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ACCOUNTING 511

A N A G EM EN T S C IEN C ES

QUALIFICATION TITLE: Year 1 Semester 1

B A C H EL O R O F C O M M ER C E LEARNER GUIDE

S: MARKETING MANAGEMENT 511 (1 ST SEMESTER) PREPARED ON BEHALF OF

T r a i n i n g & B u s i n e s s C o l l e g e (P t y ) L t d egistration Number: 2000/000757/07 rved; no part of this publication may be reproduced in

r by any means, including photocopying machines, out the written permission of the Institution.

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BUSINESS ADMINISTRATION, MANAGEMENT & COMMERCIAL SCIENCES

STUDY GUIDE MODULE: ACCOUNTING 511 (1 st SEMESTER)

Copyright © 2017 Richfield Graduate Institute of Technology (Pty) Ltd Registration Number: 2000/000757/07

All rights reserved; no part of this publication may be reproduced in any form or by any means, including photocopying

machines, without the written permission of the Institution.

TABLE OF CONTENTS

Topics Page No. Preface 1. Welcome 6

2. Title of Modules

3. Purpose of Module

4. Learning Outcomes

7 5. Method of Study 8

6. Lectures and Tutorials

7. Notices

8 8. Prescribed & Recommended Material 8

9. Assessment & Key Concepts in Assignments and Examinations

10 10. Specimen Assignment Cover Sheet 12 11. Work Readiness Programme 13 12. Work Integrated Learning 14

ACCOUNTING 511 (1 ST SEMESTER) TOPIC 1: THE NATURE AND PURPOSE OF BOOKKEEPING AND ACOUNTING

1.2 What Is Bookkeeping And What Is Accounting?

1.3 The Purpose of Accounting

1.4 Nature of accounting

1.5 Why Study Accounting?

1.6 The Functions of Accounting

1.7 Developments In Accounting

1.8 Generally Accepted Accounting Practice (GAAP)

1.9 Approach To Setting Accounting Standards

1.10 Types of Business Organisations

1.11 The Purpose, Status And Scope Of The Accounting

Framework 1.12 The Nature Of And The Need For Financial Information

1.13 The objectives of financial statements

1.14 Financial Performance, Changes In Equity, Financial Position And

Statement Of Cash Flows 1.15 Accounting principles

1.16 Accounting policy

1.17 Disclosure of Accounting policy

1.1.8 Generally accepted accounting practise (GAAP)

1.19 Elements of Financial Statements

1.20 The accounting equation

57 Assessment Questions

1.21 Qualitative characteristics of financial statements

TOPIC 2: THE DOUBLE ENTRY SYSTEM

2.1The Double entry System

2.2 The Accounting Equation

65 Assessment Questions

2.3 The effect of transactions on the basic accounting equation

TOPIC 3: THE ACCOUNTING CYCLE

3.1 Definition-Accounting Cycle

3.2 Source Documents

3.3 Books of First Entry(Journals)

3.5 Control Accounts

3.6 The Trial Balance

109 Assessment Questions

3.7 Compilation of Financial Statements

TOPIC 4: THE BASIC ASPECTS OF FINANCIAL STATEMENTS

4.1 Accounting Entity

4.2 Grouping of items in a business

4.3 Financial Position

122 Assessment Questions

4.4 The Financial Result

TOPIC 5: ADJUSTMENTS

5.1 Introduction

5.2 Five Steps Relating to Adjustments

5.3 Short-term Adjustments

5.4 Long-term Adjustments

5.5 Methods of Depreciation

5.6 Accounting Entries for Depreciation

137 Assessment Questions

5.7 The Trial Balance

TOPIC 6:CASH AND CASH EQUIVALENTS

6.1 Introduction

6.2 Bank Reconciliation Statement

144 Assessment Questions

6.3 The Petty Cash Journal

TOPIC 7: TRADE RECEIVABLES

7.1 Introduction

7 .2 Settlement Discount Granted

7 .3 Interest Charged

7 .4 Credit Losses

7 .5 Allowance for Credit Losses

7 .6 Recording Allowances For Credit Losses

7 .7 Recovery of Credit Losses Written Off

7 .8 Debtors Control Account

TOPIC 8: INVENTORY

8.1 Introduction

8.2 Cost Formulae

8.3 The Importance of Correct Inventory Valuation

TOPIC 9: NON-CURRENT ASSETS

9.1 Tangible Assets

9.2 Scrapping Of Alienation Of Assets

9.3 Scrapping An Asset Without Alienation

9.4 Sale Of An Asset

9.5 Trading In Of Assets

171 Assessment Questions

9.6 Other Non- Current Assets

TOPIC 10: LIABILITIES

10.1 Trade Creditors

10.2 Bills Payable

10.3 Other Arrears Or Accumulated Obligations

10.4 Creditors Control Account

180 Assessment Questions

10.5 Non- Current Liabilities

TOPIC 12: SOLE PROPRIETORSHIP

11.1 Introduction

11.2 Equity in the Entity

183 Assessment Questions

11.3 Statement of Changes in Equity

TOPIC 12: NON – PROFIT ORGANISATION

12.1 Introduction

12.2 What are the major differences between non-profit and for-

profit accounting?

Assessment Questions 194 TOPIC 13:ADDENDUM 511 (A) : REVISION QUESTIONS

195 TOPIC 14:ADDENDUM 511 (B) : TYPICAL EXAMINATION QUESTIONS

PREFACE

1. WELCOME Welcome to the Faculty of Business, Economics & Management Sciences at Richfield Graduate Institute of Technology (Pty) Ltd. We trust you will find the contents and learning outcomes of this module both interesting and insightful as you begin your academic journey and eventually your career in the business world.

This section of the study guide is intended to orientate you to the module before the commencement of formal lectures.

Please note that this study guide covers the content of various academic programmes at different levels of the NQF. Your lecturers will provide further guidance and additional study materials covering parts of the syllabi that may have been omitted from this study guide. Students who are undertaking this qualification may use the non-compulsory material supplied as additional reading. This will however not be directly examinable.

The following lectures will focus on the common study units described:

WELCOME & ORIENTATION Study unit 1: Orientation Programme

Lecture 1

Introducing academic staff to the students by academic head. Introduction of institution policies.

Study unit 2: Orientation of Students to Library and Students Facilities

Lecture 2

Introducing students to physical structures

Study unit 3: Distribution and Orientation of Accounting Lecture 3 511 Study guide s, Textbooks and Prescribed Materials

Study unit 4: Discussion on the Objectives and Outcomes of Lecture 4

Accounting 511

Study unit 5: Orientation and guidelines to completing Assignments

Lecture 5

Review and Recap of Study units 1-4

2. TITLE OF MODULES, COURSE, CODE, NQF LEVEL, CREDITS & MODE OF

DELIVERY 1st Semester

Title Of Module:

NQF Level:

Credits:

Mode 0f Delivery:

Contact/Distance

3. PURPOSE OF MODULE

3.1 st Accounting 511 (1 Semester)

The purpose of this module is to equip students with knowledge of accounting and the skills to apply the acquired knowledge. Students will be taught the theoretical and conceptual approaches to accounting as well as the informational and reporting functions of accounting.

4. LEARNING OUTCOMES

On completion of this module, students should have a basic / fundamental practical and theoretical knowledge of:

 The Nature and Purpose of Accounting  The Functions of Accounting  The Nature of Accounting Theory  The Financial Position and the Financial Result of an Enterprise  The Double Entry System  The Accounting Cycle  Inventory Systems  Adjustments  The Bank Reconciliation and Petty Cash Journal

5. METHOD OF STUDY

The sections that have to be studied are indicated under each topic. These form the basis for tests, assignments and examination. To be able to do the activities and assignments for this module, and to achieve the learning outcomes and ultimately to be successful in the tests and examination, you will need an in-depth understanding of the content of these sections in the learning guide and prescribed book. In order to master the learning material, you must accept responsibility for your own studies.

6. LECTURES AND TUTORIALS

Students must refer to the notice boards on their respective campuses for details of the lecture and tutorial time tables. The lecturer assigned to the module will also inform you of the number of lecture periods and tutorials allocated to a particular module. Prior preparation is required for each lecture and tutorial. Students are encouraged to actively participate in lectures and tutorials in order to ensure success in tests, assignments and examinations.

7. NOTICES

All information pertaining to this module such as tests dates, lecture and tutorial time tables, assignments, examinations etc. will be displayed on the notice board located on your campus. Students must check the notice board on a daily basis. Should you require any clarity, please consult your lecturer, or programme manager, or administrator on your respective campus.

8. PRESCRIBED & RECOMMENDED MATERIAL

8.1 Prescribed material

Berry, P.R., de Klerk, E.S., Doussy, F., Ngcobo, R.N., Rehwinkel, A., Scheepers, D. and Scott, D. 5 th ed. Vol. 1. 2014. About Financial Accounting. Durban:

LexisNexis.

8.2 Recommended Material

Myburgh, J.E., Founche, J.P. and Cloete, M. 11 th ed. 2013, Accounting: An Introduction. Durban: LexisNexis.

Kew, J., Mettler, C., Walker, T. and Watson, A. 4 th

ed. 2013. Accounting: an Introduction. Cape Town: Oxford.

8.3 Library Infrastructure

The following services are available to you:

8.3.1 Each campus keeps a limited quantity of the recommended reading titles and a larger variety of similar titles which you may borrow. Please note that students are required to purchase the prescribed materials.

8.3.2 Arrangements have been made with municipal, state and other libraries to stock our recommended reading and similar titles. You may use these on their premises or borrow them if available. It is your responsibility to safe keeps all library books.

8.3.3 RGI has also allocated one library period per week as to assist you with your formal research under professional supervision.

8.3.4 RGI has dedicated electronic libraries for use by its students. The computers laboratories, when not in use for academic purposes, may also be used for research purposes. Booking is essential for all electronic library usage.

9 ASSESSMENT

Final Assessment for this module will comprise two Continuous Assessment tests, an assignment and an examination. Your lecturer will inform you of the dates, times and the venues for each of these. You may also refer to the notice board on your campus or the Academic Calendar which is displayed in all lecture rooms.

9.1 Continuous Assessment Tests There are two compulsory tests for each module (in each semester).

9.2. Assignment

There is one compulsory assignment for each module in each semester. Your lecturer will inform you of the Assessment questions at the commencement of this module.

9.3 Examination There is one two hour examination for each module. Make sure that you diarize the correct date, time and venue. The examinations department will notify you of your results once all administrative matters are cleared and fees are paid up.

The examination may consist of multiple choice questions, short questions and essay type questions. This requires you to be thoroughly prepared as all the content matter of lectures, tutorials, all references to the prescribed text and any other additional documentation/reference materials is examinable in both your tests and the examinations. The examination department will make available to you the details of the examination (date, time and venue) in due course. You must be seated in the examination room 15 minutes before the commencement of the examination. If you arrive late, you will not be allowed any extra time. Your student registration card must be in your possession at all times.

9.4 Final Assessment The final assessment for this module will be weighted as follows:

Continuous Assessment Test 1 Continuous Assessment Test 2

9.5 Key Concepts in Assignments and Examinations In assignment and examination questions you will notice certain key concepts

(i.e. words/verbs) which tell you what is expected of you. For example, you may be asked in a question to list, describe, illustrate, demonstrate, compare, construct, relate, criticize, recommend or design particular information / aspects / factors /situations. To help you to know exactly what these key concepts or verbs mean so that you will know exactly what is expected of you, we present the following taxonomy by Bloom, explaining the concepts and stating the level of cognitive thinking that theses refer to.

Competence

Skills Demonstrated

observation and recall of information knowledge of dates, events, places knowledge of major ideas mastery of subject matter

Knowledge

Question Cues

list, define, tell, describe, identify, show, label, collect, examine, tabulate, quote, name, who, when, where, etc.

understanding information grasp meaning translate knowledge into new context interpret facts, compare, contrast order, group, infer causes

Comprehension predict consequences

Question Cues

summarize, describe, interpret, contrast, predict, associate, distinguish, estimate, differentiate, discuss, extend summarize, describe, interpret, contrast, predict, associate, distinguish, estimate, differentiate, discuss, extend

apply, demonstrate, calculate, complete, illustrate, show, solve, examine, modify, relate, change, classify, experiment, discover seeing patterns organization of parts recognition of hidden meanings identification of components

Analysis

Question Cues

analyze, separate, order, explain, connect, classify, arrange, divide, compare, select, explain, infer

use old ideas to create new ones generalize from given facts relate knowledge from several areas predict, draw conclusions

Synthesis

Question Cues

combine, integrate, modify, rearrange, substitute, plan, create, design, invent, what if?, compose, formulate, prepare, generalize, rewrite compare and discriminate between ideas assess value of theories, presentations make choices based on reasoned argument verify value of evidence recognize subjectivity

Evaluation

Question Cues

assess, decide, rank, grade, test, measure, recommend, convince, select, judge, explain, discriminate, support, conclude, compare, summarize

BUSINESS ADMINISTRATION, MANAGEMENT & COMMERCIAL SCIENCES ACCOUNTING ASSIGNMENT COVER SHEET

1 ST SEMESTER ASSIGNMENT

Name & Surname: ____________________________________________ ICAS No: _________________ Qualification: ______________________ Semester: _____ Module Name: __________________________ Specialization: _____________________

Date Submitted: ___________

QUESTION NUMBER

MARK ALLOCATION

EXAMINER MARKS

MODERATOR MARKS

Mode ato s Co

e ts:

Signature of Examiner: Signature of Moderator:

The purpose of an assignment is to ensure that the Student is able to:

 Demonstrate an understanding of accounting principles.  Systematically record the financial aspects of business transactions.

 Prepare financial statements to know the result of business operations for a particular period of time.  To meet the financial information needs of the decision-makers and help them in rational decision-making.  Report the results and position of busines s to Use s of fi a ial state e ts.

 P ese ti g t ue a d fai ie of fi a ial t a sa tio s.  Show accurate calculations for all transactions.

10. WORK READINESS PROGRAMME (WRP)

In order to prepare students for the world of work, a series of interventions over and above the formal curriculum, are concurrently implemented to prepare students. These include:

 Soft skills  Employment skills  Life skills  End –User Computing (if not included in your curriculum)

The illustration below outlines some of the key concepts for Work Readiness that will be included in your timetable.

SOFT SKILLS

LIFE SKILLS

 Time Management  Manage Personal Finance  Working in Teams  Driving Skills

 Problem Solving Skills  Basic Life Support &

 Attitude & Goal Setting First Aid

 Etiquettes & Ethics  Entrepreneurial skills  Communication Skills  Counselling skills

WORK READINESS

PROGRAMM EMPLOYMENT SKILLS

 CV Writing  Interview Skills

Presentation Skills 

 Employer / Employee Relationship  End User Computing

 Email & E-Commerce  Spread Sheets

 Data base  Presentation  Office Word

It is in your interest to attend these workshops, complete the Work Readiness Log Book and prepare for the Working World.

11. WORK INTEGRATED LEARNING (WIL)

Work Integrated Learning forms a core component of the curriculum for the completion of this programme. All modules which form part of this qualification will be assessed in an integrated manner towards the end of the programme or after completion of all other modules. Prerequisites for placement with employers will include:

 Completion of all tests & assignment  Success in examination  Payment of all arrear fees  Return of library books, etc.  Completion of the Work Readiness Programme.

Students will be fully inducted on the Work Integrated Learning Module, the Workbooks & assessment requirements before placement with employers.

The partners in Work Readiness Programme (WRP) include:

Good luck and success in your studies…

Registered with the Department of Higher Education as a Private Higher Education Institution under the Higher Education Act, 1997. Registration Certificate No. 2000/HE07/008

BUSINESS ADMINISTRATION, MANAGEMENT &

COMMERCIAL SCIENCES STUDY GUIDE

MODULE: ACCOUNTING 511 (1st SEMESTER)

TOPIC1: THE NATURE, FUNCTIONS AND PURPOSE OF BOOKKEEPING AND ACOUNTING TOPIC 2: DOUBLE ENTRY SYSTEM TOPIC 3: THE ACCOUNTING CYCLE TOPIC 4: THE BASIC ASPECTS OF FINANCIAL STATEMENTS TOPIC 5: ADJUSTMENTS TOPIC 6: CASH AND CASH EQUIVALENTS TOPIC 7: TRADE RECEIVABLES TOPIC 8: INVENTORY TOPIC 9: NON-CURRENT ASSETS TOPIC 10: LIABILITIES TOPIC 11: THE SOLE PROPRIETORSHIP TOPIC 12: NON-PROFIT ORGANISATIONS TOPIC 13: ADDENDUM 511(A): REVISION QUESTIONS TOPIC 14: ADDENDUM 511 (B): TYPICAL EXAMINATION QUESTIONS

TOPICS

TOPIC 1: THE NATURE AND PURPOSE OF BOOKKEEPING AND ACOUNTING

Introduction What Is Bookkeeping And What Is Accounting? Why Study Accounting?

Lecture 6

Developments In Accounting Generally Accepted Accounting Practice (GAAP) Approach To Setting Accounting Standards The Entity Concept The Purpose, Status And Scope Of The Accounting Framework The Nature Of And The Need For Financial Information

Lecture

Users Of Financial Information

7-9

The objectives of financial statements Financial Performance, Changes In Equity, Financial Position And Statement Of Cash Flows

Lecture

The Purpose of Accounting

10-12

Terminology The Nature of Accounting

13-16

Accounting principles Accounting Policy Disclosure Of Accounting Policy Generally Accepted Accounting Practice (GAAP) Underlying Assumptions Qualitative Characteristics of Financial Statements The Function of Accounting Users of Accounting Information

Lecture 17 TOPIC 2: THE DOUBLE ENTRY SYSTEM

The Double Entry System The Accounting Equation

Lecture

The Effect of Transactions On The Basic Accounting

18-22

Equation

TOPIC 3: THE ACCOUNTING CYCLE

Definition – Accounting Cycle Source Documents

Lecture

Books of First Entry (Journals)

23-25

Ledgers Control Accounts Compilation of Financial Statements The Trial Balance

TOPIC 4: THE BASIC ASPECTS OF FINANCIAL STATEMENTS

Accounting Entity Grouping of Items In A Business

Lecture

Financial Position

25-27

The Financial Result Income Expenditure

TOPIC 5: ADJUSTMENTS

Introduction

Lecture

Five Steps Relating to Adjustments

28-29

Short-term Adjustments Long-Term Adjustments Methods of Depreciation Accounting entries for Depreciation

Assessment Questions TOPIC 6:CASH AND CASH EQUIVALENTS

Introduction Bank Reconciliation Statement

Lecture

The Petty Cash Journal

30-31

Assessment Questions

TOPIC 7: TRADE RECEIVABLES

Settlement Discount Granted

Interest Charged Credit Losses Allowance for Credit Losses

Lecture

Recording Allowances For Credit Losses

33-34

Recovery of Credit Losses Written Off Debtors Control Account

TOPIC 8: INVENTORY

Introduction

Lecture

Cost Formulae

35-36

The Importance of Correct Inventory Valuation

TOPIC 9: NON-CURRENT ASSETS

Tangible Assets

Scrapping Of Alienation Of Assets Scrapping An Asset Without Alienation

Lecture

Sale Of An Asset

Trading In Of Assets Other Non – Current Assets Assessment Questions

TOPIC 10: LIABILITIES

Trade Creditors

Lecture

Bills Payable

42 - 43

Other Arrears Or Accumulated Obligations Creditors Control Account Non – Current Liabilities

TOPIC 11: THE SOLE PROPRIETORSHIP

Introduction

Lecture

Equity in the Entity

44 - 45

Drawings Statement of Changes in Equity

TOPIC 12: NON – PROFIT ORGANISATION

Introduction

Lecture

What are major differences between non-profit and

46 - 47

profit organisation Income and expenditure statement

TOPIC 13: ADDENDUM 511 (A): REVISION QUESTIONS Lecture 48 TOPIC 14: ADDENDUM 511 (B): TYPICAL EXAMINATION

Lecture 49 QUESTIONS

The following are guide icons that will be used throughout this Study guide :

INTERACTIVE ICONS USED IN STUDY GUIDE S

Study

Read

Learning Outcomes Writing Activity

Key Point Think Point

Glossary

Research

Review Questions

Bright Idea

Problem(s)

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TOPIC 1 _____________________________________________________________

1. THE NATURE, PURPOSE AND FUNCTIONS OF BOOKKEEPING AND ACOUNTING

Learning Outcomes:

The purpose of topic one is to explain the nature, objectives and functions of accounting and bookkeeping, the processes by means of which this

information is generated and who the users of the financial information are.

After studying this topic, you will know the types of information generated by accounting and how they meet the information needs of the various users of financial information. This knowledge is a prerequisite for studying the theory and practice of accounting, which follows hereafter. You require this knowledge in order to keep your study focused on the objectives of accounting.

1.1 INTRODUCTION

When a building is erected, it must be built on a proper foundation. If the foundation is not properly prepared, the building may develop flaws and even collapse after sometime. Similarly, the knowledge of all subjects, including accounting, must be laid on a proper foundation - think about a subject such as mathematics. You first had to learn to count, then to add and subtract, then to multiply, divide, and so on. Knowledge of each subject is based on its own foundation or separate set rules. This set of rules is sometimes referred to as the conceptual framework for a particular subject. 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 deals mainly with accounting history and theory, thereby giving a foun datio , o the asi of the a ou ti g la guage , ithout 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 Practice Board (APB) and having adopted the framework for the preparation and presentation of financial statements issued by the International Accounting Standards

The purpose of this chapter is to explain the function and objectives of accounting and the need for financial information, which the users of financial information require and how this information is generated and communicated to the users thereof.

1.2 WHAT IS BOOKKEEPING AND WHAT IS ACCOUNTING?

Bookkeeping involves the identification and recording of economics events only; therefore it is just one part of the accounting process.

Accounting can be defined as the orderly and systematically identification and recording of the monetary values of the economic transactions of an individual entrepreneur (person) or a business enterprise (entity or

institution), the reporting on the results of these transactions, and the

provision of financial information by submitting financial statements, which

information is used as a basis for decision –making .Accounting therefore

includes bookkeeping.

The above definition indicates that accounting must fulfil the following requirements:

 the orderly and systematic recording; the monetary value and economic transactions of  economic transaction of

 the monetary values of  an individual person or institutions (entity);  the reporting on the results of these transactions; and  the provision of the information in financial statements,  which information is used as a basis for decision-making by the users of the

information.

For additional information on definition of Accounting, read pages: 3 – 6 from the prescribed textbook.

1.3 THE PURPOSE OF ACCOUNTING

The primary aim of the accounting process is to give a REPORT of the financial results of a business for a particular period of time and the financial position at

a particular point in time. Accounting is the process where transactions are recorded in an Orderly and systematic manner.

A TRANSACTION is the agreement between two parties where the one sells something to another or renders a service that can be expressed in terms of money. The purpose of recording these transactions is to determine the exact financial state of the business at all times.

To do this he will need the following information:  How much does he owe other people;

 How much do other people owe him;  The value and nature of his possessions in the business;  The nature and the amount of expenses for a period;  The nature and amount of all income for a period;  The profit/loss of the period;  The amount of his interest in the business (his capital investments);  The actual financial position of the business (possession as opposed to

debts of the business)

1.4 THE NATURE OF ACCOUNTING

The main aim of any business today is for the owner to make a profit. The profit of a business can be determined by the difference between the money that he received from selling goods and the price that he paid for those goods. The owner of the business will not only like to know that his business is only making a profit, but he would also like to know how this was determined. He would like to know what must be done to maximise his income to keep his expenses as low as possible, i.e. determine the financial result. He will also be interested in the amount that the business owes to other people or companies and the amount that they owe his business. He also wants details of the possessions of the business. All these items namely debts and possessions show his financial position.

Therefore, because the owner wanted to know more it created a need for financial information. This is the main aim of accounting – to provide the necessary – FINANCIAL INFORMATION

1.5 WHY STUDY ACCOUNTING?

Knowledge of accounting is needed on two levels:  By the users of financial information, and

 By the preparers of financial information

All users of financial information need not be trained accountants. Anyone who has to make financial decisions, based on information disclosed by the accounting process should, however, at least have basic knowledge of accounting .The decision-maker must have an understanding of the information disclosed in the financial statement in order to make proper decisions. The more complex the information on which the decision is to be based, the greater the required knowledge of accounting. Knowledge of accounting will also enable any individual to manage his or her personal financial affairs more effectively.

The preparer of financial information, i.e. the accountant who accepts responsibility for the design of accounting systems, the processing of financial information in the accounting process and the preparation and interpretation of financial reports, requires a profound knowledge of the theory and practice of the subject.

In addition, a wide variety of career opportunities exist for those with accounting training. The accounting profession enjoys a high level of prestige in society and provides a great deal job satisfaction and security. The accountant, in the performance of normal responsibilities acquires a thorough insight into all the aspects of the activities of a business. An accounting qualification is an excellent entry opportunity into the business world

On obtaining an accounting qualification, the accountant has a variety of career opportunities:

 In public practice, which mainly consists of:  Auditing (trainee accountants following the training-in-practice route)  Accounting services  Management consultation services;

 In trade and industry and the financial sector, as a financial accountant, management accountant, internal auditor, financial manager or general  In trade and industry and the financial sector, as a financial accountant, management accountant, internal auditor, financial manager or general

 In the public sector as a government auditor, financial or management accountant or internal auditor, and  In academic spheres, where a great demand exists for trained accountants with a disposition for education and research.

1.6 THE FUNCTION OF ACCOUNTING

The function of accounting is to provide financial information to all interested parties on the result of the economic activities of a particular individual or institution (entity). Financial information that can be reported on in particular can be expressed in monetary terms (money values). Economic activities include all activities (transactions) that use or consume resources (assets) to create new value. A person performs economic activities by working and earning a salary. The income from this salary is added to the assets of the person at the moment that person earns the income. The increased assets are now available for use by that person.

A trading entity purchases merchandise which is sold at a price higher than the purchase price plus other related costs. The difference between the purchase price and costs on the one hand, the higher selling price on the other, is called

a profit. The proceeds from the profit increase the assets of the entity and are available for use.

The financial results of economic activities therefore have two aspects:  The value added to the net worth of a person or an entity during a particular period, and  The accumulated net worth of that person or entity.

Information about the financial results of an entity is provided in a complete set of financial statements. In terms of paragraph 10 of IAS 1 (AC101), a complete set of financial statements must consist of:

 A statement of financial position as at the of period;  A statement of comprehensive income for the period;  A statement of changes in equity for the period;  A statement of cash flows for the period;

 Notes, comprising a summary of significant accounting policies and other explanatory information.

Paragraphs 20 and 21 of the framework explain the interrelationships between the various statements and the role of the notes and supplementary schedules to the statements. A single statement may not be enough to fulfil all the needs of a user of the information since information about one transaction may be included in different statements. For example, the information disclosed on the statement of comprehensive income may give an incomplete picture of the

e tit s pe fo a e a d the i fo atio i the otes o s hedules a e necessary. (Framework 20)

The notes and schedules include aspects such as risks and uncertainties that may influence the future results or position of the entity. Resource and obligations not disclosed on the statement of financial position (such as insurance claims against or by the institution) are also included in the notes (Framework .21.). It would be necessary to make a study of the complete set of financial statements before a decision can be made.

1.7 DEVELOPMENTS IN ACCOUNTING

Accounting had been developed over many centuries as a result of the need to account for assets entrusted to people and/or entities who have the responsibility of dealing with these assets in a particular manner. It is expected that the person to whom the assets have been entrusted, i.e. the entrepreneur, will give account of the financial results regarding the economic application of those assets, to the suppliers thereof. In the early days, financial transactions were recorded by hand. In many cases, this still happens. It is only during the last century that technology has improved to such an extent that hand-written records are being replaced by computerised systems.

The fact that computers are used more often to record transactions does not mean that one need not know how to record financial transactions manually. Accounting is a very practical subject. The more practice one gets during a study of the subject, the better it will be understood. In fact, it is extremely important to understand how to write up a set of books manually before a computer package can be utilised effectively. Although evidence exists that business transaction were recorded more than 6000 years ago, Benedetto Cotrugli was probably the first person who wrote a chapter on accounting in a book published in 1458 about the commercial function. In that chapter, he presented a brief discussion of bookkeeping. The first published work with full description of double-entry system was completed by Luca Pacioli in his summa de arithmetical geometric proportion et proportionalities, which was published in 1494 in Venice. His summa, which was a mathematical work, contained a section on the Venetian method of double-entry bookkeeping.

In the rest of Europe, the first works on double-entry bookkeeping appeared towards the middle of the sixteenth century: in Antwerp in 1543, in London in 1547, and in Germany in 1549.The early literature mainly described the technique of bookkeeping, i.e. how transactions could be recorded according to the double-entry system. The development of the theory of accounting that is, the why as to the how, began only in the nineteenth century.

The

a a d the o e s ie tifi a ou ti g of the nineteenth century was a period of refinement and elaboration of the

ea s et ee Pa ioli s su

procedures described by Pacioli? The summa became the standard reference work for bookkeepers and a model for numerous textbooks that provided a record of bookkeeping innovations between the fifteenth and the nineteenth centuries.

The development of bookkeeping can be divided into three phases:

 The 110 years between 1450 and 1560. Business practices were more sophisticated than textbooks and authors tried to promote bookkeeping

mechanics as developed by merchants.  The period from1560 to about 1800. Major improvement were made

bookkeeping model and theoretical research on bookkeeping began, especially with the emergence of financial statements – and the acknowledgement of the enterprise as being separate and distinct from its owners.

 The period after 1800, when manufacturing operations, income tax and the emerging profession acted as major stimulants.

Towards the middle of the nineteenth century, the formation of professional accounting societies began in many countries. The purpose of the various institutes and societies was to make recommendations on accounting practice to their members. This was to improve uniformity in dealing with financial transactions and to formulate basic principles applicable to financial statements.

Today, the issuing of recommendations on accounting practice is one of the most important functions of professional societies of accountants and auditors throughout the world.

The first organised society of accountants in South Africa came into being in 1894, with the formation of the Institute of Accountants in the South African

Republic (the ZAR). Today, the profession in South Africa is organised into various provincial and national accounting institutes and societies, the most prominent being the South Africa Institutes of Chartered Accountants (SAICA).

I , the Pu li A ou ta ts a d Audito s A t, o , hi h o t ols the practicing section of the accountancy profession in South Africa, was

p o ulgated. This legislatio eated the Pu li A ou ta ts a d Audito s Board, whose functions include the registration of accountants and auditors

who are permitted to practice in public, ensure discipline in the profession, and train accountants.

1.8 GENERALLY ACCEPTED ACCOUNTING PRACTICE (GAAP)

South Africa, like various other countries, developed its own accounting standards in the form of statements, which are the basis on which accounting reporting is done. The development of statements goes through a whole process of drafting and exposure by SAICA. They must then be approved by the APB (the standard-setting body in South Africa). The principle objective of the APB is the establishment, recognition and acceptance of what the board considers being generally accepted practice (GAAP). The APB consists of representatives from commerce and industry, regulators, professional bodies, academics and user groups.

Since the APB has agreed to issue international financial reporting standard (IFRSs) as statements of GAAP, it has adopted the International Accounting Standards Board (IASB) framework for the preparation of financial statements (hereafter referred to as the frameworks). The purpose of this framework is mainly to assist preparers of financial statements to prepare and present financial statements for external use according to international standards.

In this module, reference will be made to the content of the framework, the preface to GAAP, and to International Accounting Standards (IAS). The

sta da ds set the IA“B a e la elled ith the p efi IA“ a d a u e . The corresponding statement of GAAP will form part of the reference. For example:

IAS 1 (AC 101) deals with the presentation of financial statements. Where reference is made to a paragraph of IAS, for example paragraph 55 of IAS 1, the reference will be stated as IAS 1 (AC 101).55.

Apart from IAS 1 9AC 101), there are quite a number of statements which be dealt with in subsequent courses in accounting. The purpose of the preface to statements, GAAP is to explain the scope and authority of statements of GAAP Apart from IAS 1 9AC 101), there are quite a number of statements which be dealt with in subsequent courses in accounting. The purpose of the preface to statements, GAAP is to explain the scope and authority of statements of GAAP

Since the framework forms the basis of accounting theory, it will be discussed in more detail in the remainder of this chapter and in chapter 2. As you progress with your studies, you might find it necessary to revisit these two chapters to re-acquaint yourself with the framework.

1.9 APPROACH TO SETTING ACCOUNTING STANDARDS

Statements of GAAP have been harmonised with IFRS. The APB has taken a decision to approve the international text of IFRS for issue in South Africa, without amendment (Preface .12).

Application of statements of GAAP

IFRSs apply to all general-purpose financial statements. Such financial statements are directed towards the common information needs of a wide range of users, for example, shareholders, creditors, employees and the public at large. The objective of a financial statement is to provide information about the financial position, performance and cash flows of an entity that is useful to those users in making economic decisions. (Preface, Annexure A .10).

Compliance with Legal Requirements

The requirements of the Companies Act and Schedule 4 thereto are taken into account in the preparation of GAAP (Companies Act, No 61 of 1973 as amended, section 285A (a) and (b). Some entities may be required to prepare financial statements which comply with other statutes. Statements of GAAP are, however, of concern in the preparation of all financial statements that purport to be prepared in accordance with GAAP, including those of business entities incorporated under other legislation, as well as those not incorporated at all.

1.10 TYPES OF BUSINESS ORGANISATIONS WITH PROFIT MOTIVES

In the private sector, there are mainly four types of business organisations with profit motives which can be considered as individual entities:

 Sole traders (sole proprietors);  Partnerships;  Close corporations, and  Companies.

There are a wide variety of organisations in the private sector with various objectives without a profit motive that can be regarded as individual entities:

 Clubs;  Charitable organisations;  Churches;  Educational institutions;  Associations, and  Trusts.

In the public sector, the state as a whole, or individual government establishments, such as provinces, state departments, municipalities, boards and commissions, are all regarded as accounting entities. All these concepts are discussed extensively in business management modules and handbooks.

Between a public business and private business, which one

would you prefer to run?

Types of business activities with profit motives

Business operating with a profit motive can be classified as service, trading and manufacturing business. These types of business can be explained in the following examples. George is a qualified electrician who runs his business from home. George installs electrical cables and repairs electrical cables. The cabling he is doing must be supplied by the people for whom he is doing the repairs. These people are called clients.

Because George is merely rendering a service; we say that he runs a service organization. His clients buy their cabling from the hardware shop. The

hardware shop is therefore a trading organization. The other people and other business entities served by the hardware shop are customers. The hardware shop buys the good from the manufacturer who is in this case the supplier. The business entities that manufacture and sell the products are called

manufacturing organizations.

It is important to note that the manufacturer and the wholesaler are not always the same. Sometimes the distribution chain is longer with the manufacturer selling to a wholesaler, the wholesaler selling to retailer and the retailer selling to the customer.

TYPES OF BUSINESS BASED ON ORTGANISATIONAL FORM

Sole trader

Partnership

Company

Close corporation

Public Private Company Company

Sole trader

A sole trader is sometimes referred to as the sole proprietorship. This is a form of business ownership owned and run by one person usually the owner. The owner is responsible for the day to day running activities of the business. Many small service businesses such as plumbers, hairdressers and lawyers, fall into this category.

This is one the simplest form of business ownership since a limited amount of capital is required to start up the business. However, the owner is liable/ responsible in his/her personal capacity for the debts of the business. The owner is taxed is his own capacity. The sole proprietorship is not a separate legal entity meaning that the business cannot be summoned to court and it can cease to exist once the owner dies.

Partnership

A partnership is a form of business that is owned by a minimum of two partners and a maximum of twenty (20) partners. Medical doctors, stockbrokers, attorneys and accountants often conduct their business as partnership. All the partners are the owners of the business. A partnership just a sole proprietorship does not have a separate legal personality. The individual partners are liable in their personal capacity for the debts of the company. Partnership profits are taxed in the hands of the individual partners.

When a partner dies or withdraws from the partnership, the partnership will

be dissolved. If the remaining partners want to continue their business a new partnership will be formed.

One of the advantages of a partnership is that it can be set up with relatively little effor t a d i i al apital i est e t. I the i di idual pa t e s o interest, it is important to draw up a partnership agreement which will contain information such as:

 The profit sharing ratio  Each partners duties  And general code of conduct  Interest on drawings  Interest on capital, and  Salaries.

In order to ensure that the terms of the partnership agreement are complied with, it is important that financial information is provided by an accounting system.

Close corporation

The close corporation as business form has very popular in South Africa since 1985. A close corporation may have a minimum of 1 and a maximum of 10 owners (called members). The close corporation is different from the sole traders and the partnership in the sense that it has its own legal personality, and it exist independently of its members. When certain conditions exist members of the close corporation are personally liable for its debts. The members of the close corporation are usually also actively involved in its daily business activities. The letter CC after the name of the close corporation denotes it as such, for example Industrial Laboratories CC.

When compared with a company, a CC is relatively easy and inexpensive to set up. Presentation of the financial statements of a close corporation is regulated by the Close Corporation Act and Generally Accepted Accounting Practice (GAAP).

When registering a close corporation there are a number of legal requirements and certain paper work needs to be completed and signed.

One of the documents required is called a Founding Statement.

The registration process is explained below:

 The Founding Statement of the CC needs to be completed and signed by every member.  The Founding Statement needs to contain the following information:

 Full name of the CC  Letters CC added to the end of the businesses name  Postal address of the registered office  Principal activity of the CC  Details of each members contributions to the CC  Full names and identity numbers of each member  Interest of each member which needs to be expressed in percentage  Date on which the financial year ends  Name and address of the accounting officer of the CC  The Founding Statement is then sent to the Registrar of Close Corporations  An accounting officer must be appointed to the CC as he will draw up the

financial statements

The Registrar of Close Corporations will issue a Certificate of Incorporation and

a Registration number when the CC is registered. One copy of the Certificate of Incorporation is kept by the Registrar, another copy is sent to the CC and a third copy is sent to SARS (South African Revenue Services) to register the business for tax purposes.

 The CC may only commence business after the Certificate of Incorporation has been issued.

When registering a CC you will have to provide your desired name of the CC, it is a good idea to have a few ideas as your first choice might not be available.

Advantages of a Close Corporation

The advantages of a CC are:  Registering a Close Corporation (CC) is a simple and relatively affordable option. It is not expensive and there are only a few regulations.

 A CC does not have any legal complications that a company has. For example, a CC is not required to have annual financial statements audited

and a CC is not required to hold annual general meetings. This makes running a CC easier than a company.

 The CC is regarded as a legal entity/person; this is an advantage because it means that the continuity of a CC is not linked to the status and life of the

members.

 Income distributed to the members of the CC is exempted from normal income tax.