About Financial Accounting Vol 1

368 Pages·2014·6.6 MB·English

About
Financial Accounting
Volume 1
Fifth Edition
About
Financial Accounting
Volume 1
Fifth Edition
Contributing authors
F Doussy (editor)
D Scott
Volume 2
Fifth Edition
Contributing authors
JS Jansen van Rensburg
RN Ngcobo
A Rehwinkel
D Scheepers (editor)
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© 2014
ISBN 978 0 409 05711 9
E-Book ISBN 978 0 409 11990 9
First edition 2005
Reprinted 2006
Second edition 2007
Third edition 2008
Fourth edition 2011
Copyright subsists in this work. No part of this work may be reproduced in any form or by any means without
the publisher’s written permission. Any unauthorised reproduction of this work will constitute a copyright
infringement and render the doer liable under both civil and criminal law.
Whilst every effort has been made to ensure that the information published in this work is accurate, the
editors, publishers and printers take no responsibility for any loss or damage suffered by any person as a
result of the reliance upon the information contained therein.
Editor: Lisa Sandford
Technical Editor: Liz Bisschoff
Printed in South Africa by Interpak Books Pietermaritzburg
Preface
The accelerating globalisation of business has affected South Africa in many ways and
the discipline of accounting has not been left untouched. Accounting is a challenging
subject because it is always changing. These changes are reflected in this book, but
the authors have not lost sight of the fact that the basic principles of accounting have
not altered since the invention of double-entry bookkeeping centuries ago.
One has to learn to crawl before one can learn to walk. This is a fact of life and a
reflection of life itself. With this in mind, many aspects of the intricacies of disclosure
and the exact or complete disclosure requirements of generally accepted accounting
practice were left for the more advanced student of accounting. This book is not
intended to be a reference book. Rather, the following guidelines were adopted by the
authors:
• simplicity
• basic principles
• creating knowledge blocks
• practical application
• demonstration by way of examples.
To achieve this goal, the focus is on a handwritten system, thus avoiding the notion
that the basics of accounting, like the processing of data and closing-off procedures,
are mysterious activities that take place inside a computer. This notion seems to be a
growing problem for serious students of accounting.
The book is divided into two volumes. Volume 1 deals with the financial accounting
concepts, principles and procedures. Volume 2 deals with the accounting for
partnerships, close corporations, branches and manufacturing entities. Volume 2 also
covers some management accounting principles such as budgets and the analysis
and interpretation of financial statements. It introduces the reader to companies and to
the accounting framework and statement of cash flows for the entities mentioned.
The authors of this book represent a large pool of lecturing and practical experience
gained over many years of work and study. This book reflects the hard work and
determination of these authors, for which we are very grateful.
The editors
November 2014
v
Table of abbreviations
APB Accounting Practices Board
FRS Financial Reporting Standard
GAAP Generally Accepted Accounting Practice
IAS International Accounting Standard
IASB International Accounting Standards Board
IFRS International Financial Reporting Standard
JSE JSE Limited
SAICA South African Institute of Chartered Accountants

vii
Contents
Page
Preface .................................................................................................................... v
Table of abbreviations ............................................................................................. vii
1. The basic concepts, principles and objectives of accounting ..................... 1
2. The financial position .................................................................................... 21
3. The financial performance ............................................................................ 33
4. The recording of transactions ....................................................................... 45
5. Processing accounting data ......................................................................... 71
6. Adjustments .................................................................................................. 107
7. The closing-off procedure, determining profit and
preparing financial statements ..................................................................... 125
8. Cash and cash equivalents .......................................................................... 161
9. Credit granted: Debtors and other receivables ............................................ 195
10. Inventory ....................................................................................................... 227
11. Property, plant and equipment ..................................................................... 243
12. Other non-current assets and financial assets ............................................. 277
13. Current liabilities ........................................................................................... 289
14. Non-current liabilities .................................................................................... 305
15. Financial statements of a sole proprietorship ............................................... 317
16. Non-profit entities .......................................................................................... 333
17. Incomplete records ....................................................................................... 361
Index ....................................................................................................................... 377

ix
1
CHAPTER
The basic concepts, principles and objectives
of accounting
Contents
Page
1.1 Introduction ................................................................................................... 3
1.2 What is bookkeeping and what is accounting? ............................................ 4
1.3 Why study accounting? ................................................................................. 4
1.4 Developments in accounting ........................................................................ 5
1.5 The function of accounting ........................................................................... 6
1.6 The entity concept ........................................................................................ 7
1.7 The nature of and the need for financial information .................................... 8
1.8 Users of financial information ........................................................................ 8
1.9 The objective of financial statements ............................................................ 9
1.10 Financial performance, changes in equity, financial position and
cash flow ....................................................................................................... 9
1.10.1 Statement of profit or loss and other comprehensive income ......... 9
1.10.2 Statement of changes in equity ....................................................... 10
1.10.3 Statement of financial position ......................................................... 11
1.10.4 Statement of cash flows ................................................................... 12
1.11 The accounting process ............................................................................... 12
1.12 The domains of accounting .......................................................................... 13
1.13 Underlying assumption – Going concern ..................................................... 13
1.14 Qualitative characteristics of financial statements ........................................ 14
1.14.1 Relevance ........................................................................................ 15
1.14.2 Faithful representation ..................................................................... 15
1.14.3 Further enhancements to the qualitative characteristics of
financial information ......................................................................... 15
1.14.3.1 Comparability .................................................................. 15
1.14.3.2 Verifiability ....................................................................... 16
1.14.3.3 Timeliness ........................................................................ 16
1.14.3.4 Understandability ............................................................ 16
1.14.4 Constraints on relevant and reliable information ............................. 16
1
2 About Financial Accounting: Volume 1

Page
1.15 The elements of financial statements ............................................................ 16
1.16 Recognition of the elements of financial statements ..................................... 17
1.17 Measurement of the elements of financial statements .................................. 17
1.18 Summary ....................................................................................................... 18
Chapter 1: The basic concepts, principles and objectives of accounting 3

1.1 Introduction
Study objectives
After studying this chapter you should be able to
l describe how accounting developed over the ages;
l define accounting;
l describe the function of accounting;
l explain the entity concept;
l explain why an accounting framework is necessary;
l describe the nature of and the need for financial information;
l identify the various users of financial information;
l describe what the objectives of financial statements are;
l explain what is meant by financial performance, changes in equity, financial
position and cash flow;
l describe what the accounting process entails;
l distinguish between the two main types of financial information;
l describe the assumptions underlying the preparation of financial statements;
l explain what the qualitative characteristics of financial statements are;
l identify the elements of financial statements;
l describe the recognition of the elements of financial statements; and
l explain what is meant by the measurement of the elements of financial
statements.
Accounting is a means of communication. To communicate, one must know at least
the basics or the foundation of the language of the party with whom one is
communicating. The first two chapters of this book deal mainly with accounting history
and theory, providing a foundation of the basics of the accounting “language”. Without
the theory regulating the subject of accounting, it would be very difficult, perhaps
impossible, to communicate in accounting terms.
In accounting, the conceptual framework and other rules are laid down by the South
African Institute of Chartered Accountants (SAICA) after approval by the Accounting
Practices Board (APB). To comply with international accounting standards the
Conceptual Framework for Financial Reporting 2010 (the IFRS Framework) was
approved by the International Accounting Standards Board (IASB). Although these
rules are important, the detail presented in the framework is not required for
understanding the basic accounting concepts, principles and procedures. The
present volume of About Financial Accounting will therefore only make limited
reference to the framework.
The purpose of this chapter is to explain the function and objectives of accounting, the
need for financial information, who the users of the financial information are, the
processes by means of which this information is generated and how this information is
communicated to the users thereof.