Act will be brought into line
with legislation on private companies
advantages of a cc
cheap to form (R50 for registering name and R100 for founding document)
limited to 10 natural members
finance from owners or outsiders
Members’ liability for debts of CC is limited to amount originally invested
Perpetual succession
Regulated by Close Corporations Act No. 69 of 1984
Legal Association agreement regulating internal administration and control
Does not require an audit of accounting records
disadvantages of a CC
limited growht
lose their limited liability status - piercing the corporate veil – if fraud or intention to defraud can be proven in the court of law
advantages of a public company
The name of a public company must end with “Limited” or its abbreviation, “Ltd”.
Finance from owners and /or outsiders (banks)
Minimum of 1 shareholder no maximum
Perpetual succession
Shares (ownership) freely transferable
Limited liability - Shareholders’ (owners) liability limited to amount originally invested
Managed by Board of Directors and must have at least 3 directors
The majority of the non-executive directors of the board must be independent (King III
Report)
Board must have a Chairman and Chief Executive Officer who are two separate persons
Requires a full statutory audit of accounting records
Annual financial reports prepared in compliance with full International Financial Reporting
Standards (IFRS)
disadvantages of a public company
complicated and expensive
minority shareholder have no say in affairs
comply with expensive procedures to comply with IFRS
have to prepare and publish their financial statements
public companies are required to be more transparent and disclose more info than other forms of entities
what does Pty Ltd stand for?
propriety limited
advantages of a private company
finance from owners and outside
minimum of one shareholder and no max
perpetual succession
Shareholders’ liability limited to amount originally invested
Managed by Board of Directors and must have at least one director
Does not require a full statutory audit of accounting records
Small and medium enterprises (SME’s) can use International Financial Reporting Standards
(IFRS) for SME’s
Financial information in a private companies is only available to shareholders
Annual financial reports prepared in compliance with International Financial Reporting
Standards (IFRS).
disadvantages of private companies
shares are not freely transferable - cannot offer shares directly to the public
expensive to form
difference between public and private companies
public - can sell shares to public
private - can’t sell shares to the public
Describe a state owned company
The name of a state-owned company must end with “SOE Ltd”.
Finance from owners and /or outsiders (banks)
Minimum of 1 shareholder, no maximum
Perpetual succession
Shares (ownership) freely transferable
Shareholders’ liability limited to amount originally invested
Managed by Board of Directors
Requires a full statutory audit of accounting records
What is a personal liability
form of ownership used by doctors, accountants, lawyers , engineers
conditions for a personal liability
The name of a personal liability company must end with the word “Incorporated” or its
abbreviation “Inc.”.
A personal liability company is deemed to be a private company unless its Memorandum of
Incorporation states it is a personal liability company
Perpetual succession
Individuals can be held liable for the debts of the personal liability company.
what are the criteria to operate as a small business?
- all shareholders must be natural persons
- no shareholder may have equity in another company
- cross income must not excede R20m
- The small business must be an existing close corporation, co-operative or a private company
as defined in the Companies Act No. 71, 2008. - The SBC’s combined investment income and “personal service income” must not be more
than 20 % of the total income and capital gains. Investment income includes annuity,
interest, rental income (immovable property), royalty, local dividends - must not be an employment entity
tax rates for the year
see notes
investment incentive
The full cost of any asset used directly in the process of manufacture and brought into use for the first time
on or after 1 April 2001, may be deducted in the tax year in which the asset is brought into use. As from
April 2005, all other depreciable assets may be written off a on a 50 : 30 : 20 basis.
main income earning activities of the business
service providers
trading
manufacturing
what is the accrual basis
provides a better and more accurate measure of net income and is more complete - involves matching of income earned with expenses occured
what does the accrual basis say in terms of income and expenses
income is recognised and recorded when income has been earned - irrespective of whether cash has moved or not
expenses are recognised when they are incurred irrespective of whether cash has flowed or not
What is the going concern assumption
requires us to assume that the entity will continue in operational existence for the foreseeable future. It is assumed that the entity neither has the assumption to liquidate or curtail materially the scale of operation (decrease their size of operations - I think)
qualitative characteristics
Qualitative characteristics are the attributes that make the information provided in financial statements
useful to users
what are the two fundamental characteristics
relevance and faithful representation
what is relevance
it is capable of making a difference in the decisions made by users in their role
as capital providers.
Information has the quality of relevance when it influences the decisions of users.
Information has the quality of relevance when it influences the economic decisions of users by helping
them to, make accurate decisions about the future financial status of the enterprise (predictive value) or
confirming the accuracy of decisions already taken (feedback value).
Information is relevant because of
its nature and its materiality.
What is faithful representation?
A transaction is faithfully represented if the financial information depicts the economic substance of the
transaction (which may differ from the legal form).
To be reliable information must represent faithfully the financial transactions and other financial events
it either purports to represent or could reasonably be expected to represent.
This means that the
annual financial statements must be a true and fair reflection of the financial effects of the transactions
relating to items appearing on the financial statements
three things that faithful representation must comply with
completenes
free from material error
neutrality
what is completeness?
Includes all information necessary for faithful representation (some of which may be disclosure)
what does it mean to be free from material error?
Which does not imply total freedom from error as many economic phenomena are measured
under conditions of uncertainty
Material error means that there are errors in the information which could affect the decisions of the users of the statements - the statements must be free of this for the info to be faithfully represented
what does neutraility mean?
if not neutral - the info is incorrect or put in a certain format or way to sway the decisions of the users in a specific direction
what are the enhancing qualitative characteristics?
comparability
verifiability
Timeliness
understandability
what is comparability
The users of financial statements must be able to compare the financial statements of an enterprise
over a period of time to identify trends in its financial position and financial performance.
They should
also be able to compare the financial statements of different enterprises in order to evaluate their
relative financial position, financial performance and changes in financial position (cash flow statement).
basically users should be able to compare the fin statements to previous years and other businesses’
what is verifiability
It implies that a different person would generally agree with the way in which the financial effects of a
transaction has been represented.
what is timeliness?
Timeliness means having information available before it loses its capacity to influence decisions. It is
therefore acceptable to present information as soon as possible after the financial year end.
what is understandability?
The users must readily understand information presented in annual financial statements.
It is assumed that the users possess a reasonable knowledge of business and economic activities and accounting (users must be financial literate and diligent).
They must also be prepared to study the information with
care.
Accounting information on complex matters that would be relevant to the economic decision making needs of users must be disclosed despite the high degree of technical complexity.
what are 2 pervasive constraints?
materiality
costs
what is materiality?
Information is material if its omission or misstatement could influence the economic decisions of users
taken on the basis of the presented financial statements.
what is costs
Financial reporting imposes costs the benefits of the financial reporting should justify the costs.
The costs are mainly incurred by the preparer of the annual financial statements, but the capital providers
suffer in the form of reduced returns.
what are the 2 accounting basis
cash flow
accrual
what is the cash basis of accounting
Under this basis all transactions are recorded in the books when cash has been received or paid out.
This basis was generally used by Non-Profit Organisations such as Sport clubs.
what are the Other relevant fundamental accounting assumptions and principles
these help with the understanding and interpretation of financial information
matching concept consistency concept monetary concept entity concept cost principles duality principle
what is the matching concept?
- The matching concept states that income and costs are accrued and matched with one another in the in
the income statement and for a period to which they relate. - therefore it is crucial that all income and expenses are recorded whether or not cash has flowed
what is the consistency concept
The consistency concept is that there is consistency in the accounting treatment of like items within each accounting period and from one period to the next
The consistency concept is to ensure comparability of financial statements. If the financial statements have been prepared on a consistent basis the users can be assured that that they are comparable with the previous year’s financial
statements.
The application of this rule enhances the confidence of the users of financial statements
What is the role of Monetary unit in the understanding of the
a unit or scale of measurement must be chosen.
A common denominator is therefore required to measure all the elements.
The rand in South Africa is the most appropriate common denominator to express information about financial statement elements and changes in those elements.
what is the entity principle?
A very important assumption is that all financial and economic events can be identified with a particular
economic entity. Generally investors desire information about an economic entity that corresponds to
their ownership interest.
The enterprise is separate from its owners and other entities - financial affairs of the business and the owners are kept separate.
what does the entity principle say in the case of sole traders - legally and for accounting purposes?
legally - owner and the business is one and the same
accounting - owner and the business is different
what are the different cost principles
historic cost
replacement value
net realisable value
present economic value
what is the historic cost pricniple
In general Generally Accepted Accounting Practice (GAAP) we measure assets and liabilities at their
original transaction value, that is, their historical costs
Historical cost valuation is the result of an exchange transaction between two independent parties. The
exchange value is objective and highly verifiable.
what is replacement value?
This value is established by determining the present cost of replacing an asset with another in a similar
condition.
what is vet realisible value
This value is established by determining the net price the asset could be sold for on the open (active)
market (fair value) less the costs to sell.
What is present economic value?
This value is established by determining the present worth (value) of all the future cash inflows less all
the future cash outflows due to the use of the machinery
(Net present value of future cash flows =
Future cash inflows – future cash outflows).
what is the duality principle?
requires that the financial situation of an entity be represented in terms of the
basic accounting equation. Every transaction entered into by the entity has a twofold affect on the
accounting equation resulting in a balanced accounting equation.
what is the accounting cycle
transactions source docs subsidiary journals pre-adj TB adj post adj TB
original invoice
your business bought on credit
duplicate invoice
your business sold on credit
original receipt
your bus bought something with cash
duplicate receipt
you sold for cash
duplicate credit note
Inventory previously sold on
credit returned by the debtors
what is the primary purpose of the TB
To check the mathematical accuracy of the General Ledger Account entries that is the monetary
equality of the Debits and Credits.
What are the uses of TB
13.3.1 It is an aid to checking for certain types of errors in a manual accounting system.
13.3.2 It is a convenient list from which accounting statements [reports] may be prepared at the
end of a financial period.
13.3.3 It can be extended to form a worksheet from which year-end adjusting and closing entries
may be prepared.
what are some errors what will be revealed by the trial balance?
incorrect addition incorrect balancing entry of balance in wrong column omission of a balance Omission of either a debit or credit entry in the accounts, that is, a single entry in the accounts.
what are some errors that wont be revealed by the TB
13.4.2.1 Omission: a transaction could have been completely omitted from the books of account.
13.4.2.2 Complete reversal of entry.
13.4.2.3 Principle: a transaction is entered in the wrong type of account.
13.4.2.4 Commission: a transaction may have been entered in the correct type of account, but in the
wrong personal account.
13.4.2.5 Compensating: where the effect of one error is cancelled by another error
define an asset
(An asset is a present economic resource a controlled by the enterprise as a result of past event and from which future
economic benefits are expected to flow to the enterprise
what are non current assets
fixed assets - are usually acquired to be used to generate income, and will
not be sold in the next twelve months
They
are relatively long-lived resources, which are acquired for direct use in the production of
merchandise and services and indirect use for administration
what are current assets
are either cash, or are expected to be realised in cash, sold or consumed (used)
during the next twelve months.
define future economic benefits
Future Economic Benefit (FEB) embodied in an asset is the potential to contribute, directly or
indirectly, to the flow of cash and cash equivalents to the enterprise. It may also take the form of
convertibility into cash or cash equivalents or a capability to reduce cash outflows.
example of how F E B can be used
Used singly or in combination with other assets in the production of goods or services to be sold
by the enterprise;
Exchanged for other assets; Used to settle a liability; or
Distributed to the owners of the enterprise
define a liability
(A liability is a present obligation of the enterprise arising from past events, the settlement of which is
expected to result in an outflow from the enterprise of resources embodying economic benefits
define non-current liabilities
(long term liabilities) are amounts owing which will not be repayable in
the immediate twelve months. Examples are long-term loans and debentures. Interest is usually payable on these amounts.
define current liabilities
are obligations, which become (payable) due in the near future, usually within
the next financial year (12 months)
how can one settle a liability
-Payment of cash Transfer of other assets Provision of services Replacement of obligation with another obligation Conversion of obligation to equity
what is working capital?
The items categorised as Current Assets and Current Liabilities are broadly known as working capital.
what is the net current assets
current assets - current liabilities - assuming that the assets are more than the liabilities
what is owners equity
This amount represents the book value of the owner’s interest in the business. This assumes the
amount of assets due to the owners after deducting its liabilities.
what two accounts is the owners equity represented by?
capital and drawings
All assets, liabilities and capital and drawings are all recognised on the Statement of Financial Position (balance sheet)
define income
(Incomes are increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases of equity, other than those relating to contributions from equity participants
define expenses
(Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or
incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants
define Net Profit for a period
Therefore Income – expenses = profit (reported in the income statement).
Net profit made / earned during a period would increase the owner’s equity
what are dividends?
Dividends are a distribution of net profit after tax in accordance with the firm’s distribution policy
(decision).
Dividends that are declared (intention to pay a dividend in the future) by a firm and then paid to its shareholders are not recognised as a normal operating expense and are therefore not reported in
the income statement
Dividends can be declared twice a year. The first one (interim dividend) being
six months after the start of the financial year, if sufficient profits have been made and a final dividend is
declared on the last day of the financial year.
The dividends must be paid in cash within eight (8) weeks
after the declaration date. The company is obliged to deduct a Dividend Withholding Tax (DWT) of 15 %
of the total dividend. The DWT of 15 % is paid to the South African Revenue Services (SARS) on behalf of
the shareholders
GL entry for dividends DECLARED
DR Dividends (-E) x
CR Dividends payable(L) xGL entry for dividends PAID
DR Dividends payable xx
CR Bank xx
