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2023 Conceptual Framework

The document discusses accounting and financial principles including the conceptual framework, elements of financial statements, qualitative characteristics of useful financial information, and provides examples of classifying different items. It covers topics like objectives of financial reporting, assets, liabilities, equity, income, expenses, recognition criteria, relevance, faithful representation, comparability, verifiability, timeliness, and understandability.

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53 views8 pages

2023 Conceptual Framework

The document discusses accounting and financial principles including the conceptual framework, elements of financial statements, qualitative characteristics of useful financial information, and provides examples of classifying different items. It covers topics like objectives of financial reporting, assets, liabilities, equity, income, expenses, recognition criteria, relevance, faithful representation, comparability, verifiability, timeliness, and understandability.

Uploaded by

sammie cele
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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2023 Accounting & Financial Principles

FACULTY OF ACCOUNTING AND INFORMATICS

DEPARTMENT OF FINANCIAL ACCOUNTING

DEPARTMENT OF FINANCE & INFORMATION MANAGEMENT

ACCOUNTING & FINANCIAL PRINCIPLES


(ACFP201/AFPR201)

Conceptual Framework

2023

Designed by Mrs T Jacobs (PmB)


Revised by Dr A Bhana (14 February 2023)
2023 Accounting & Financial Principles

CONCEPTUAL FRAMEWORK

THE OBJECTIVE OF GENERAL PURPOSE FINANCIAL REPORTING

The objective of financial statements is to provide financial information about the reporting
entity that is useful to users i.e. existing and potential investors, lenders and other creditors
in making decisions about providing resources to the entity.

General purpose financial reports provide:

• Information regarding the financial position of an entity in the form of information


about the economic resources of the entity as well as the claims against it.
- This information needs to be provided in the statement of financial position
- This information needs to assist users in providing information on the entity’s
liquidity (ability to meet its financial commitments) and solvency (assets
exceeding liabilities)
• Information regarding transactions and other events which change the economic
resources and claims against the entity.
- This information relates to the financial performance of the entity and can be
found in the statement of profit or loss and other comprehensive income of
the entity.

Designed by Mrs T Jacobs (PmB)


Revised by Dr A Bhana (14 February 2023)
2023 Accounting & Financial Principles

ELEMENTS OF FINANCIAL STATEMENTS


The five elements of financial statements are assets, liabilities, equity, income and
expenses. The definition is as follows:

1 Assets
Resources, controlled by the business, as a result of past events, from which future
benefits are expected to flow to the entity

2 Equity
It is defined as the residual interest in the assets of an entity after deducting all of its
liabilities. Owners equity in the case of a company, comprise a share capital, retained
earnings and reserves. In case of other types of entities, it is referred to “capital”.
Equity is the balance between the assets less liabilities of an entity.

3 Liabilities
Present obligation of the business, as a result of past events, from which economic
benefits are expected to flow from the business

4 Income
An increase in economic benefits, during the accounting period, in form of increase in
assets or decrease in liabilities, resulting in increase in equity, other than contributions
from owners of the business

5 Expenses
A decrease in economic benefits, during the accounting period, in the form of
decreases in assets or increase in liabilities, resulting in decrease in equity, other than
distributions to owners of the business

Designed by Mrs T Jacobs (PmB)


Revised by Dr A Bhana (14 February 2023)
2023 Accounting & Financial Principles

1.2. Recognition criteria for elements


A transaction is included in one or more of the elements in the financial statements
only if it:
• Meets the definition of an element and
• Probably lead to a future economic benefit flowing to or from the entity and
• Be reliably measurable in monetary terms.

Designed by Mrs T Jacobs (PmB)


Revised by Dr A Bhana (14 February 2023)
2023 Accounting & Financial Principles

QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL


INFORMATION

The conceptual framework outlines the qualitative characteristics, which, when embodied in
the financial reports of an entity, are likely to be most useful to the primary users of those
financial reports when making decisions.
Qualitative characteristics apply to the information contained in the financial statements and
also to financial information presented in other ways.

• Relevance
 Relevant information is information that makes a difference to or will
influence the decision made by the user of the information.
 Relevant information is affected by its materiality. Information is
material if omitting it or stating it incorrectly will influence the decision
of the user. Materiality is therefore an aspect of relevance.

• Faithful representation
 In order to be useful, financial information must not only report what
is relevant but must do it in a way that faithfully represents what is being
reported.
 Financial information needs to be complete, neutral and free from
error.

• Comparability - Allows users to compare financial position and performance across


time and across companies.
• Verifiability – this means that two different users of the financial information would
come to a similar conclusion about whether or not faithful representation has been
achieved. Remember that certain predictive information can only be verified at a
future date.
• Timeliness - How quickly information is available to users of accounting information
after the financial period.
• Understandability -

Designed by Mrs T Jacobs (PmB)


Revised by Dr A Bhana (14 February 2023)
2023 Accounting & Financial Principles

UNDERLYING ASSUMPTION
Financial statements are prepared on the basis that the entity is a going concern i.e. it will
continue to operate as normal for the foreseeable future.

Designed by Mrs T Jacobs (PmB)


Revised by Dr A Bhana (14 February 2023)
2023 Accounting & Financial Principles

Exercise 1
Classify the following items (Assets, Liabilities, Owner’s Equity, Income or Expenses)

a) Capital contributed by the owner


b) Delivery vehicle
c) Weekly wages
d) Receipts from customers from sale of inventory
e) Stock/ inventory/ merchandise held for sale
f) Mortgage loan raised from the Bank
g) Telephone bill
h) Debtors (Accounts receivable)
i) Business computer
j) Interest received on fixed deposit
k) Fixed Deposit
l) Creditors (Accounts payables)
m) Land and Buildings
n) Interest paid on loan
o) Rent received from tenants
p) Discount Allowed
q) Depreciation on delivery vehicle
r) Stationery (envelopes, pens, glue, papers etc.)
s) Discount received
t) Office Photocopy machine
u) Bank overdraft
v) Machinery
w) Drawings
x) Rent paid
y) Water and electricity paid
z) Favourable bank account

Designed by Mrs T Jacobs (PmB)


Revised by Dr A Bhana (14 February 2023)
2023 Accounting & Financial Principles

SELF-ASSESSMENT EXERCISE 2

Kimmy’s Fashions is a business which sells clothing and other apparels. The business rents
shops in various shopping centres in KwaZulu-Natal from which they sell their merchandise.
The owner, Miss Kim Joshua has asked you to help her identify which items belong to the
elements which is required for the businesses financial statements.
Indicate whether each of the following items is an asset, a liability, an income or
an expense. You must view all transactions from Kimmy’s Fashions point of
view.

a) The monthly rental paid for all the shops.


b) A loan raised from AM Bank.
c) Petty Cash on hand.
d) Cash at the Bank.
e) Amounts owed to Kimmy by customers who bought on credit.
f) New delivery vehicle purchased for the business.
g) The stock of clothes on hand in each shop.
h) Amounts owed by Kimmy to his suppliers of stock.
i) Warehouse owned by Kimmy's used for storing stock.
j) Receipts from customers for the sale of shoes and bag.

Designed by Mrs T Jacobs (PmB)


Revised by Dr A Bhana (14 February 2023)

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