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Unit1 The Nature and Function of Accounting

Accounting is the measurement, processing, and communication of financial information about economic entities, serving as the language of the business community. Its main purpose is to provide financial information to users for informed decision-making, and it follows specific principles and concepts such as the cost principle and matching concept. Financial statements, including the statement of financial position and statement of profit or loss, summarize the financial activities of a business, detailing assets, liabilities, equity, income, and expenses.

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26 views21 pages

Unit1 The Nature and Function of Accounting

Accounting is the measurement, processing, and communication of financial information about economic entities, serving as the language of the business community. Its main purpose is to provide financial information to users for informed decision-making, and it follows specific principles and concepts such as the cost principle and matching concept. Financial statements, including the statement of financial position and statement of profit or loss, summarize the financial activities of a business, detailing assets, liabilities, equity, income, and expenses.

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deborahmwa960
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THE NATURE

AND
FUNCTION OF
ACCOUNTING
WHAT IS ACCOUNTING?

 Accounting or accountancy is the measurement, processing and communication of financial


information about economic entities. In simple terms, it's all about keeping track of money coming in and
going out.

 Accounting is known as the language of business community.


THE PURPOSE OF ACCOUNTING

The main purpose of accounting is to provide financial information to interested parties (users
of financial information) so that they are able to make sound and informed decisions about how
to manage their money, plan for the future, and stay financially healthy.
THE ACCOUNTING CYCLE
CHAPTER 4

1.
Transaction

6. Financial 2.
statements Document

5. Trial
3. Journals
Balance

4. General
Ledger
ACCOUNTING PRINCIPLES AND CONCEPTS
 Money is common unit of account: only transactions expressed in rands can be recorded in South Africa

 The cost principle: advocates that assets are recorded at their cost price

 The entity principle: the transactions of the owner and those of the business should be kept separate

 The Duality principle: every transaction affects two accounts

 Materiality principle: all material information need to be clearly shown in the financial statements of the
business
 Going concern concept: Financial statements are prepared on the assumption that the business will continue
with operations in the foreseeable future
 Matching concept: An accounting concept that matches expenses incurred with income earned in order to
arrive at net profit or loss.
USERS OF ACCOUNTING INFORMATION
Users of financial information WHY

Owners and investors Would want information about the performance of their
investment in terms of profit or loss

Management Need information for planning purposes


Employees Will be interested to know the prospects of their future
employment or to use the information in bargaining for salary
increments
Payables /suppliers They want to know that the money owing to them is likely to be
repaid
Government To calculate income tax and VAT respectfully

Note: The list is not exhaustive you can lookup other users of financial information on the internet.
Type of business activities
There three type of businesses
1. Service business: the business provides a service for a fee. Examples are hair salons, providers of
public transport, tutors etc…
2. Trading business (also known as a retail business): the business buys products and sell them for a
profit. Examples are retailers and wholesalers
3. Manufacturing business: the business produces and sell the products. Examples are furniture
manufacture design and produce furniture and sell them to retailers, food and beverage
manufacture produce food and drinks and sell them to supermarkets.
ECONOMIC ENTITIES/TYPES OF ENTITIES

 Sole Proprietor

 Partnership

 Non-Profit Company (NPC or NGO)

 Close Corporation

 Profit Company
 Private company
 Public company
WHAT ARE FINANCIAL STATEMENTS

Financial statements are formal records of the financial activities of the of a business
Financial statements are prepared at the end of the financial year
Financial statements disclose the financial position, financial performance, the source of finance of the
business and how it is used.
The following represent financial statements:
 Statement of financial position
 Statement of profit or loss and other comprehensive income

 Statement of cash flaw


 Assets (what the business owns)

 Liabilities (what the business owes)

ELEMENTS OF  Owners’ Equity (the owner’s share in the business)

FINANCIAL  Income (money the business earns)

STATEMENTS  Expenses (money the business spend)


ELEMENTS OF FINANCIAL STATEMENTS
Assets
 A present economic resource controlled by the entity as a result of past events

An economic resource is a right that has a potential to produce economic benefits


Assets are divided in to non-current assets, current assets and long-term investments
 Non-current assets: These are economic resources, held for use by the business with a life span of more
than one year from which economic benefit will flow in to the business. Example land and buildings
 Current assets: These are economic resources which are expected to be converted in to cash in the next 12
months. Example trading stock
 Long-term investment: Money invested for a period of more than one year. Example is a fixed deposit
ELEMENTS OF FINANCIAL STATEMENTS
Liability
 A present obligation of an entity to transfer an economic resource as a result of past event.

An obligation is a duty or responsibility that the entity has no practical ability to avoid.
Liabilities are divided into non-current liabilities and current liabilities
 Non-current liabilities: These are present obligations that are repayable in the period of more than
12 months. Examples: Loans or mortgage bond
 Current liabilities: These are present obligations that are repayable within 12 months. Examples
creditors
ELEMENTS OF FINANCIAL STATEMENTS
Equity
 Equity is the different between assets and liabilities of a business

 Examples: Capital and Drawings

 Capital: are assets contributed by the owner of the business

 Drawings: are assets taken out of the business by the owner


ELEMENTS OF FINANCIAL STATEMENTS

Income
 Increases in assets or

 Decreases of liabilities

 That results in increases in equity

 Other than those relating to contributions from holders equity claims

 Examples: Rent received, Sales and Interest received


ELEMENTS OF FINANCIAL STATEMENTS

Expenses
 Decreases in assets or

 Increases in liabilities

 Other than those relating to distributions to holders of equity claims.


 Examples: Cost of sales, water and electricity
LIST OF ACCOUNTS
Assets Liability Owners’ Income Expenses
Equity

Non-current assets Non-current Capital Sales Cost sales


Land liabilities Drawings Services rendered (current Salaries and wages
Buildings Loan income) Telephone
Vehicle Mortgage loan Rental received Water and electricity
Furniture Rent paid
Interest received on fixed- deposit
Insurance
Equipment Current liabilities Commission received
Interest on loan
Machinery Creditors Interest income Commission paid
Investment Bank overdraft Discount received Fuel
Fixed deposit Money owed to Credit losses recovered Patrol and oil
Current assets SARS for VAT Interest on savings Advertising
Bank (money in the Donation
Commission received
bank) Stationery
Cash Rates and taxes
Trading inventory/ stock Packing material
Debtors
Petty cash
Activity 1
Activity 1: Solution
Activity 2
Classify the following accounts as either Non-current asset, Current asset, Non-
current liability, Current liability, Owners’ equity, income or expense
Activity 2: Solution

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