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Fundamentals of Financial Accounting
Fifth Edition
Fifth Edition
Volume Editor
A MOHAMMADALI HAJI
CA(SA), RA(SA)
University of Johannesburg, College of Business and Economics
Co-workers
T Mohohlo
CA(SA)
T Mutshutshu
CA(SA)
B Sibiya
CA(SA)
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Preface
The language of International Financial Reporting Standards (IFRS Standards) is the predominant
globally recognised accounting language in most major capital markets. The application of IFRS
Standards in the preparation of financial statements is a legal requirement for all public com-
panies and certain private companies in South Africa. These IFRS Standards bring transparency,
accountability and efficiency to financial markets in South Africa and around the world. With
increased globalisation, a recognised standard accounting language makes South African com-
panies comparable with companies around the world.
Fundamentals of Financial Accounting deals with the concepts in the Conceptual Framework for
Financial Reporting (Conceptual Framework) and with key principles from selected IFRS Stand-
ards, to the degree that is possible in an introductory work on financial accounting. This work is
written for an introductory course in financial accounting and is aimed at delivering a responsible
and proficient accounting student with a desire for life-long learning.
Relevant routine transactions and events of a profit-orientated entity are contextualised, and the
recognition thereof is repeatedly and consistently traced back to the Conceptual Framework and
represented by means of a journal entry. This work is unique in how it integrates concepts and
principles with the accumulation of transactions and events in accordance with the double-entry
system.
Certainly, the most important value that a textbook such as this one contributes to an introductory
course in financial accounting is that it equips students with the ability to journalise a selection of
relevant routine transactions and events with understanding, to accumulate these in accounts
and to present and disclose them. It follows a contextualised learning experience and does so by
using relevant routine transactions which students can relate to. It also encourages students to
think critically by teaching them to apply accounting knowledge correctly.
Accounting records are mainly maintained by means of computers and applicable software pack-
ages. This makes journalising with understanding an essential component of the pedagogical
approach followed in this work.
Changes made for the fifth edition

During March 2018, the International Accounting Standards Board (IASB) issued the revised
Conceptual Framework, replacing the previous version issued in 2010 (Conceptual Framework
2010). The authors have decided to contextualise the textbook with the revised Conceptual
Framework only. Accordingly, the revised Conceptual Framework is covered in Chapter 2,
replacing the Conceptual Framework 2010, and Chapter 24 has been removed. Students are
alerted to the fact that the Conceptual Framework is not a Standard and that nothing in the Con-
ceptual Framework overrides any Standard or any requirement in a Standard. Therefore, the
IFRS Standards are used in solving accounting problems, and the Conceptual Framework helps
preparers to develop accounting policies when no IFRS Standard applies to a particular trans-
action or event, or when the IFRS Standard allows a choice of accounting policy. Students are
alerted to the fact that the recognition criteria in the IFRS Standards may be different from those
in the Conceptual Framework. The individual chapters cover the specific recognition criteria
where applicable.
Previous references to sole proprietorships have been deleted throughout, and the textbook now
focuses only on companies. Learning outcomes have been added to the beginning of each chap-
ter. In addition, the layout has also changed.
Recognition
The authors recognise the contributions of the previous authors of the first, second, third and
fourth editions, namely KN Mans, Y de Wet, HC Ponting and K Dempsey.
v
A few remarks regarding the layout of this work

Chapter 2 deals with the Conceptual Framework in a unique way. The key concepts are
entrenched throughout the work, and assets and liabilities are regularly justified and linked back
to them.
Chapter 3 provides a framework for the presentation of financial statements of a company,
including notes.
For educational purposes a few aspects are initially dealt with as follows:
x For the Conceptual Framework, only items that meet the definition of an element can be
recognised in the financial statements. However, not all items that meet the definition of one
of those elements are recognised. Items are recognised only if they add useful information
that is relevant and faithfully represented. In this work, the elements are assumed to pro-
vide a relevant and faithful representation.
x Chapter 3 presents a complete picture of a set of financial statements for a private com-
pany, including accompanying disclosure notes and accounting policies. At this stage,
students would not have been exposed to these financial statements or much of their con-
tent. Educators are therefore reminded that the purpose of this chapter is to show students
what a complete set of financial statements of a company looks like, but also to remind
them that they need not know everything at this point. Subsequent chapters cover relevant
concepts together with their presentation and disclosures. With each chapter that follows,
educators will have to return to this chapter and show students the presentation and dis-
closure impact of that chapter on the financial statements. Chapter 3 can be viewed as a
complete picture of a puzzle, and subsequent chapters as pieces of that puzzle that com-
plete the picture. Understanding this is crucial so that students are not confused at the end
of this chapter.
x The perpetual inventory system is used in the first 5 chapters. The periodic inventory
system is introduced in Chapter 6 and dealt with in detail from Chapter 14.
x Up to the end of Chapter 5, the effect that the journal entry has on the accounting equation
is reflected at the bottom of each journal. From Chapter 5, one of the following abbrevi-
ations is included between brackets next to each account mentioned in a journal entry:
– P/L (Profit or Loss) for income accounts and expense accounts;
– SCE (Statement of Changes in Equity) for the capital accounts and distribution
accounts; and
– SFP (Statement of Financial Position) for asset accounts and liability accounts.
x Value-added tax is applicable only from Chapter 8.
x The ‘simplified approach’ as defined in IFRS 9 Financial Instruments is used in this work for
the impairment of trade receivables. This is considered appropriate as it fundamentally
establishes the core principles of accounting for expected credit losses, which principles
can be built on in the later years of study.
x The lease recognition exemption for the lessee is applied in the initial chapters until the
lease principles are covered in Chapter 16. Therefore, rental paid is expensed in the initial
chapters on short-term or low-value leases.
The authors
November 2022
vi
Contents
Page
Chapter 1 Financial accounting – an introduction .............................................................. 1
Chapter 2 Conceptual Framework for financial reporting ................................................... 11
Chapter 3 Financial statements framework for a company ................................................. 57
Chapter 4 Double-entry rules and the application thereof .................................................. 83
Chapter 5 Recognition of transactions and events in the accounting records and the
presentation of account balances in the financial statements ........................... 115
Chapter 6 Review and adjustments .................................................................................... 227
Chapter 7 The closing off process ...................................................................................... 269
Chapter 8 Value added tax ................................................................................................. 281
Chapter 9 Property, plant and equipment........................................................................... 301
Chapter 10 Non-current assets: Intangible assets – trademarks, computer software
purchased and cryptocurrencies ....................................................................... 353
Chapter 11 Trade payables and trade receivables .............................................................. 365
Chapter 12 Cash and cash equivalents ................................................................................ 393
Chapter 13 Revenue from contracts with customers ............................................................ 413
Chapter 14 Inventories .......................................................................................................... 429
Chapter 15 Share-related transactions and other concepts ................................................. 473
Chapter 16 Loans and leases ............................................................................................... 511
Chapter 17 Non-current assets: Investment property ........................................................... 555
Chapter 18 Provisions, contingent liabilities and contingent assets ..................................... 565
Chapter 19 Events after the reporting period........................................................................ 579
Chapter 20 Non-current assets: Investment in subsidiary and other
financial investments .......................................................................................... 591
Chapter 21 Statement of cash flows ..................................................................................... 609
vii
1
CHAPTER
Financial accounting – an introduction
Contents
Paragraph
The nature of financial accounting ................................................................................................. 1
The development of financial accounting ...................................................................................... 6
Origin of accounting .................................................................................................................. 6
The influence of technological development ........................................................................... 10
The influence of the development of forms of entities ............................................................. 16
Sole Proprietorship ............................................................................................................. 19
Partnership ......................................................................................................................... 22
Company ............................................................................................................................ 26
The influence of the professional movement ........................................................................... 29
Related fields of study .................................................................................................................. 36
Management accounting ......................................................................................................... 37
Financial management ............................................................................................................ 39
Auditing ................................................................................................................................... 40
Internal control ......................................................................................................................... 42
Taxation ................................................................................................................................... 45
Sustainability accounting ......................................................................................................... 47
International Financial Reporting Standards ................................................................................ 48
Preface to International Financial Reporting Standards .......................................................... 48
The objectives of the IASB ...................................................................................................... 49
Scope and authority of International Financial Reporting Standards ...................................... 50
International Reporting Standards and this work..................................................................... 55
Why study accounting? ................................................................................................................ 58
1
The nature of financial accounting

1 Human knowledge may be classified into two broad disciplines – natural sciences, (for
example Physics, Chemistry and Physiology) and social sciences (for example Psychology,
Economics and Accounting).
2 There are various definitions of financial accounting, but in our view the following descrip-
tion embraces the essence of it:
The practice and knowledge of systematically identifying, measuring, recording and report-
ing of quantitative and qualitative information in respect of economic activities of entities,
that is useful for users in making economic decisions.
3 It is important that the information provided by the accounting process is relevant, reliable,
comparable and understandable for users worldwide. Therefore, there are certain guide-
lines with which one must comply. These guidelines are the set of assumptions, concepts,
principles, methods, procedures and standards jointly known as International Financial Re-
porting Standards (IFRS Standards) that were developed internationally by the accounting
profession. The treatment of accounting in this module is based on IFRS Standards. Refer-
ence to IFRS Standards will be made throughout this work.
4 Financial accounting provides information to the shareholders and other users who are not
involved in the daily operations of the entity. The information is distributed through the fi-
nancial statements that are prepared at least annually. A set of financial statements usually
includes a statement of financial position, a statement of changes in equity, a statement of
profit or loss, a statement of cash flows and additional notes and annexures.
5 In the chapters that follow various concepts, principles and practices of financial account-
ing are dealt with. This body of knowledge is directed towards one objective, namely com-
municating both financial and non-financial information about the entity to the stakeholders
so that they are able to understand the entity’s affairs and assess the uncertainties of the
general and business environment in which the entity operates.
The development of financial accounting
Origin of accounting
6 Modern financial accounting had its origin in the form of the double-entry system in Italy
towards the end of the 15th century.
7 Benedetto Cotrugli was probably the first writer on accounting. He completed a work on the
commercial function in 1458 and in one chapter presented a brief discussion of bookkeep-
ing. However, the work was published only some time later. The first published work was
the full description of the double-entry system by Luca Pacioli in his Summa de arithmetica
geometria proportioni et proportionalitate that was published in Venice in 1494. His Summa,
which was a mathematical work, contained a section on the Venetian method of double-
entry bookkeeping. Pacioli was an eminent sage and in the course of his career he served
as professor of mathematics at various universities in Italian cities. From 1514 onwards he
was professor at the Sapienza in Rome.
8 In the rest of Europe the first works on double-entry bookkeeping appeared towards the
middle of the 16th century: In Antwerp in 1543, in London in 1547 and in Germany in 1549.
9 In the main, the early literature described the technique of bookkeeping – of how transac-
tions could be recorded in accordance with the double-entry system. The development of
the theory of accounting, the why as opposed to the how, began only in the 19th century.
2
Chapter 1: Financial accounting – an introduction
The influence of technological development

10 Technological development and its influence on economic development, and more particu-
larly on business management, was undoubtedly one of the most important factors in the
development of accounting.
11 From the middle of the 18th century a series of technological developments and inventions,
inter alia that of the steam engine by Watt, ushered in the Industrial Revolution in England,
Europe and the United States of America. These inventions and developments led to mass
production techniques and the erection of factories that replaced the home industries.
Businesses became capital intensive; the cost of buildings and equipment; which had for-
merly not been an important factor, made up an ever-greater proportion of total production
costs. Far larger volumes of raw materials were handled in order to gain the benefits of
mass production, which meant that more raw materials and finished products were kept in
stock. Credit transactions in various forms grew in extent and transport, insurance and fi-
nancing services increased in significance. These phenomena led to the development of
cost accounting.
12 This development process is still in progress. Apart from the usefulness of extracting infor-
mation regarding the cost of an undertaking for the purposes of price and profit determina-
tion, management also needs this information for the purposes of planning and control.
Management accounting thus developed out of cost accounting.
13 Technological developments regarding transport and specifically the Internet in the 20th
century led to globalisation. With world markets becoming more accessible, companies
were conducting business beyond their countries borders. There was a growing need to
establish a set of international accounting guidelines and in 2001 the International Account-
ing Standards Board (IASB) was established. This board is responsible for the publication
of the IFRSs.
14 The Fourth Industrial Revolution (4IR) has led to several technological advances. These
include machine learning and automation, artificial intelligence, robotics, the Internet of
Things (IOT), 3D printing, quantum computing, blockchain, and the emergence of crypto-
currencies. The new facets introduced by these technologies change the way business is
carried out as well as the regulations that govern it. For example, cryptocurrencies act as a
medium of exchange as well as a store of value. Cryptocurrencies by nature are computer-
generated digital assets which are founded on revolutionary technology known as block-
chain. Because cryptocurrencies do not have legal tender status, they cannot be consid-
ered as fiat money. Fiat money is money that has been declared by a decree from the
government to be legal tender controlled by a central authority. For example, the South Af-
rican rand is fiat money as it is declared to be legal tender by the South African government
and is controlled by the South African Reserve Bank. Cryptocurrencies, on the other hand,
are governed by algorithms and operating protocols related to the underlying blockchain.
Blockchain is a distributed ledger which provides security through its algorithms. Block-
chain thus serves as a continuous record of all transactions since inception.
15 The Fifth Industrial Revolution (5IR) can be summarised as the combination of humans and
machines in the workplace. It is paving the way for innovations drawing humans and ma-
chines together. In this environment of 4IR and 5IR, it is critical for the accountant to co-
exist with machines. This requires the accountant to have critical technological skills.
The influence of the development of forms of entities

16 The development of different forms of entities from sole proprietorship, through partner-
ships, to companies contributed greatly to the development of accounting.
17 Three forms of business ownership currently exist in South Africa. These are
x a sole proprietorship;
x a partnership; and
x a company.
3
18 Entrepreneurs wishing to form a business entity consider a number of factors in deciding

which of the entity forms to choose. These factors include the number of owners, access to
funding, tax considerations and whether to operate as an unincorporated entity or as an in-
corporated entity.
Sole Proprietorship
19 This type of business entity is owned by one person. For small entities this is a popular form
of ownership since there are no formal procedures required to set up the entity. Expansion
in the sole proprietorship is limited by the funding available to the owner.
20 The sole proprietorship or sole trader, as it is often referred to, is not a separate legal entity
apart from its owner. It cannot be involved in any legal relationship or activity except in the
name of the owner.
21 For normal tax purposes, the sole proprietor is not a separate taxable entity. Therefore the
owner is taxed on the activities of the business entity in his or her personal capacity.
Partnership
22 A partnership is used for relatively small business entities that wish to take advantage of
combined financial capital, managerial talent and experience. This form of entity is also fre-
quently found amongst the professions, such as doctors, dentists, lawyers and account-
ants. However, some of the large audit, tax and advisory practices have chosen to
incorporate. There are specific provisions in the existing Companies Act to cater for this.
23 A partnership is a legal relationship which arises as a result of an agreement between two
or more persons, but not exceeding twenty. The membership of organised professions
which are designated by the Minister of Trade and Industries may, however, exceed twenty.
24 No legislation exists in South Africa to control partnerships. The principles of common law
are therefore applicable. A partnership is also not a legal entity and it has no legal standing
apart from the members who constitute it. The individual partners are the joint owners of the
assets and are jointly and severally liable for the liabilities of the partnership. In other words,
each partner could incur unlimited liability for all the debts and obligations of the partner-
ship.
25 A partnership is not taxed in its own right; it is not a taxable entity. The profits are taxed in
the hands of the individual partners.
Company
26 A company is a legal entity distinct from the persons who own it. The shareholders as a
group own the company through ownership of the shares issued by it. They do not person-
ally own its assets. They have no direct claim on the profit of the company. The profit be-
comes due to them only if it is distributed by way of dividends. The shareholders appoint a
board of directors to conduct the activities of the company. A company, being a separate
legal entity, is liable to pay tax on its profits.
27 The two most important types of companies (according to the Companies Act 71 of 2008)
are known as the public company and the private company.
28 Accounting is a necessity in every entity, regardless of type or size. It is so important that a
full-time international body, the IASB, which represents accounting experts from several
countries, exists to provide guidance on how to account for items and transactions, and on
how this information should be communicated (presented). How transactions are recorded/
accounted for and how this information is communicated, is basically the same for all types
of entities. Therefore, in this work, the generic reference to a commercial enterprise as an
entity will mostly be used.
4
The influence of the professional movement

29 One of the most important stages in the development of accounting was undoubtedly the
emergence and development of the two professions of accountancy and auditing. Account-
ing grew rapidly into a specialised discipline, and people began to qualify themselves in
order to enter the field in a professional capacity. The earliest reference to professional ac-
countants is as old as the literature on the double-entry system.
30 The formation of professional societies began towards the middle of the 19th century. The
year 1853 saw the establishment of the Society of Accountants in Edinburgh and of an Insti-
tute of Accountants and Actuaries in Glasgow, and during the next two decades a number
of similar societies were formed in England. In 1880, various professional accountants’ so-
cieties in Great Britain were amalgamated into the Institute of Chartered Accountants in
England and Wales, which developed into one of the most influential professional account-
ants’ societies.
31 In the United States of America, the first society of accountants was founded in New York in
1897. The Institute of Certified Public Accountants in the United States of America is today
one of the largest and most influential professional societies.
32 An important phase in the development of various professional societies was the decision
to make recommendations on accounting practice to members. In 1935, the American Ac-
counting Association decided to formulate basic principles applicable to financial state-
ments. In 1939, the American Institute of Certified Public Accountants initiated the
publication of bulletins on topical accounting subjects, and in 1942 the Institute of Char-
tered Accountants in England and Wales commenced publication of a series of recom-
mendations.
33 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.
34 The first organised society of accountants in South Africa came into being in 1894 with the
formation of the Institute of Accountants and Auditors in the then South African Republic.
Today the profession in South Africa is organised into various national accounting institutes
of societies, the most prominent being The South African Institute of Chartered Accountants
(SAICA) formed in 1980, and the South African Institute of Professional Accountants
(SAIPA) (formerly known as CFA and CPA).
35 In 1951, the Public Accountants’ and Auditors’ Act, which controls the practising section of
the accountancy profession in South Africa, was promulgated. This legislation created the
Public Accountants’ and Auditors’ Board, whose functions mostly entailed the registration of
accountants and auditors permitted to practice in public, discipline in the profession, and
the training of accountants. In 2006, the Independent Regulatory Board of Auditors was es-
tablished for the new auditing profession.
Related fields of study

36 During the past century various fields of study developed out of financial accounting, name-
ly management accounting and financial management. Other fields of study closely related
to financial accounting are auditing and taxation. Due to the historical course of events the
concept accounting was also used in the past to refer to the fields of study as a group. The
mastering of these fields of study on an integrated basis ensures the effective participation
to the economic environment.
Management accounting
37 Management accounting is a process of collecting, analysing, summarising and evaluating
various alternative courses of action. Its goal is to advise the management on the most ap-
propriate course of action based on the cost efficiency and capability. Cost accounting
provides the detailed cost information that management needs to control current operations
and plan for the future.
5
38 As mentioned above, management is also interested in the information contained in the

financial statements even though it has access to additional management and financial in-
formation that helps it carry out its planning, decision-making and control responsibilities.
Financial management
39 Financial management entails the planning, monitoring and controlling of the monetary
resources of an organisation in order to maximise shareholders wealth.
Auditing
40 In terms of the Companies Act 71 of 2008, certain companies are required to appoint an
auditor. It is the responsibility of the board of directors to have financial statements pre-
pared which fairly present the company’s financial position, performance and cash flows.
The role of the auditor is to express an opinion on the fair presentation of the information
and whether or not it has been prepared in accordance with IFRS Standards.
41 An audit is carried out by a firm of independent auditors and, as such, adds credibility to
the financial statements.
Internal control
42 A sound system of internal control is important to ensure that the business organisation is
effectively and efficiently run, that the assets are safeguarded, and that the financial state-
ments faithfully present the information which they purport to present.
43 A system of internal control ensures that:
x the information the directors need to make decisions is available;
x the delegated authorities are properly exercised;
x the data needed for the control of costs is accurate and complete; and
x the data needed for the preparation of financial statements is accurate and complete.
44 The internal control system is integral to ongoing business operations and is as important to
the continuation of the business as are market opportunities and cash flows. Internal control
is a subdivision of the subject Auditing.
Taxation
45 Accountants who are specialists in taxation assist their clients in planning their affairs in
order to minimise taxes payable. The taxes may, depending on the nature of the transac-
tion, include any of the following taxes: income tax, donations tax, estate duty, VAT and
transfer duty.
46 Tax specialists may also assist clients with the rendering of tax returns, the review of as-
sessments, objections to assessments with which the client disagrees and generally assist-
ing with any tax-related problems which might arise.
Sustainability accounting
47 Sustainability accounting is about measuring, analysing and reporting on a company’s
social and environmental impacts. Stakeholders are interested in more than financial mat-
ters: they are also interested in the company’s ESG. ESG refers to the environmental, social
and governance information about a company.
6
International Financial Reporting Standards
Preface to International Financial Reporting Standards

48 The IASB was established in 2001 and operates under the oversight of the IFRS Founda-
tion. The governance of the IFRS Foundation rests with the Trustees. The Trustees’ respon-
sibilities include appointing the members of the IASB and associated councils and
committees, as well as securing financing for the organisation. The IASB comprises full-time
members. Approval of IFRS Standards and related documents, such as the Conceptual
drafts is the responsibility of the IASB.
The objectives of the IASB

49 The objectives of the IASB are:
x to develop, in the public interest, a single set of high quality, understandable, enforce-
able and globally accepted financial reporting standards based on clearly articulated
principles. These standards should require high quality, transparent and comparable in-
formation in financial statements and other financial reporting to help investors, other
participants in the various capital markets of the world and other users of financial infor-
mation make economic decisions;
x to promote the use and rigorous application of those standards;
x to take account of, as appropriate, the needs of a range of sizes and types of entities in
diverse economic settings; and
x to promote and facilitate the adoption of IFRSs, being the standards and interpretations
issued by the IASB, through the convergence of national accounting standards and
IFRSs.
Scope and authority of International Financial Reporting Standards

50 IFRS Standards set out recognition, measurement, presentation and disclosure require-
ments dealing with transactions and events that are important in general purpose financial
statements. IFRS Standards are based on the Conceptual Framework for Financial Report-
ing (Conceptual Framework), which addresses the concepts underlying the information
presented in general purpose financial statements. The objective of the Conceptual
Framework is to facilitate the consistent and logical formulation of IFRS Standards. The
Conceptual Framework also provides a basis for the use of judgement in resolving account-
ing issues. The Conceptual Framework is dealt with in Chapter 2.
51 IFRS Standards are designed to apply to the general purpose financial statements and
other financial reporting of profit-oriented entities. Profit-oriented entities include those en-
gaged in commercial, industrial, financial and similar activities, whether organised in corpo-
rate or in other forms.
52 The objective of general purpose financial statements is to provide financial information
about the reporting entity – that is, the financial position, performance, cash flows and relat-
ed notes of an entity – that is useful to existing and potential investors, lenders and other
creditors in making economic decisions relating to providing resources to the entity.
53 A complete set of financial statements includes a statement of financial position, a state-
ment of profit and loss, a statement of changes in equity, a statement of cash flows and ac-
counting policies and explanatory notes.
54 Standards approved by the IASB include paragraphs in bold type and plain type, which
have equal authority. Paragraphs in bold type indicate the main principles. An individual
standard should be read in the context of the objective stated in that standard.
7
International Reporting Standards and this work

55 The following publications issued by the IASB are of particular interest with regards to the
studying of financial accounting:
x Conceptual Framework for Financial Reporting;
x International Financial Reporting Standards (IFRSs) – currently 16 standards; and
x International Accounting Standards (IASs) – currently 25 standards.
56 The Conceptual Framework for Financial Reporting contains the basic concepts of account-
ing which forms the foundation for the recognition and measurement of a variety of transac-
tions and events found in a profit-orientated entity. Each of the standards (IFRS Standards
and IAS Standards) contains the principles, methods, procedures and rules applicable to
transactions and events in respect of a specific topic (for example inventories), which are
important for general purpose financial statements.
57 This work deals with the fundamentals of financial accounting. Consequently, the focus is
on the Conceptual Framework and a few standards. A (sometimes highly limited) selection
of principles, methods, procedures and rules which are contained in the following stand-
ards are, to the degree that it is possible in an introductory work on financial accounting,
dealt with:
x Preface to International Financial Reporting Standards;
x Conceptual Framework for Financial Reporting;
x IAS 1 Presentation of Financial Statements;
x IAS 2 Inventories;
x IAS 7 Statement of Cash Flows;
x IAS 10 Events after the Reporting Period;
x IAS 16 Property, Plant and Equipment;
x IAS 23 Borrowing Costs;
x IAS 32 Financial Instruments: Presentation;
x IAS 33 Earnings per Share;
x IAS 36 Impairment of Assets;
x IAS 37 Provisions, Contingent Liabilities and Contingent Assets;
x IAS 38 Intangible Assets;
x IAS 40 Investment Property;
x IFRS 7 Financial Instruments: Disclosure;
x IFRS 9 Financial Instruments;
x IFRS 15 Revenue from Contracts with Customers; and
x IFRS 16 Leases
Why study accounting?

58 Accounting is one of the oldest professions in the world and has, over time, been the career
option of choice for many. A wide variety of career opportunities exist for those with training
in accountancy. The accounting profession enjoys a great deal of prestige in society and
provides a great deal of job satisfaction and security. The accountant, in the performance
of his normal responsibilities, acquires a thorough insight into all the aspects of an entity’s
activities. An accounting qualification, and more specifically a professional qualification, is
thus an excellent entry opportunity into the business world, both locally and globally.
8
59 It is important to remember that all industries need accountants. There may be concerns
that the work of the accountant may have become redundant with the advent of technology;
however, this is not true. As technology has evolved, so has the role of the accountant.
When working with spreadsheets and financial statements, accountants need to be able to
apply their critical thinking skills to interpret the story behind the numbers. They need to be
able to spot trends and irregularities, and they need to be able to devise strategies and find
solutions to problems. Critical thinking skills for decision-making are one of the essential
skills required of accountants. Entrepreneurship is critical for developing economies, and
accounting offers its very valuable contribution to the development and training of innova-
tive and dynamic professionals who contribute to the development of the economy through
entrepreneurship.
9
2
CHAPTER
Conceptual Framework for Financial Reporting
Contents
Paragraph
Learning outcomes ...........................................................................................................................
Outline ............................................................................................................................................ 1
General purpose financial reports .................................................................................................. 7
Objective of general purpose financial reports ......................................................................... 7
Users of financial reports ........................................................................................................... 9
Components of financial statements ....................................................................................... 16
Statement of financial position ............................................................................................ 18
Statement of profit or loss ................................................................................................... 19
Statement of cash flows ...................................................................................................... 21
Statement of changes in equity .......................................................................................... 23
Notes .................................................................................................................................. 24
Reporting entity and related concepts ......................................................................................... 25
Reporting entity ....................................................................................................................... 25
Reporting period and the reporting date ................................................................................. 28
Accrual accounting – the basis on which financial statements are prepared ......................... 30
Underlying assumption – going concern ................................................................................. 32
Qualitative characteristics of useful financial information ............................................................. 34
Fundamental qualitative characteristics .................................................................................. 36
Relevance ........................................................................................................................... 37
Faithful representation ........................................................................................................ 38
Enhancing qualitative characteristics ...................................................................................... 43
The cost constraint on useful financial statements .................................................................. 48
Transactions and events .............................................................................................................. 49
Transactions ............................................................................................................................ 49
Events ...................................................................................................................................... 52
Elements of financial statements .................................................................................................. 54
Outline ..................................................................................................................................... 54
Financial position ..................................................................................................................... 57
Introduction ......................................................................................................................... 57
The element assets ............................................................................................................. 58
The definition of the element assets ................................................................................... 60
Economic resource ........................................................................................................ 61
Right............................................................................................................................... 62
Potential to produce economic benefits ........................................................................ 66
Control ........................................................................................................................... 68
The element liabilities ......................................................................................................... 81
The definition of the element liabilities ................................................................................ 82
An obligation .................................................................................................................. 83
Transfer of an economic resource ................................................................................. 85
Present obligation as a result of past events ................................................................. 88
The definition of the element equity (shareholder’s interest) .............................................. 90
Financial performance (Profit/loss for the period).................................................................. 101
11
Paragraph
Introduction – the nature of retained earnings .................................................................. 101
Profit for the period ........................................................................................................... 108
The definition of the element income ................................................................................ 111
The definition of the element expenses ............................................................................ 118
Recognition and measurement of the elements ......................................................................... 127
Recognition ........................................................................................................................... 127
Measurement ......................................................................................................................... 135
Introduction ....................................................................................................................... 135
Measurement bases ......................................................................................................... 138
The historical cost model ............................................................................................. 138
The fair value model..................................................................................................... 139
Subsequent measurement ................................................................................................ 140
Recognition and measurement of equity (only share capital and dividends) ....................... 142
The nature, recognition and measurement of share capital ............................................. 143
The nature, recognition and measurement of dividends .................................................. 146
Applications – Recognition and initial measurement of assets, liabilities and equity
(share capital) within the framework of the
accounting equation ........................................................................................................... 149
Introduction ....................................................................................................................... 149
Recognition and initial measurement of the increase in the asset-item cash
and the increase in the associated equity-item share capital........................................ 154
Recognition and initial measurement of the increase in the asset-item cash
and the increase in the associated liabilities-item loan received ................................... 161
Recognition and initial measurement of the increase in the asset-item trade
inventories and the increase in the associated liabilities-item trade payable ................ 169
Recognition and initial measurement of the increase in the asset-item delivery vehicle
and the decrease in (derecognition of) the asset-item cash ......................................... 180
Recognition of income ........................................................................................................... 187
Recognition of an expense .................................................................................................... 190
Applications – Recognition and initial measurement of income and expenses within the
framework of the accounting equation ............................................................................... 193
Introduction .................................................................................................................. 193
Recognition and initial measurement of the increase in the expense-item
maintenance and the increase in the associated liabilities-item payable ................. 195
Recognition and initial measurement of the increase in the expense-item wages
and the decrease in (derecognition of) the associated asset-item cash .................. 206
Recognition and initial measurement of the increase in the income-item revenue
and the increase in the associated asset-item cash ................................................. 215
Recognition and initial measurement of the increase in the income-item revenue
and the increase in the associated asset-item trade receivable............................... 232
Recognition and initial measurement of the increase in the income-item rent in-
come and the increase in the associated asset-item cash ....................................... 248
Derecognition of assets and liabilities ........................................................................................ 258
Derecognition of trade receivables ....................................................................................... 262
Derecognition of trade payables and loans .......................................................................... 263
Presentation and disclosure ....................................................................................................... 265
Examples
Example
2.1 The dual effect of transactions on the accounting equation
2.2 The dual effect of transactions on the accounting equation
12
Chapter 2: Conceptual Framework for Financial Reporting
Learning outcomes
After studying this chapter, you should be able to:
x explain the purpose and status of the Conceptual Framework for Financial Reporting;
x explain how the Conceptual Framework for Financial Reporting interacts with IFRS Standards;
x explain the mission of the IFRS Foundation and the International Accounting Standards Board;
x explain the objective of general purpose financial reports;
x explain who the primary users of the financial reports are, their specific information needs
and why they need that information;
x explain each of the components of the financial statements;
x explain the concepts of reporting entity, reporting period, reporting date, accrual accounting
and going concern;
x explain the fundamental and enhancing qualitative characteristics;
x explain the difference between transactions and events;
x explain and apply the elements of the financial statements: assets, liabilities, equity, income,
expenses and understand the relationship between each in the accounting equation, and
specifically in the context of the following transactions:
o recognition and initial measurement of the increase in the asset-item cash and the in-
crease in the associated equity-item share capital;
o recognition and initial measurement of the increase in the asset-item cash and the in-
crease in the associated liabilities-item loan received;
o recognition and initial measurement of the increase in the asset-item trade inventories and
the increase in the associated liabilities-item trade payable;
o recognition and initial measurement of the increase in the asset-item delivery vehicle and
the decrease in (derecognition of) the asset-item cash;
o recognition and initial measurement of the increase in the expense-item maintenance and
the increase in the associated liabilities-item payable;
o recognition and initial measurement of the increase in the expense-item wages and the
decrease in (derecognition of) the associated asset-item cash;
o recognition and initial measurement of the increase in the income-item revenue and the
increase in the associated asset-item cash;
o recognition and initial measurement of the increase in the income-item revenue and the
increase in the associated asset-item trade receivable; and
o recognition and initial measurement of the increase in the income-item rent income and
the increase in the associated asset-item cash;
x explain the concept of recognition, understand its relationship to the accounting equation
and the double-entry system;
x explain the concept of measurement, and the different measurement bases available;
x explain the recognition and measurement of share capital and dividends;
x explain the derecognition of assets and liabilities, specifically trade receivables, trade paya-
bles and loan; and
x explain the principles supporting presentation and disclosure.
13
Outline
1 In this chapter, a conceptual framework for the recognition of transactions and events in the
accounting records/financial statements is dealt with on an introductory basis.
2 The Conceptual Framework for Financial Reporting was issued by the International Account-
ing Standards Board (IASB) in September 2010. It was revised in March 2018. Set out in the
Conceptual Framework are the objectives of, and the concepts for, general purpose finan-
cial reporting.
3 The introduction to the Conceptual Framework states that the purpose of the Conceptual
Framework is to provide assistance to:
x the IASB to develop IFRS Standards (Standards) that are based on consistent concepts;
x preparers of financial statements to develop consistent accounting policies when no
Standard applies to a particular transaction or other event, or when a Standard allows a
choice of accounting policy; and
x all parties to understand and interpret the Standards.
4 The Conceptual Framework is not a Standard and nothing in the Conceptual Framework
overrides the Standards or requirements of the standard. Notably, there will be cases where
the IASB will specify requirements that depart from aspects of the Conceptual Framework,
1
and reasons for such cases will be explained by the IASB in the Basis for Conclusions on
that Standard. The Conceptual Framework may be revised from time to time. Revisions of
the Conceptual Framework do not automatically lead to changes to the Standards.
5 The mission of the IFRS Foundation and the IASB is to develop Standards that will result in
transparency, accountability and efficiency to financial markers globally. It is the intention of
the IASB to serve the public interest of the public by fostering trust, growth and long-term
financial stability in the global economy.
6 The Conceptual Framework in this chapter (that is, for financial reporting) deals with
x general purpose financial reports;
x the reporting entity and related concepts;
x the qualitative characteristics of useful financial information;
x transactions and events; and
x the definition, recognition, measurement and derecognition of the elements of financial
statements.
General purpose financial reports
Objective of general purpose financial reports

7 The Conceptual Framework informs the foundation for general purpose financial reporting
and other financial reporting. Other financial reporting entails quantitative as well as quali-
tative information that are provided outside the financial statements and assists in the in-
terpretation of the financial statements or improves a users’ ability to make the most efficient
economic decisions (see the Preface to IFRS.7). The focus of this work is on financial report-
ing in the form of general purpose financial reports. Financial reports are a structured expos-
ition of the financial position and the financial performance of the reporting entity.
8 The objective of general purpose financial reports is to provide financial information about
the financial position, the financial performance and the cash flow of the reporting entity,
1 The Basis of Conclusions accompanies an IFRS Standard and summarises the considerations of the IASB in
reaching some of the conclusions in that IFRS Standard.
14
which is useful to existing and potential investors, lenders and other creditors in making
economic decisions relating to providing resources to the reporting entity. Financial reports
also reflect the result of the stewardship of an entity’s management over the resources en-
trusted to it. To achieve this objective, financial statements provide information about the
economic resources of the entity, claims against the entity and changes in those resources
and claims, being the reporting entity’s assets, liabilities, equity, income, expenses and
cash flow.
Users of financial reports

9 The Conceptual Framework identifies existing and potential investors, lenders and other
creditors as the primary users to whom general purpose financial reports are directed.
10 The majority of existing and potential investors, lenders and other creditors cannot request
the reporting entity to provide information directly to them and consequently have to rely on
the general purpose financial reports of the reporting entity as their main source of infor-
mation in respect of the entity. Potential investors, lenders and other creditors are conse-
quently seen as the primary or main users of general purpose financial reports. Other users
are the government and government institutions as well as members of the public such as
customers, employees and the community.
11 The decisions of investors, lenders and other creditors are usually made based on a fore-
cast of the reporting entity’s ability to generate net cash inflow in the future. The information
contained in the financial statements is useful for the primary users to make a forecast in
respect of the entity’s ability to generate cash and cash equivalents, the amounts, timing
and uncertainties of future cash flow and whether the entity will probably be successful in
obtaining loans in the future. Information regarding solvency and liquidity is used to fore-
cast the entity’s ability to timeously settle obligations/liabilities.
12 Investors, lenders and other creditors often use historical information to determine future
prospects. The forecast of the net cash inflow that an entity will probably generate in the
future will, at least partially, be based on the historical performance of the entity. Historical
performance of an entity is also an indication of how effective the management’s steward-
ship is over the economic resources entrusted to it.
13 General purpose financial reports do not provide all the information that existing and poten-
tial investors, lenders and other creditors require. These users will also consider other
sources of information such as general economic conditions and expectations, political
events and political climate, the relevant industry as well as the entity’s prospects. General
purpose financial reports are also not designed to indicate the value of the reporting entity,
but provide information that will help existing and potential investors, lenders and other
payables estimate the value of the reporting entity.
14 The management of a reporting entity is also interested in financial information regarding
the entity. Management, however, does not need to rely on general purpose financial re-
ports, since it can obtain the financial information internally.
15 Although other users (the government and government institutions, customers, employees
and the community) may also find general purpose financial reports useful, these financial
reports are not primarily directed to this other group of users.
Components of financial statements

16 Financial statements are a particular form of general purpose financial reports. Financial
statements provide information about economic resources of the reporting entity, claims
against the entity, and changes in those economic resources and claims. Financial state-
ments comprise the following components:
x the statement of financial position;
x the statement of profit or loss;
15
x the statement of cash flows;

x the statement of changes in equity; and
x notes.
17 There is a close relationship between the various components of financial statements. The
effect of a transaction or event resulting from the entity’s operating activities will usually in-
fluence both the statement of profit or loss and the statement of financial position, while the
statement of cash flows is basically inferred from the other components of financial state-
ments. No single statement or even all the statements collectively provides all the infor-
mation that users of financial statements require. Financial statements are dealt with in more
detail in Chapter 3 and onwards. In this chapter, we give only a brief overview of each of
the components of financial statements.
Statement of financial position

18 The statement of financial position reflects the extent and composition of the economic
resources (assets) of the reporting entity as well as the extent and composition of the
claims (liabilities) against such resources on a specific date, namely the reporting date.
Since the statement contains comparative amounts as at the previous reporting date, the
statement also reflects the effect of transactions and events on the resources and claims
against the resources in the previous reporting period as well as the changes between the
reporting periods. The shareholder’s interest, called equity, is the difference between the
resources (assets) of the reporting entity and the claims (liabilities) against such resources.
The statement of financial position was previously referred to as the balance sheet. Refer to
the statement of financial position as contained in Chapter 3.
Statement of profit or loss

19 The statement of profit or loss provides information about the financial performance of the
reporting entity during a specific period, namely the reporting period. This is information
about the effects of transactions and other events that change a reporting entity’s economic
resources and claims. Financial performance is the relationship between the income and
expenses of an entity for a reporting period. The statement of profit or loss reflects the
extent and composition of the income as well as the extent and composition of the expenses
for a specific reporting period. In this work, it is sufficient to use the term/title statement of
profit or loss, since other comprehensive income will not be dealt with. The statement of
profit or loss was previously referred to as the income statement. Refer to the statement of
profit or loss as contained in Chapter 3.
20 Information about an entity’s financial performance helps users to understand the return
(income less expenses) the entity has produced with the economic resources.
Statement of cash flows

21 The statement of cash flows provides information in respect of:
x the changes in the reporting entity’s financial position during a specific period in a for-
mat that makes it possible to evaluate the entity’s investing, financing and operating
activities;
x the manner in which cash and cash equivalents were obtained and utilised by the entity;
and
x the ability of the entity to generate cash and cash equivalents.
22 Refer to the statement of cash flows as contained in Chapter 21.
Statement of changes in equity

23 The statement of changes in equity provides detail of the composition of the finance pro-
vided by the shareholder(s) to the entity and the changes therein during a specific report-
ing period. The statement of changes in equity reflects in respect of a specific reporting
16
period, the extent of and changes in capital contributions by the shareholder(s) as well as
earnings that were retained in the entity after distributions to the shareholder(s) (dividends)
were made. Refer to the statement of changes in equity as contained in Chapter 3.
Notes
24 The notes to the financial statements provide information that is necessary to understand
the statements better. This includes information about the accounting policy followed by the
entity, risks and uncertainties that affect the reporting entity as well as resources and
claims/liabilities that are not recognised/included in the financial statements.
Reporting entity and related concepts
Reporting entity
25 When the transactions and events of an entity are recorded, classified and communicated
in financial statements, the boundaries of the entity in respect of which is reported on must
clearly be demarcated. The reporting entity concept is a fundamental concept in account-
ing. In accordance with this concept, a specific enterprise/business is deemed to be an en-
tity that, for accounting purposes, operates totally separately from the shareholder(s) and
also separately from all other accounting entities. Accounting entities are therefore clearly
identifiable, separate enterprises.
26 The accounting process therefore focuses on setting procedures to accumulate all financial
information that relate to a specific entity in that reporting entity’s accounting records.
Financial information that does not pertain to the entity is not accumulated in the records of
the entity. For example, the purchase of water pipes by the owner of a plumbing business,
for use by the business, will be accumulated in the separate accounting records of the
business. On the other hand, the purchase of groceries by the owner for personal use
bears no reference to the owner’s plumbing business and will consequently not be accu-
mulated in the business’ financial records. A reporting entity can inter alia be a sole propri-
etor, a school, a society or a company. The accounting entity concept is in respect of a
company as a form of an entity, in accordance with the Companies Act, which determines
that a company is a separate legal person that is independent from the shareholders (own-
ers).
27 A reporting entity is an entity that is required, or chooses, to prepare financial statements.
Entities could be sole proprietors, partnerships, close corporations or companies. This work
focuses on an entity which is a company. There are various types of companies. The two
types relevant for this work are private companies (which have a name ending in ‘(Pty) Ltd’
– Proprietary Limited) and public companies (which have a name ending in ‘Ltd’ – Limited)
(refer to Chapter 3, paragraphs 9 to 28). A private company is for profit, does not offer its
shares to the public and restricts the transfer of its shares. It is the most common type of
company. A public company is also for profit, but its shares can be listed on an exchange,
allowing for easier transferability of the shares. The owners of a company are called share-
holders.
Reporting period and the reporting date

28 In accordance with the time-interval concept of accounting, the reporting life of an entity is
divided into separate consecutive periods. The norm is consecutive periods of twelve
months. Each separate period is known as the reporting period. Each reporting period is
reported on in the form of the statement of profit or loss, the statement of changes in equity
and the statement of cash flows. The last day of a reporting period is known as the report-
ing date. On each reporting date, a statement of financial position is prepared.
29 Financial statements include information about transactions and other events that have
occurred after the end of the reporting period if providing that information is necessary to
meet the objective of financial statements (see Chapter 19 in this regard).
17
Accrual accounting – the basis on which financial statements are

prepared
30 In order to achieve the set objectives, the statement of profit or loss, the statement of
changes in equity and the statement of financial position are prepared from accounting
records in which the effect of transactions and events are, where applicable, accumulated
in accordance with accrual accounting.
31 In accordance with accrual accounting, the effect of transactions that are incurred on
credit, are recorded in the accounting records when the transaction or event is incurred
and not only at that point in time when settlement takes place. Or as stated in the Concep-
tual Framework, accrual accounting depicts the effects of transactions and other events
and circumstances on a reporting entity’s economic resources and claims in the periods in
which those effects occur, even if the resulting cash receipts and payments occur in a dif-
ferent period. Stated differently, in accordance with the accrual basis of accounting, items
are recognised as assets, liabilities, equity, income and expenses (that is the elements of
financial statements) when the items satisfy the definition of that element and the recog-
nition criteria (see IAS 1.28). The definitions of elements are discussed later in this chapter.
The practical implication of accrual accounting is that the purchase of an asset on credit,
the receipt of a loan, the sale of trade inventories on credit, the incurrence of an expense on
credit and the subsequent settlement of the debt, are separate transactions.
Underlying assumption – going concern

32 In this work, it is accepted that the entity is a going concern. The reporting entity normally
prepares financial statements on the assumption that the entity is a going concern and will
therefore continue to be in operation for the foreseeable future. Therefore, it is assumed that
that the entity has neither the intention nor the need to liquidate or curtail materially the
scale of its operations.
33 Foreseeable future relates to the 12-month period after the reporting date.
Qualitative characteristics of useful financial information

34 The qualitative characteristics of useful financial information discussed below identify the
types of information that are likely to be most useful to the existing and potential investors,
lenders and other creditors for making decisions about the reporting entity on the basis of
information in its financial report. Subsequently, attention is given on an introductory basis
to the characteristics that financial information should consist of to be useful. For financial
information to be useful, it should be relevant and a faithful representation of what it pur-
ports to represent. The usefulness of financial information is enhanced if it is comparable,
verifiable, timely and understandable.
35 The Conceptual Framework distinguishes between fundamental qualitative characteristics
and enhancing qualitative characteristics of financial information.
Fundamental qualitative characteristics

36 The fundamental qualitative characteristics are relevance and faithful representation.
Relevance
37 Relevant financial information is capable of making a difference in decisions made by
users. Relevant information has one or both of the characteristics of confirmatory value or
predictive value. Financial information has predictive value if it can be used by users as an
input to predict future outcomes. On the other hand, financial information has confirmatory
value if it provides feedback about previous evaluations. When evaluating the relevance of
18
information, materiality plays a role. Usually only material items are relevant, but the report-
ing entity has to apply proper judgement to determine which items are not material. Infor-
mation is seen to be material if the omission, misstatement or obscuring thereof could have
an influence on the decisions that the primary users make based on that information.
Faithful representation
38 Financial reports represent economic phenomena that are expressed in words and
amounts. To be useful, financial information must not only represent relevant phenomena,
but it must also be a faithful representation of the substance of the phenomena it purports
to represent. The substance of an economic phenomenon and its legal form are often the
same. However, if they are not the same, providing information only about the legal form
would not faithfully represent the economic phenomenon. This is called ‘substance over
form’. A perfectly faithful representation has three characteristics: it will be complete, neu-
tral and free from error. A perfect representation is probably not achievable, but it should
be the aim.
39 A complete representation includes all information necessary for a user to understand the
phenomenon that is represented, including all necessary descriptions and explanations.
40 A neutral representation is without bias in the selection and presentation of financial infor-
mation. A neutral representation is not slanted, weighted, emphasised, de-emphasised or
otherwise manipulated to increase the probability that the financial information will be re-
ceived favourably or unfavourably by users.
41 Neutrality is supported by the exercise of prudence. Prudence is the exercise of caution
when making judgements under conditions of uncertainty. The exercise of prudence means
that assets and income are not overstated, and liabilities and expenses are not under-
stated. Equally, the exercise of prudence does not allow for the understatement of assets or
income or the overstatement of liabilities or expenses. Such misstatements can lead to the
overstatement or understatement of income or expenses in future periods.
42 Faithful representation does not mean accurate in all aspects. Free from error means there
are no errors or omissions in the description of the phenomenon. Free from error also
means that the selection and the application of the process followed to generate the infor-
mation that is represented is free from errors. The information contained in financial state-
ments is, to a large extent, based on estimates, the application of judgement, the usage of
models, and methods, and is therefore not an exact representation.
Enhancing qualitative characteristics

43 Comparability, verifiability, timeliness and understandability are qualitative characteristics
that enhance the usefulness of information that is relevant and faithfully represented.
44 Comparability of information for the reporting entity during and between reporting periods
and between entities enhances the usefulness of information for the users thereof. To help
users of financial statements to identify and assess changes and trends, financial state-
ments provide comparative information for at least one preceding reporting period. Con-
sistency is the most important characteristic that supports comparability. Consistency is the
use of the same methods for the same items, either in a single period within a reporting en-
tity or from period to period within a reporting entity or in a single period across entities.
Consistency is ensured if the number of accounting methods available to represent an eco-
nomic phenomenon is limited to the minimum.
45 Verifiability provides assurance to users that the information, as represented in the financial
reports, is a faithful representation of the phenomena that it purports to represent. Verifiabil-
ity means that an informed user can evaluate a depiction and decide whether it is a faithful
representation. Some depictions, such as the market value of listed shares, can be verified
explicitly, while other depictions require the application of models and judgement.
19
46 Timeliness means to have information available on time, so that the information has the
ability to influence the users’ decisions. Generally, the older the information, the less useful
it is for decision-making. Tension could exist between supplying information on time and the
faithful representation of information. In order to provide information on time, it may be
necessary to report on matters before all aspects of the representation are known. Conse-
quently, completeness and accuracy could be forfeited.
47 Understandability of information is brought about by appropriately classifying the infor-
mation and categorising it in a clear concise representation. In this regard, it is accepted
that users have reasonable knowledge of business and economic activities as well as
accounting and that they are prepared to study the information purposefully. Information
regarding complex issues must not be left out merely because users might possibly not
understand it.
The cost constraint on useful financial statements

48 Although the reporting entity incurs the cost in respect of the collection, processing and
verification of information as well as the preparation and distribution of the financial state-
ments, the costs are ultimately borne by the users in the form of reduced returns from the
reporting entity. A continuous constraint on supplying all financial information is the cost
associated with the preparation thereof. If the cost associated with the preparation of infor-
mation exceeds the benefit that would be obtained from supplying it, such information may
not be required in terms of accounting standards. The IASB takes this into account when
developing accounting standards.
Transactions and events
Transactions
49 An entity’s participation in the economy occurs through transactions with other entities and
individuals. Many transactions entail the exchange of goods and services for cash or on
credit. For example, an entity purchases trade inventories from another entity, sells the
trade inventories to customers, pays salaries to employees for services delivered, etc.
50 Transactions with other entities and individuals always take on the form of a contract be-
tween the related parties. The legal form of transactions in respect of the acquisition of
goods and services and the sale of trade inventories is a purchase contract, which can be
a written or oral agreement. The acquisition of property by an entity is also regulated by a
purchase contract, but in the case of property, the purchase contract has to be in writing.
The relationship between an entity and the entity’s employees is regulated by a written em-
ployment contract. The relationship between the entity as a borrower of funds from a finan-
cial institution, as lender of funds, is regulated by a written loan agreement. The legal
relationship between the lessee and the lessor of property is regulated by a written lease
agreement.
51 A second category of transactions has its origin in legislation. For instance, entities collect
Value Added Tax (VAT), Income tax and other levies on behalf of the government.
Events
52 Apart from transactions, there are events which an entity accumulates in the accounting
records in the same way as transactions. These events do not entail an exchange of goods
or services for cash – for example, when an entity’s assets are destroyed in an incident
(refer to Chapters 9 and 14) or when an entity is sued by one of its customers (refer to
Chapter 18). Events usually originate from accounting processes such as subsequent
measurement and the adjustment process which is performed on each reporting date and
inter alia result in the recording of depreciation, doubtful debts, accrued and prepaid ex-
penses and finance costs.
20
53 The financial effect of transactions and events are accumulated in the financial records of
an entity with reference to the elements of the end product of accounting, namely the finan-
cial statements. The elements of financial statements are assets, liabilities, equity, income
and expenses.
Elements of financial statements
Outline
54 The end product of the accounting process is the delivery of four general purpose financial
statements, namely the statement of profit or loss, the statement of changes in equity, the
statement of financial position and the statement of cash flows.
55 General purpose financial statements provide information about the performance, financial
position and cash flow of an accounting entity that is useful to the shareholders and other
users, such as the providers of finance.
56 The financial statements of an entity describe the financial effect of transactions and events
by classifying these transactions and events in accordance with the economic characteris-
tics thereof into categories (named elements). The elements that relate directly to the
measurement of the financial position of the entity are assets, liabilities and equity and are
presented in the statement of financial position. The elements that relate directly to the
measurement of financial performance are income and expenses and are presented in the
statement of profit or loss. This can be linked and depicted as follows:
Statement Objective of financial reporting Element

Economic resource Asset
Statement of financial
Liability
position Claim
Equity
Changes in economic resources and Income
Statement of financial
claims, reflecting financial
performance
performance Expenses
Financial position
Introduction
57 The elements that relate directly to the measurement of the financial position are assets, lia-
bilities and equity and are presented in the statement of financial position. These elements
stand in a specific relationship to each other, which is called the accounting equation:
Assets = Liabilities + Equity
The element assets

58 The element assets comprise various asset items. Examples of asset items are land, build-
ings, machinery, vehicles, equipment, trademarks (acquired rights to sell a specific trade-
mark product), trade inventories, trade receivables (arise from the sale of trade inventories
on credit), fixed term investments (investment of surplus cash) as well as cash and cash
equivalents (call deposits). Refer to the asset items as presented in the statement of finan-
cial position in the ‘Financial statements framework for a company’ as contained in Chapter 3.
59 Although a number of assets have a physical form (e.g. property, plant and equipment,
inventories), it should be noted that physical form is not essential to the existence of an asset
(refer to Chapter 10).
21
The definition of the element assets

60 The definition of an asset is as follows:
An asset is a present economic resource controlled by the entity as a result of past events (Con-
ceptual Framework 4.3).
Economic resource
61 An economic resource is defined as a right that has the potential to produce economic
benefits (Conceptual Framework 4.4). The Conceptual Framework subsequently defines a
right as the potential to produce economic benefits and control.
Right
62 Rights that have the potential to produce economic benefits include:
o rights that correspond to an obligation of another party, such as:
rights to receive cash; and
rights to receive goods and services.
o rights that do not correspond to an obligation of another party, such as:
rights over physical objects such as property, plant and equipment or inventories.
Examples of such rights include the use of a physical object or the right to benefit
from the residual value of a leased object; and
rights to use intellectual property (Conceptual Framework 4.6(a) and (b)).
63 Many rights are established by means of a contract, legislation or other similar means (Con-
ceptual Framework 4.7). An entity may have rights to an item of plant evidenced by a pur-
chase contract. Similarly, an entity may have a right to receive cash, based on a credit-sale
agreement with a customer or on a legislative requirement such as a refund from SARS.
64 Other rights include rights created by the customary practices and published policies of an
entity. These rights are however beyond the scope of this work.
65 A right on its own does not result in an asset for the entity. To qualify as an asset, an item
must have the potential to produce economic benefits beyond the economic benefits avail-
able to all other parties and must be controlled by the entity (Conceptual Framework 4.9).
Potential to produce economic benefits

66 The potential to produce economic benefits embedded in a right does not have to be certain
or likely. It is only required that the right already exists and that, in at least one circum-
stance, it would produce for the entity economic benefits beyond those available to all other
parties (Conceptual Framework 4.14). A right can meet the definition of an economic re-
source and hence can be an asset, even if the probability that it will produce economic
benefits is low. This may affect whether the asset is recognised and what information will be
presented for the asset (Conceptual Framework 4.15).
67 An economic resource could produce economic benefits for an entity by entitling or enabling
it to do, for example, one or more of the following:
a) receive contractual cash flows or another economic resource;
b) exchange economic resources with another party on favourable terms;
c) produce cash inflows or avoid cash outflows by, for example:
i using the economic resource either individually or in combination with other eco-
nomic resources to produce goods or provide services;
ii using the economic resource to enhance the value of other economic resources; or
iii leasing the economic resource to another party;
22
d) receive cash or other economic resources by selling the economic resource; or

e) extinguish liabilities by transferring the economic resource.
Control
68 An entity will only be able to recognise an asset where it has control over a right that has
the potential to produce economic benefits. An entity controls an economic resource if it
has the present ability to direct the use of the economic resource and obtain the economic
benefits that may flow from it. Control includes the ability to prevent other parties from dir-
ecting the use of the economic resource and from obtaining the economic benefits that may
flow from it. Therefore, if one party controls an economic resource, no other party can con-
trol that resource (Conceptual Framework 4.20).
69 An entity has the ability to direct the use of an economic resource if it has the right to deploy
the economic resource in its activities, or to allow another party to deploy the economic re-
source in that other party’s activities (Conceptual Framework 4.21).
70 Control of an economic resource is often evidenced by the ability to enforce legal rights
over the economic resource. However, even where no legally enforceable rights exists, an
entity can control the economic resource where it has other means and no other party has
the direct ability to obtain the benefits that flow from the resource (Conceptual Framework
4.22).
71 Furthermore, for an entity to control the economic resource, the future economic benefits in
the economic resource must flow directly or indirectly to the entity and not to another party.
This aspect of control does not imply that the entity can ensure that the resource will pro-
duce economic benefits in all circumstances. Instead, it means that if the resource pro-
duces economic benefits, the entity is the party that will obtain them either directly or
indirectly (Conceptual Framework 4.23).
72 Where one party (agent) agrees to act on behalf of another party (principal) for the benefit
of the principal, even though the agent has custody of the economic resource, the agent
does not have control of the economic resource (Conceptual Framework 4.25).
73 Past events are transactions that have already been incurred by the entity (in the past).
Examples of transactions in this regard are the purchase of an asset for cash or on credit
and the sale of trade inventories for cash or on credit.
Rights of ownership
74 Right of ownership of assets such as property, machinery, equipment and trade inventories
include rights of the owner, such as:
x the right to use the asset;
x the right to sell the asset;
x the right to let the asset; and
x the right to pledge the asset to obtain a loan.
75 Ownership can be a good indicator of control over an asset item. As of the date of obtain-
ing ownership, the purchasing entity has the present ability to direct the use of the asset-
item as it pleases and obtain the economic benefits that may flow from it.
76 However, ownership is not a prerequisite for control over an asset-item. An entity may have
control over rights of use, even if it does not own that item. An example is leasing trans-
actions, where a lessee obtains the right of use of property, motor vehicles, machinery etc.
but does not actually own the item. Chapter 16 deals with leases.
77 The legal form of a transaction where asset-items (e.g. property, motor vehicles, machinery
etc.) are purchased for cash or on credit is a purchase contract. This contract can be an
oral agreement, but in certain cases it has to be in writing. Right of ownership of an asset
that was purchased for cash or on credit, transfers to the purchasing entity as soon as the
23
supplier of the asset delivers the asset (in accordance with the contract) to the purchasing
entity. If an asset is purchased, the historical/past event that results in control’s passing to
the purchasing entity is the delivery of the asset by the supplier to the purchasing entity (in
accordance with the contract). Right of ownership (obtaining control) of an acquired asset
therefore does not transfer with the placement of an order, the mere signing of a purchase
contract or a payment to the supplier – it transfers only through the delivery of the asset.
78 Right of ownership of land and buildings (property) transfers to the purchaser when the
deeds office registers the property in the name of the purchasing entity. The purchasing en-
tity receives a title deed which indicates that the purchaser is the owner of the property.
Right of ownership of acquired trademarks transfers to the purchaser as soon as the trans-
fer of right of ownership is, in accordance with the Trade Marks Act 194 of 1993, registered
in the name of the purchaser. Right of ownership of the asset-item cash transfers with re-
ceipt of the cash.
Obtaining a right to claim

79 Another important asset-item, namely trade receivables, arises when trade inventories are
sold on credit to customers. The legal form of a sales transaction is a purchase contract
which can be an oral agreement or in writing. An enforceable right to claim in respect of the
amount due by a trade receivable arises as soon as the sold trade inventories are delivered
to the customer (trade receivable) in accordance with the contract. A receivable (the right
to claim) is therefore a resource controlled by the selling entity based on the right to claim
that arose with the delivery of the goods to the receivable.
80 A right to claim of assets such as trade receivables includes rights to the selling entity such
as
x the right to collect the amount receivable;
x the right to legally enforce the collection;
x the right to pledge the amount due to obtain a loan; and
x the right to sell the right to claim.
The element liabilities

81 The element liabilities comprise various liability-items. Examples of liability-items are mort-
gage bonds, bank loans, suppliers’ loans and payables. Refer to the liability-items as pre-
sented in the statement of financial position in the ‘Financial statements framework for a
company’ as contained in Chapter 3 as well as the liability-items as listed in Chapter 4, para-
graph 6.
The definition of the element liabilities

82 A liability is defined as follows:
A liability is a present obligation of the entity to transfer an economic resource as a result of past
events (Conceptual Framework 4.26).
An obligation
83 An obligation is a duty or responsibility that the entity has no practical ability to avoid. The
obligation is owed to another party or parties and is enforceable by means of a contract,
legislation or other similar means. Obligations can also arise from the entity’s customary
practices, published policies or specific statements if the entity has no practical ability to
act in a manner inconsistent with those practices, policies or specific statements. These ob-
ligations are referred to as constructive obligations.
84 In some cases, it is uncertain whether an obligation exists. For example, if another party is
seeking compensation for an entity’s alleged act of wrongdoing, it might be uncertain
whether the act occurred, whether the entity committed it or how the law applies. Until that
24
existence uncertainty is resolved – for example, by a court ruling – it is uncertain whether

the entity has an obligation to the party seeking compensation and, consequently, whether
a liability exists. Chapter 18 deals with court cases involving uncertain obligations.
Transfer of an economic resource

85 The obligation must have the potential to require the entity to transfer an economic resource
to another party or parties. The potential does not have to be certain or likely – the only re-
quirement is that the obligation already exists and that, in at least one circumstance, it
would require the entity to transfer an economic resource (Conceptual Framework 4.37).
86 An obligation can meet the definition of a liability even if the probability of transferring the
economic resource is low. The low probability would determine the information that is pro-
vided for the liability and how it is provided.
87 Examples of obligations to transfer an economic resource include, inter alia
a) obligations to pay cash; and
b) obligations to deliver goods or services.
Present obligation as a result of past events

88 A present obligation exists as a result of past events only if
a) the entity has already obtained economic benefits or taken an action; and
b) as a consequence, the entity will or may have to transfer an economic resource that it
would not otherwise have had to transfer.
89 An example of economic benefits obtained could be goods (trade inventories) or services
received, and an example of an action taken could be operating a particular business or
operating in a particular market. An entity does not have an obligation to transfer an eco-
nomic resource until it has obtained economic benefits or has taken action that would re-
quire the entity to transfer an economic resource that it would not otherwise have had to
transfer. For example: Where an entity has ordered goods from a supplier, the entity does
not yet have a present obligation until the goods are delivered. Delivery is the point at which
the entity obtains the economic benefits. Another example is: If an entity has entered into a
contract to pay an employee a salary in exchange for receiving the employee’s services,
the entity does not have a present obligation to pay the salary until it has received the em-
ployee’s services.
The definition of the element equity (shareholder’s interest)

90 The definition of equity is as follows:
Equity is the residual interest in the assets of the entity after deducting all its liabilities (Concep-
tual Framework 4.63).
91 Equity comprises claims against the entity that do not meet the definition of a liability. The
claims are established by contract, legislation or similar means and include shares of vari-
ous types issued by the entity.
92 Claims by different classes of equity, such as shareholders, may confer rights to receive
some or all of the following from equity:
a) dividends, if they are declared to eligible shareholders;
b) the proceeds from satisfying the equity claims, either in full on liquidation, or in part at
other times; or
c) other equity claims (Conceptual Framework 4.65).
25
93 By defining equity as the remaining/residual interest in the context of the accounting equa-
tion, a closed system is created which forms the basis for:
x the record-keeping of the effect of transactions and events on the elements; and
x the preparation of financial statements.
94 The definition of equity causes the following relationship between assets, liabilities and
equity:
Equity = Assets – Liabilities
95 In accordance with the reporting-entity concept (paragraphs 25 to 27), the above-

mentioned equation is however written as follows:
96 To put the elements that deal with the financial position of an entity (assets, liabilities and
equity) into context, refer to the statement of financial position as contained in Chapter 3
(refer to the comprehensive example at the end of the chapter). The relevant statement of
financial position provides details of AC (Pty) Ltd’s financial position on 31 December 20.7.
Naturally, the accounting equation is in balance as at the dates indicated:

31/12/20.7 14 408 535 = 4 897 015 + 9 511 520
97 The statement of financial position therefore indicates that the total assets of AC (Pty) Ltd on
31 December 20.7, namely R14 408 535, is financed as follows:
x R4 897 015 by external parties (non-current liabilities and current liabilities); and
x R9 511 520 by the shareholders.
98 The statement of financial position furthermore indicates that equity on 31 December 20.7
to the amount of R9 511 520 comprises two items, namely capital of R6 500 000 and re-
tained earnings of R3 011 520.
99 The accounting equation can therefore be expanded as follows:
Equity
Assets = Liabilities + Share capital + Retained earnings
100 Share capital represents the cash an entity raises by issuing its shares to its shareholders.
Retained earnings are the accumulated profits of the entity since the inception of the entity,
which have not been distributed to the shareholders. Distributions to the shareholders are,
in the context of a company, known as dividends. A dividend is a return of profits to the
shareholders for their investment in the company. Normally a major portion of a company’s
profits are retained within the company (retained earnings) to support the company’s on-
going and future business activities. The remaining portion of the profits may be distributed
to the shareholders.
Financial performance (Profit/loss for the period)

Introduction – the nature of retained earnings
101 In paragraph 99 above, the accounting equation is indicated as follows:
Equity
Assets = Liabilities + Share capital + Retained earnings
26
102 The above-mentioned accounting equation can, with reference to the amounts as contained
in the statement of financial position of AC (Pty) Ltd in Chapter 3 (refer to the comprehen-
sive example at the end of the chapter), be provided with the following amounts:
Equity
Retained
Assets = Liabilities + Capital +
earnings
R R R R
31 Dec 20.6 12 937 055 = 4 790 000 + 6 000 000 + 2 147 055
(assumed) (assumed) (from State- (from Statement
ment of of changes in
changes in equity)
equity)
31 Dec 20.7 14 408 535 = 4 897 015 + 6 500 000 + 3 011 520
Change 1 471 480 = 107 015 + 500 000 + 864 465
increase increase increase increase
103 During 20.7, the assets increased by R1 471 480 due to the liabilities and equity that col-
lectively increased by R1 471 480. Capital increased by R500 000 because the shareholder
subscribed to further share capital of R500 000.
104 The retained earnings concept is clearly illustrated in the statement of changes in equity.
Refer to the statement of changes in equity of AC (Pty) Ltd for the year/reporting period
ended 31 December 20.7 in Chapter 3 (refer to the comprehensive example at the end of
the chapter). During 20.7, the shareholder’s interest in AC (Pty) Ltd’s assets increased from
R8 147 055 to R9 511 520 because the shareholder’s capital contribution increased by
R500 000 and because retained earnings increased by R864 465 (R3 011 520 – R2 147 055).
Retained earnings increased by R864 465 because the entity made a profit of R1 824 465
for 20.7, from which the entity declared a dividend of R960 000. The R864 465 can also be
referred to as the retained earnings for the current year/reporting period. If the statement of
profit or loss as contained in Chapter 3 is referred to, it can be observed that the profit for
the year of R1 824 465 is calculated as the sum of the income items (R12 819 735) less the
sum of the expense items (R10 995 270).
105 With reference to the amounts as contained in the statement of changes in equity of AC (Pty)
Ltd in the comprehensive example in Chapter 3, retained earnings comprise the following
components:
Profit for the current reporting period

Retained Retained
Income for the Expenses for the Distributions for
earnings at the earnings at the
= + current reporting – current reporting – the current
end of the beginning of the
period period reporting period
reporting period reporting period
R R R R R
3 011 520 = 2 147 055 + 12 819 735 – 10 995 270 – 960 000
106 It is now possible to expand the accounting equation as follows:

Equity
Retained earnings
Profit for the year
Assets = Liabilities + Share + Retained earnings + Income – Expenses – Dividends
capital opening balance for the for the year for the year
year
27
107 The above-mentioned equation lays the foundation for recognising transactions and events
in the accounting records of an entity. In Accounting, there are only a few transactions/
events that reduce the retained earnings balance as at the beginning of the year. Such
transactions/events are dealt with in later years of study.
Profit for the period

108 Financial performance is the relationship between the income and expenses of an entity for
a reporting period. Performance of an entity for a reporting period is indicated as ‘Profit for
the period’ or ‘Loss for the period’. A profit for a reporting period arises when the income is
greater than the expenses for the specific period. A loss for a reporting period arises when
the income is less than the expenses for the specific period. Refer to the statement of profit
or loss in the comprehensive example in Chapter 3 in which details of the performance of
AC (Pty) Ltd for the year/reporting period ended 31 December 20.7 are indicated. The
statement of profit or loss reflects that the profit for 20.7 is R1 824 465. The profit is calcu-
lated as the sum of the income items less the sum of the expense items (R1 824 465 =
R12 819 735 – R10 995 270). The statement of profit or loss furthermore reflects income
and expense items per their function and not nature.
109 The elements that relate directly to the measurement of the financial performance (profit or
loss) of an entity are income and expenses and are presented in the statement of profit or
loss.
110 Income and expenses are components of retained earnings, which belong to the element
equity.
The definition of the element income

111 Income relates to a specific reporting period and is mainly the result of the operating activi-
ties of an entity.
112 The definition of income is as follows:
Income is increases in assets or decreases in liabilities that result in increases in equity, other
than those relating to contributions from holders of equity claims (Conceptual Framework 4.68).
113 Holders of equity claims are the shareholders in respect of a company. Income is therefore
increases in cash and other assets such as trade receivables that cause an increase in
equity (retained earnings). No other element of the accounting equation is affected by in-
come.
114 Income comprises various income-items – for example, revenue, rent income and interest
income. Revenue is the main income-item of a trading entity resulting from the sale of trade
inventories by an entity. The sale of the trade inventories can occur in accordance with a
cash or credit transaction. The legal form of the revenue transaction is a sales contract,
which can be an oral agreement or in writing. If an entity sells trade inventories which cost
R4 000 for R9 000 cash, the income-item revenue is at the gross amount, namely R9 000.
115 In addition to the main income-item revenue, an entity can also obtain income resulting
from:
x the use of an entity’s assets by another party. The following are examples of such in-
come-items: rent income (because the entity lets a portion of its building – refer to Chap-
ter 5), interest income or dividend income (because an entity invests funds – refer to
Chapter 20) and profit on the subsequent measurement of an asset such as an invest-
ment in shares (because the market value of the shares increased – refer to Chapter 20);
and
x the sale of a non-current asset-item – for example, profit on the sale of a delivery vehicle
(refer to Chapter 9).
116 In the case of a service-delivery entity, the main income-item is the revenue earned from the
service that is delivered. There are various services that can be delivered – for example,
medical services, repair services, postal services, cosmetic services etc.
28
117 Refer to the comprehensive example in Chapter 3 and note how the income-items of AC
(Pty) Ltd for 20.7 are presented in the statement of profit or loss for the year/reporting peri-
od ended 31 December 20.7. Note that the performance of AC (Pty) Ltd for 20.7 is indicat-
ed as a profit of R1 824 465.
The definition of the element expenses

118 Expenses relate to a specific reporting period and are mainly the result of the operating
activities of an entity. Expenses are incurred to generate income.
119 The assets of an entity (such as machinery, equipment, delivery vehicles and trade inven-
tories) create the capacity for the execution of the operating activities. Operating activities
are activities of an entity which entail the utilisation of the entity’s assets, with the aim of
making a profit. The assets are usually purchased by the entity with cash made available to
the entity by the shareholders and long-term lenders. To execute the operating activities,
the entity also needs employees, water and electricity, insurance, petrol, etc. Apart from the
acquisition of assets, the entity therefore also needs to incur monthly expenditure (e.g. sala-
ries, water and electricity etc.) to execute operating activities.
120 The purchase of an asset such as equipment (office or computer equipment) by an entity
entails cash flows out of the entity to obtain the right of use of the asset. The economic ben-
efits associated with the use of the equipment will flow to the entity over several years.
121 Salaries are paid monthly by the entity and accrue for work done by the employees for a
specific month. The salaries hold economic benefits for the entity and are received and
immediately consumed by an entity. An entity’s right to obtain these economic benefits ex-
ists momentarily, until the entity consumes the goods or services. Therefore, as opposed to
most assets, where the economic benefits associated with the asset flow to the entity over
several years, salaries are treated as expenses.
122 The definition of expenses is therefore as follows:
Expenses are decreases in assets, or increases in liabilities, that result in decreases in equity,
other than those relating to distributions to holders of equity claims (Conceptual Framework
4.69).
123 Expenses are therefore decreases in cash or other assets (e.g. trade inventories when they
are sold) or increases in liabilities (e.g. trade payables) that result in a decrease in equity
(retained earnings), excluding dividends.
124 Distributions to the holders of equity claims (shareholders), in the context of a company, are
known as dividends. Dividends can be paid in cash or other assets (e.g. machinery or de-
livery vehicles). Although dividends decrease the assets of an entity as well as the retained
earnings, they are not an expense but a distribution to the shareholder.
125 Expenses consist of various expense items – for example, cost of sales, salaries, wages,
water and electricity and telecommunication. Refer to the statement of profit or loss of
AC (Pty) Ltd as contained in the comprehensive example in Chapter 3 and note how the
expense-items of AC (Pty) Ltd for 20.7 are presented in the statement of profit or loss for the
year/reporting period ended 31 December 20.7. Note that the performance of AC (Pty) Ltd
for 20.7 is indicated as a profit of R1 824 465. Also refer to the list of expenses as set out in
Chapter 4, paragraph 6.
126 Note the following in respect of equity (retained earnings):
x If income increases, profit for the period will increase, which causes retained earnings to
increase, which in turn leads to an increase in equity.
x If expenses increase, profit for the period will decrease, which causes retained earnings
to decrease, which in turn leads to a decrease in equity.
x If dividends increase, retained earnings decrease, which results in a decrease in equity.
29
Recognition and measurement of the elements
Recognition
127 Recognition is the process that causes the incorporation and accumulation of (an increase
in) an item that satisfies the definition of an element in the accounting records. Recognition
involves depicting an element in the accounting records in words and by monetary amount.
The amount at which an asset, liability or equity is recognised is called the carrying amount.
128 Only items that meet the definition of an asset, liability or equity are recognised in the
statement of financial position. Similarly, only items that meet the definition of income and
expenses are recognised in the statement of profit or loss. However, not all items that meet
the definition of one of those elements are recognised (Conceptual Framework 5.6). An
asset or liability is recognised only if recognition of that asset or liability and of any resulting
income, expense or change in equity provides a user of financial statements with infor-
mation that is useful, that is to say:
a) relevant information about the asset or liability and about any resulting income, ex-
penses or changes in equity; and
b) a faithful representation of the asset or liability and of any resulting income, expenses
or changes in equity.
For purposes of this text, the assets, liabilities and any resulting income, expenses and
changes in equity are assumed to be both relevant and a faithful representation. A detailed
discussion of the criteria is dealt with in subsequent years of study.
129 The recognition concept set out in the Conceptual Framework may be different to the
recognition principle applied in a specific accounting standard. This is because the Con-
ceptual Framework is not an Accounting Standard (refer to paragraph 4 above). In this
case, the recognition principle in the specific accounting standard always takes prefer-
ence. For example, the accounting standard on property, plant and equipment (see IAS 16)
states that the cost of an item of property, plant and equipment shall be recognised as an
asset if, and only if:
a) it is probable that future economic benefits associated with the item will flow to the
entity; and
b) the cost of the item can be measured reliably (see IAS 16 paragraph 7).
The specific recognition principles are covered in the subsequent chapters dealing with the
relevant assets and liabilities.
130 The description of the concept recognition, as set out in the Conceptual Framework 5.2,
places the focus on the recognition of items in the statement of profit or loss and the state-
ment of financial position. Financial statements are however prepared from financial infor-
mation that is accumulated in the financial records of the reporting entity. Transactions and
events should consequently be accumulated in the accounting records in such a manner
that appropriate IFRS-compliant financial statements can be prepared from these records.
The incorporation of the effect of transactions and events in the accounting records occurs
on the basis known as the double-entry system. The double-entry system is brilliantly de-
signed and is derived from the accounting equation. The double-entry system is dealt with
in Chapter 4.
131 An entity participates in the economy through transactions. The financial effect of transac-
tions and events (refer to paragraphs 49 to 53) is recognised in the financial records of an
entity with reference to the elements of financial statements. Each of the elements consists
of various items. For instance, the asset-element comprises inter alia office furniture, trade
inventories and bank.
132 A transaction or an event always has a financial effect on at least two items, which can
belong to the same element or two different elements. The financial effect of the transac-
tions and events causes the amounts of the elements to change (increase or decrease)
30
because the amounts of the components of the elements (namely the individual items)
change.
133 Recognition should take place at a fixed date (that is determinable). The recognition of a
transaction or event must always occur in such a manner that the accounting equation re-
mains in balance.
134 As a result of the relationship that exists between the elements (Assets = Liabilities +
Equity), each transaction or event of an entity will result in one of the following four effects
on the elements of the accounting equation, which causes the accounting equation to al-
ways remain in balance:
x The transaction increases an asset and increases a liability or equity;
x The transaction decreases an asset and decreases a liability or equity;
x The transaction increases an asset and decreases another asset; and
x The transaction increases a liability and decreases another liability or equity.
Measurement
Introduction
135 The management of the entity is entrusted with the responsibility of managing the economic
resources of the entity. This is referred to as stewardship. The Conceptual Framework is
clear about management’s stewardship and accountability for the changes of those eco-
nomic resources to the users of the financial statements. The concept of measurement as-
sists users of the financial statements in determining how well the management has
discharged its responsibilities of stewardship over the entity’s economic resources entrust-
ed to it (Conceptual Framework 1.22).
136 Measurement is the process whereby an entity determines the monetary amount at which
assets, liabilities, equity, income and expenses must be recognised (Conceptual Frame-
work 6.1). In this regard, distinction is made between initial measurement and subsequent
measurement. Initial measurement is the determination of the amount at which assets, liabil-
ities, equity, income and expenses are initially recognised in the accounting records. Sub-
sequent measurement is the remeasurement of assets and liabilities on the reporting date
and on each subsequent reporting date.
137 There are various models whereby measurement can occur. Various factors are taken into
consideration in selecting the measurement basis. The nature of the information that will be
produced by the measurement basis in the financial statements is a consideration for the
selection of the measurement basis (Conceptual Framework 6.43). The other consideration
for selecting the measurement basis is whether the information provided by the measure-
ment basis will be useful to the users of the financial statements. To test that the information
produced by the measurement basis is useful, the information must be relevant, and it must
faithfully represent what it sets out to represent. Furthermore, the information must be com-
parable, verifiable, timely and understandable as far as possible (Conceptual Framework
6.45). In this work, the historical cost model is mainly used. The other model that is used in
this work to a limited degree is the fair value model.
Measurement bases
The historical cost model
138 In accordance with the historical cost model, assets, liabilities, equity, income and expens-
es are, with initial recognition of the item, measured at the historical cost price. The histori-
cal cost of an asset is the value of the costs incurred in acquiring or creating the asset,
comprising the amounts paid to acquire or create the asset plus transaction costs. The his-
torical cost of a liability is the value of the amounts received to incur or take on the liability
minus transaction costs. In respect of initial measurement, this work mostly deals with items
31
of which the initial measurement is either the invoice amount or, in the case of a loan, the
amount received.
The fair value model

139 Fair value is the price that would be received to sell an asset in an orderly transaction
between market participants at the measurement date (Conceptual Framework 6.12). An
example of a market is the Johannesburg Stock Exchange (JSE) with buyers and sellers of
shares being the market participants.
Subsequent measurement
140 Subsequent measurement is the change in the value of assets and liabilities on the report-
ing date and on each subsequent reporting date.
141 Subsequent measurement of assets and liabilities mostly occurs as follows, the measure-
ment being derived from the historical cost price:
x Land is initially measured at historical cost and is subsequently not depreciated (refer to
Chapter 9).
x Depreciable non-current assets (property, plant and equipment) are depreciated over
the useful life of the asset (refer to Chapter 9).
x Trade inventories are subsequently measured at the lower of cost price and net realisable
value (refer to Chapter 14).
x A term deposit is subsequently measured at the amortised cost thereof (refer to Chapter
16).
x The subsequent measurement of trade receivables occurs at the amount that would
probably be received, namely the outstanding invoice price less the allowance for
doubtful debts (refer to Chapter 11).
x The subsequent measurement of trade payables occurs at the amount that would be
paid, namely the outstanding invoice price (refer to Chapter 11).
x The subsequent measurement of a loan received occurs at the amortised cost thereof
(refer to Chapters 5 and 16).
x The subsequent measurement of an investment in the ordinary shares on an unlisted
company occurs in this work at the historical cost price thereof (refer to Chapter 20).
x The subsequent measurement of investment property (refer to Chapter 17) and an in-
vestment in the ordinary shares of a listed company (refer to Chapter 20) occurs in this
work at the fair value thereof.
Recognition and measurement of equity (only share capital and

dividends)
142 The recognition and measurement of transactions with the shareholders are dealt with
below. Transactions with the shareholder entail share transactions as well as dividends
paid to the shareholder.
The nature, recognition and measurement of share capital

143 Share capital represents the cash an entity raises by issuing its shares to its shareholders.
From the shareholder’s perspective, the cash that is transferred to the entity is an invest-
ment for the shareholder on which a return (dividend) is expected.
144 In accounting, the entity operates totally separate from the shareholders and also separate
from all other accounting entities (reporting entities). The resources that the shareholder
makes available to the entity become controlled by the entity. The resources can comprise
cash and other assets such as land, buildings, furniture and equipment.
32
145 The transaction in accordance with which resources (cash and other assets) are transferred
by the shareholder to the entity, bring about the following items: the asset-items for example
cash or other assets and the equity-item share capital. If the resources that the shareholder
transferred to the entity satisfy the definition of an asset, the increase in the asset-item is
recognised on the day on which the asset-item is received. An increase in the equity-item
share capital is recognised at the same time. The recognition occurs at the amount at which
the cash or the other asset increases and on the day on which the cash or the other asset is
received.
The nature, recognition and measurement of dividends

146 Distributions to the shareholders are, in the context of a company, known as dividends. A
dividend is a return of profits to the shareholders for their investment in the company. Nor-
mally, a major portion of a company’s profits are retained within the company (retained
earnings) to support the company’s ongoing and future business activities. The remaining
portion of the profits may be distributed to the shareholders.
147 Dividends usually take the form of cash payments from the entity. The following items are
brought about by the payment of dividends: the equity-item, more specifically the retained
earnings-item, dividends and the asset-item cash or the liabilities-item payable (if the pay-
ment does not occur immediately, but is postponed through the utilisation of credit).
148 Dividends are recognised by decreasing equity (retained earnings) and at the same time
recognising the decrease in the asset-item cash or recognising the increase in the liabili-
ties-item payable. The recognition occurs at the amount by which the cash decreases or
the payable increases on the day on which the cash is paid or the payable is recognised.
Applications – Recognition and initial measurement of assets, liabilities

and equity (share capital) within the framework of the accounting
equation
Introduction
149 The element assets comprise various asset-items, for example machinery, vehicles, equip-
ment, trade inventories and trade receivables. The element liabilities also comprise various
liability-items, for example loan received and trade payables. The element equity comprises
the following two items, namely share capital and retained earnings. The equity-item re-
tained earnings in turn comprise income-items, for example revenue and rent income, and
expense-items, for example cost of sales, salaries and water and electricity, and the item
dividends.
150 As a result of the relationship that exists between the elements (Assets = Liabilities + Equity),
each single transaction or event that brings about the recognition of an asset and/or the
recognition of a liability and/or the recognition of equity (more specifically share capital), will
result in one of the following dual effects on the elements of the accounting equation:
x An asset-item (e.g. cash) increases and the equity-item share capital increases (be-
cause the shareholder made an asset, for example cash or land and buildings, available
to the entity);
x An asset-item (e.g. cash) increases and a liabilities-item (e.g. bank loan) increases (be-
cause the entity received a borrowed amount);
x An asset-item (e.g. delivery vehicle or trade inventories) increases and a liabilities-item
(e.g. payable/trade payable) increases (because the entity purchased the said assets
on credit); or
x An asset-item (e.g. delivery vehicle or trade inventories) increases and an asset-item
(e.g. cash) decreases (because the entity purchased the said assets for cash).
151 Transactions that have an effect on retained earnings are dealt with in the following section.
33
152 With reference to the cases mentioned in the preceding paragraph, the recognition of
assets, liabilities and equity (more specifically share capital) are subsequently dealt with.
Various aspects of the recognition of assets, liabilities and equity are covered. The dual ef-
fect of the transactions is at this stage recognised within the framework of the accounting
equation.
153 In respect of each of the transactions, the items that are brought about by the relevant
transaction are indicated. Thereafter, as in paragraph 157 below, it is demonstrated every
time that each of the identified items actually satisfies the definition of the relevant element.
Recognition and initial measurement of the increase in the asset-item cash and the
increase in the associated equity-item share capital
154 If the shareholders subscribe to shares in the company and deposit an amount in the en-
tity’s bank account, this amount being the shareholders’ capital contribution, the two items
brought about by the transaction are the asset-item cash/bank (an increase) and the equity-
item share capital (an increase).
155 Cash and cash equivalents include cash in the general sense of the word, but usually refers
to cash held in a bank account. Cash held in a bank account means that an entity trans-
fers/deposits the cash that it has on hand into a bank account at a registered bank. If an
entity wants to transfer or use some of the cash in the bank, an electronic instruction (an
EFT) is used to transfer the cash to another party.
156 Take the following transaction as an example:
On 2 January 20.7, a shareholder subscribed to the shares in AC (Pty) Ltd and deposited
an amount of R4 500 000 into AC (Pty) Ltd’s bank account, that amount being the capital
contribution.
157 Cash received in accordance with a transaction because the shareholder made a capital
contribution is recognised if the cash received satisfies the definition of an asset. The Con-
ceptual Framework does not contain guidelines for the recognition of share capital. In this
work, the equity-item share capital is recognised when the associated asset-item is recog-
nised. It can be indicated as follows that cash satisfies the definition of an asset:
Definition of an asset Application – cash

An asset is a present economic Cash is a present economic resource as AC (Pty) Ltd has a
resource present legal right of ownership that has the potential to
produce economic benefits as AC (Pty) Ltd can use the
cash to, for example, buy other assets, produce goods or
services, or pay expenses and liabilities.
controlled by the entity AC (Pty) Ltd controls the economic resource (cash) since it
has the present ability to direct the use of the cash and
obtain the economic benefits that may flow from it.
AC (Pty) Ltd has the present ability to direct the use of the
cash as it has the legal right to deploy the cash in its
activities.
as a result of past events. The past event is the shareholder’s depositing the money
into the entity’s account as its capital contribution to the
business.
158 The increase in the asset-item cash and the associated increase in the equity-item share
capital is recognised on the day on which the cash is received, in other words the day on
which the shareholder made the deposit, namely 2 January 20.7. This date represents the
date on which the cash satisfied the definition of an asset. The amount of the increase is the
amount of the capital contribution by the shareholder.
159 The element assets increase (because the asset-item cash increases) and the element
equity increases (because the equity-item share capital increases). The accounting equa-
tion consequently remains in balance.
34
160 The recognition of the increase in the asset-item cash and the increase in the equity-item
share capital occur as follows, within the framework of the accounting equation:
Assets = Liabilities + Equity Classification

+4 500 000 = 0 + +4 500 000 Share capital
(Cash)
Remark in respect of the accounting equation

1 The classification column in the accounting equation relates to the equity column. If a
transaction changes equity, detail is provided in the classification column about the compo-
nent of equity that changed. There are four possibilities, namely Share capital, Retained
earnings – income, Retained earnings – expenses and Retained earnings – dividends.
Recognition and initial measurement of the increase in the asset-item cash and the
increase in the associated liabilities-item loan received
161 If a loan is incurred with a financial institution, the two items brought about by the transac-
tion are the asset-item cash/bank (an increase) and the liabilities-item loan (an increase).
162 Cash received in accordance with a loan agreement, is recognised if the cash satisfies the
definition of an asset and if the loan satisfies the definition of a liability.
On 4 January 20.7, AC (Pty) Ltd received a bank loan of R800 000. The contract was
signed on 19 December 20.6.
164 It is already indicated in paragraph 157 that cash satisfies the definition of an asset.
165 It can be indicated as follows that a bank loan received satisfies the definition of a liability:
Definition of a liability Application – bank loan

A liability is a present obligation of AC (Pty) Ltd has a legally enforceable duty or responsibility
the entity towards the financial institution which AC (Pty) Ltd has no
practical ability to avoid.
to transfer an economic resource AC (Pty) Ltd has an obligation to transfer an economic
resource in the form of cash to extinguish the obligation.
as a result of past events. The transfer of the loan amount on 4 January 20.7 in
accordance with the loan agreement, is the past event that
gave rise to the present obligation of AC (Pty) Ltd.
This is the date when AC (Pty) Ltd has already received the
economic benefits in the form of the loan amount and as a
consequence will have to transfer an economic resource in
the form of cash.
166 A legal obligation towards the financial institution, which satisfies the definition of a liability,
arises on the day on which the money was received from the financial institution (4 January
20.7). The increase in the asset-item cash and the increase in the associated liabilities-item
bank loan are recognised on the day on which the cash is received. The increases are
measured at the amount of the loan received. The past event cannot be the signing of the
contract, as no economic benefits would have been obtained on that date.
167 The element assets increase (because the asset-item cash increases) and the element
liabilities increase (because the liabilities-item bank loan increases). The accounting equa-
tion consequently remains in balance.
168 The recognition of the increase in the asset-item cash and the increase in the liabilities-item
bank loan occur as follows, within the framework of the accounting equation:
Assets = Liabilities + Equity Classification

+800 000 = +800 000 + 0
(Cash) (Bank loan)
35
Recognition and initial measurement of the increase in the asset-item trade

inventories and the increase in the associated liabilities-item trade payable
169 If trade inventories are purchased on credit, the two items brought about by the transaction
are the asset-item trade inventories (an increase) and the liabilities-item trade payable (an
increase).
AC (Pty) Ltd, that uses the perpetual inventory system, purchased trade inventories on credit
from Payable L for R226 000. The trade inventories were received on 1 March 20.7 and the
debt is payable on or before 31 March 20.7.
Remarks
1 In accordance with accrual accounting (refer to paragraph 31) the purchase of the trade
inventories on credit and the subsequent settlement of the debt are two separate trans-
actions.
2 In accordance with the perpetual inventory system, acquired trade inventories satisfy the
definition of an asset. A perpetual inventory system is an inventory management method
that records when inventory is sold or received in real time. A perpetual inventory system
will record changes in inventory at the time of a purchase or sales transaction. (Initially, only
the perpetual inventory system is dealt with in this work. Inventory systems are dealt with in
Chapters 5 and 14.)
171 Trade inventories purchased on credit and the accompanying trade payable are recog-
nised if the trade inventories satisfy the definition of an asset and if the trade payable satis-
fies the definition of a liability.
172 It can be indicated as follows that trade inventories satisfy the definition of an asset:
Definition of an asset Application – trade inventories

An asset is a present economic Trade inventories are a present economic resource as AC
resource (Pty) Ltd has a present legal right of ownership that has the
potential to produce economic benefits when AC (Pty) Ltd
sells the trade inventories to customers at a profit in order to
generate cash flow.
controlled by the entity AC (Pty) Ltd controls the economic resource (trade
inventories) since it has the present ability to direct the use
of the trade inventories and obtain the economic benefits
that may flow from it.
AC (Pty) Ltd has the present ability to direct the use of the
trade inventories as it has the legal right to sell the
inventories to customers for a profit.
as a result of past events. The past events are the ordering of inventories by AC (Pty)
Ltd and delivery by Payable L.
173 Besides the asset-item trade inventories, the transaction (the credit purchase of an asset)
also brings about a liabilities-item, a trade payable. It can be indicated as follows that a
trade payable satisfies the definition of a liability:
Definition of a liability Application – trade inventories

A liability is a present obligation of As a result of the delivery of the trade inventories by Payable
the entity L to AC (Pty) Ltd in accordance with the purchase contract,
AC (Pty) Ltd has a legally enforceable duty or responsibility
towards Payable L, which AC (Pty) Ltd has no practical
ability to avoid.
to transfer an economic resource AC (Pty) Ltd has an obligation to transfer an economic
resource in the form of cash to extinguish the obligation to
Payable L.
continued
36
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“No, I know that; but she does sometimes write more cheerfully. I
wonder will she ever marry.”
Her aunt made no answer, but instead, arose and observed, “I must
get the house well in order for Thomas’s home-coming.”
“Will they be here in time for the wedding?”
“They will make the effort.”
“I believe Patsey would be perfectly willing to wait for the sake of
having Uncle Tom here.”
“I don’t believe in putting off weddings,” said Betty, coming in. “It has
already been put off once. You must have a new gown for the
occasion, Lettice. I have been telling you that for weeks; it isn’t like
you to be so indifferent to such things.”
“There is time enough before New Year’s Eve.”
“Yes, but time flies. Come, go down with me and select it. There will
be nothing so good for you as a shopping expedition. I must stop in
Lovely Lane to attend to a matter, and then we will give ourselves up
to choosing your bridesmaid gown. Lutie can look after the boy, I
suppose.”
“Yes, and will be glad to do it. I must look out for a gay calico for
Lutie’s Christmas.”
“You spoil her,” remarked Aunt Martha.
“Maybe; but I am so glad to have her with me again.”
She came down a little later, cloaked and tippeted, her curls peeping
from under her beaver hat. Betty looked at her mischievously. “You
are decked out fairly well, Letty. I’ll warrant more than one head will
be turned over a shoulder to look after you this morning.”
“I care not whether any turn,” sighed Lettice.
“Ah-h, that accounts for your pensiveness; your poor little heart has
slipped its leash, and you are pining for—Did I hear Aunt Martha say
she had a letter from Rhoda? Lettice, you are not mourning for
Robert Clinton?”
“How many times must I tell you, no, no, no!” replied Lettice,
pettishly. “I don’t care a whit for him, as you know well; yet, all this
morning’s news has brought back the past very vividly, and makes
me remember that my home is gone; and my two brothers—one lies
on the shores of the great lakes, and one in our own forsaken
graveyard. To think that, after all, poor Tom should be denied a
resting-place beside his own kith and kin.”
“What matters that to him? He has won himself a lasting name for
courage and faithfulness, and that is a comfort. Now do put by these
sad thoughts and let us talk of the wedding. Oh, by the way, I heard
a piece of news; William says Becky Lowe is to marry Stephen
Dean. He has won his lady-love after all these years of devotion.
There is nothing like perseverance, you see. Poor Birket!”
“Why, poor Birket?”
“Because he didn’t persevere; he was too easily set back.”
“Now, Betty, I never had a single thought of Birket. He is a nice lad,
but too young for my liking.”
“I know that, my dear grandmother, and I do not forget that your true
love is a sailor lad.”
“You mean he was. My dear love will never again be a sailor.”
“There are other things he can be. He has been true to his word, has
he, Lettice?”
“Of course,” she returned proudly. “If he made a promise to William,
he will keep it to the bitter end.”
“Well, it is a great thing to be able to have faith in one’s true love.
Here we are. Now let us see what we can find to make my little sister
outshine the bride.” And they were soon absorbed in turning over
mulls and muslins, till they settled upon what suited them. Then
came a visit to the mantua-maker, and the two returned home in fine
spirits.
The days sped by, till the last day of the year brought Patsey’s
wedding-day. Sylvia’s Ramble was opened to receive all the Hopkins
tribe, and Aunt Martha, more excited than Lettice had ever seen her,
went around with a duster from room to room.
“Do sit down, Aunt Martha,” her niece begged. “You will be tired out
before night, and these rooms are already as clean as hands can
make them.”
“My child, I can’t sit down. Why, Lettice, I am to see my husband to-
day, after all these years.” She faltered, and mechanically moved her
duster back and forth upon the already polished table, on which, all
at once, a tear dropped. “There, I am getting in my dotage,” said
Aunt Martha, turning away, ashamed of this evidence of emotion.
“Hark! Lettice, do I hear wheels?”
Lettice ran to the door. “Only Mose from the store, Aunt Martha,” she
reported. “The boat is not in yet.”
But it was not long before there was a shout and a hurrah, a clatter
of hoofs and a rumble of wheels, the shrill laughter of little children,
as the pickaninnies scampered to open the gates; and in they swept,
the long-absent soldiers in the carriage, Joe and William on
horseback, Patrick behind them all on a lively mule; then in another
moment the master of Sylvia’s Ramble was at home again, while
Lettice, laughing and crying, was clasping her father’s neck and
gazing with loving eyes at his tanned, weather-beaten face. “Father,
my dear, dear daddy, you are here safe and sound!”
“Here, you people,” cried Joe, “I want you to know this is my
wedding-day, and I expect all the fuss to be made over me.”
“Pshaw!” cried Lettice, gayly. “People can get married any day, but it
isn’t every day that one has a chance of welcoming back war-stained
veterans.”
“Can get married any day, eh? Well, I haven’t found that I could, or
I’d have been a Benedict something over a year.”
“This is better than Dartmoor Prison, isn’t it, Joe?” said his uncle.
“Sh! Sh! Let us have no such reminiscences to-day,” said Betty. And
then they all went into the house to discuss the dinner, over the
preparation of which Aunt Martha had spent much anxious thought.
CHAPTER XX.
Her Valentine.
Lettice was not long in seeking a private talk with her father, there
was so much that each wanted to say without the presence of
listeners; and when many of the sad things had been talked over,
and when the gladness of the present again enfolded them, her
father drew the girl close to him.
“And what is this I hear of an impecunious young fellow who has
dared to make love to my daughter?” he said.
“He didn’t, father, he really didn’t; he couldn’t help himself, for it was
in a moment of great suspense.” And she told him the
circumstances.
“And you have not given him any reason to hope he may win you?”
“No-o. I don’t know. I like him, you know.” She twisted a button on
her father’s coat round and round.
“Ah-h!” he shook his head. “That will not do, my baby. You are too
young to judge of what is best for you. Give him no more thought. I
cannot have my little girl throw herself away upon a poverty-stricken
fellow with no means of livelihood and not likely to have any. You are
still too young to have this weigh long upon you, my love. Be guided
by your daddy, who thinks only of your happiness, and give up this
young man, if you love me.”
Lettice’s lip quivered, but she said bravely: “But suppose I cannot
help loving him, father. I would not love you any the less; and it
would only mean that I would always be at home with you, if I were
faithful to him the rest of my life.”
“You have not seen him? He has kept his word to William that he
would not try to see you till my return?”
“Yes; but I know he is as true to me as I am to him. If you say so,
father, I will not see him again, and I know he would not have me do
anything to make you unhappy, but—” She put her head on her
father’s shoulder to hide her wet eyes.
Mr. Hopkins looked troubled. “Well, my love, well, just let me have
time to look further into the matter. I didn’t realize that you felt so
about it. Don’t let your old dad make you unhappy upon this very first
day of his home-coming. Cheer up now, and let it rest as it is for the
present. I promise you to give the subject my best attention.”
Lettice put up her mouth for a kiss, feeling a little more comforted.
Surely her father loved her too well to let her be miserable all the
days of her life. Perhaps, after years and years of waiting, when her
lad should have become a rich man through some unexpected
means, her father would consent; meantime she would try to be
happy, and she could at least think of him, even if she didn’t see him.
If there was happiness and peace at Sylvia’s Ramble, so there was a
great joy in the home of the fair bride. Such a glad ending to a sad
year. Her Joe’s wife! Faithful, loving Patsey had no other thought;
and when, as the day drew to a close, and the guests from far and
near came flocking in, each whispered to the other, “Did you ever
see such a radiant face as the bride’s?”
“And when is your wedding to be, Lettice?” asked Becky Lowe,
important in her own prospective marriage.
“Law, child, don’t ask me!” replied Lettice, lightly. “But pray don’t
insist that I shall be your bridesmaid, Becky, if you would have me
married, for this is my second service in that capacity; the first was at
Brother William’s wedding, and you know the old saying, ‘three times
a bridesmaid, never a bride.’”
“Who told you I was to be married?” simpered Becky.
“I didn’t have to be told,” Lettice replied teasingly; “it is a self-evident
fact. Are we to have a dance? So we are. With pleasure, Tyler.” And
leaving Becky, Lettice was led out upon the floor. She longed, yet
hesitated, to ask her partner when he had heard from his cousin, and
where was he? But all of a sudden her heart stood still, for there in
close converse with her father stood her comrade in many a perilous
hour. He looked grave and was talking earnestly. Lettice, so
confused that she forgot her steps, turned the wrong person, to the
amusement of her friends. “Who could ever suppose that Lettice
Hopkins would forget a dance?” cried one. So she recovered herself
and took better heed to the figures of the Cauliflower, and at the end
of the dance was led back to her seat, her eager little heart beating
fast. Why did he not come and speak to her? And O dear, why
should her father detain him? Did he mean that when he was
separated from her but by the distance of a few feet, he was still to
keep his promise to avoid her? Common politeness would forbid
that. Surely they were talking longer than was necessary, and
accounts of battles and such things would keep till another time. Yet,
perhaps it was she of whom they were talking, and the thought made
her heart beat even faster.
Presently her father looked over to where she sat and smiled at her;
then he spoke a few words to his companion and both came toward
her.
“I have been thanking this young gentleman for his several services
done my daughter,” said Mr. Hopkins. “I was fortunate in having the
opportunity.” Lettice looked up with a lovely smile and murmured a
few conventional words of greeting.
“Lettice, my love,” said her father, gravely, “do you know that Mr.
Baldwin is the same who helped our poor Tom to escape from the
British ship? Mr. Baldwin did not know him as the same, under his
assumed name, and, strange as it may seem, I never connected Mr.
Ellicott Baldwin with the young lieutenant who came so nobly to
Tom’s defence, and I promised Tom that if ever I had the chance I
would try to pay his debt of gratitude; so, Mr. Baldwin, will you give
my daughter your hand—for this dance?” The start and blush which
followed these words caused Mr. Hopkins to smile.
“Would it tax your generosity beyond its limit to ask you to grant my
request for a dance, Miss Lettice?” said Mr. Baldwin, looking at her
with all his soul in his eyes.
She arose immediately, and for the rest of the evening she was
enveloped in an atmosphere of joy. She forgot that she had not seen
her lover, nor heard from him, in all these months. She was aware
only of a new gladness, of how delightful it was to have him near her.
She did not know she could be so glad. Once Betty whispered as
she passed them, “You look as happy as the bride herself, Letty.”
Lettice for answer made a little mouth at her. She felt all her youth
and buoyancy returning to her, as she found herself once more in the
company of this beloved one and surrounded by the merry friends of
her childhood. To all who knew her she was the old Lettice of the
days before the war, and her pretty, innocent coquetries but added to
her charm.
“Shall you remain long in the neighborhood?” Mr. Baldwin asked.
“No, we only came down for the wedding. I do not know what Brother
William and Betty will do; Uncle Tom wants them to stay at Sylvia’s
Ramble till their new home is built, but I shall probably go back to
town with my father. I have not heard his plans; we have been so
busy with the wedding. Is not Patsey a sweet bride, and does not
Cousin Joe look as if he were in the seventh heaven? They have
been such a devoted pair of lovers that every one is the more
interested in them, especially as we came so near to losing Cousin
Joe.”
“And you are happy, I hope, Miss Lettice? It must be a great
pleasure for you to see your father again. You did not expect I would
be here to-night, did you?” he asked abruptly.
“No, I did not.”
“My cousins would have it that I must come down to spend
Christmas, and then nothing would do but I must stay for this affair. I
had to refuse at first, but Tyler insisted, and when I knew your father
would be here, I consented.” The two looked at each other, and there
was a complete understanding of the state of affairs without further
explanation.
“Have you been in Washington all this while?” Lettice asked.
“No, I returned to Boston for a short time. I made a visit to my sister;
she is my only near relative, you know; and then, as I was not in
sympathy with the Federalist movement, in which so many of my
friends up there believed, I thought I would return to Baltimore and
see what I could do as a landsman. I have been rather hopeless
about my future till now.”
“And now?” The look of interest and loving sympathy in Lettice’s
eyes was almost too much for the young man’s self-control.
“I am more encouraged,” he told her after a moment’s pause, in
which it seemed to him that she must hear the wild beating of his
heart. “I shall remain in Baltimore, and may I hope to see you there?
You will be at your uncle’s for the present?”
“I think so, and—yes, I will be glad to see you there.” She wondered
if he had the faintest idea of how glad. “Hark, there is twelve o’clock
striking,” she exclaimed; “it is the New Year. I can be the first to offer
you my good wishes. May it be a happy year to you!”
“May it bring you much joy!” he returned, bending over and kissing
her hand; surely that little offering of homage might be allowed him
on the occasion of the dawn of a new year.
“Happy New Year!” called one to another. “Happy New Year!”
“It is a happy New Year to us, Patsey,” said Joe, as the last guests
departed, and the last lantern twinkled down the road.
“It is the happiest New Year of my life, Joe,” said Patsey, lifting her
face to his. “My dear, my dear, suppose you were still languishing in
that terrible prison!” She shuddered and hid her face on his shoulder.
“It is you who wear the fetters now,” said Joe, playfully, to turn her
thoughts from the subject.
“Yes; but I rejoice in my bondage,” said Patsey, kissing her shining
wedding ring. “I glory in being a slave. I am your willing prisoner.”
“Not my prisoner, but my queen, my wife,” he answered.
“It is a happy New Year for me,” said Lettice, cuddling close to her
father’s side, as they drove home together. “What were you and Mr.
Baldwin talking about so long?”
He drew her closer to him under the warm bearskin robes. “About
several things. Is my little girl so very fond of that young man? And
would it make her very unhappy to give him up?”
“Oh, daddy, dear, you mustn’t ask such personal questions.”
“But I want to know.”
“Why?”
“Because if he is everything to you, I shall put into execution a plan I
have; otherwise, I might do something else. You see, he has no
future, my child, unless some one uses influence to give him a start.
I would rather he were a Marylander, but he cannot help it that he
had the misfortune to be born elsewhere,” he added, laughing. “Now,
the question is: How far shall I use that influence?”
Lettice’s answer came in muffled tones from under the robes, “Use
every particle you possess.”
And her father, with a laugh that turned into a sigh, returned: “So let
it be, my love. Now don’t ask me any more questions, but let time
decide how it will turn out.” And Lettice was quite content at this.
The next thing they were all settled down in Baltimore, and Mr.
Baldwin was filling the place Lettice’s father had always intended for
Jamie, while Lettice realized that this new confidential clerk was
obliged to stop at the house very frequently upon one pretext or
another. So the winter promised to be a very pleasant one.
The report of the great battle of New Orleans, with the news of
peace, came to end all controversies over the war, and the young
people of Lettice’s acquaintance organized a grand sleighing party in
honor of the good news.
Did she ever forget that night? Under the gleaming stars, well
muffled up from the winter’s cold, she did not feel the sharp, frosty
air. From her quilted hood of silk bordered with swansdown, her fair
little face peeped like a rosebud from a snowdrift. She snuggled
down warmly by the side of Ellicott Baldwin, who had grown so deft
with the use of his one hand that to drive was no great task. Over the
snow they sped, bells jingling ahead of and behind them. They
talked of many things. It was not often that they were alone in each
other’s company, and at last the conversation took a new turn.
“Do you know what I said to your father that last night of the old
year? Are you cold, darling? You shivered then.”
“Did I shiver? No, I am not cold.” She was trembling at his words.
“What did you say?” she asked, almost in a whisper.
“I told him how much I loved his daughter, and he said that I must not
tell you then, but that if I could make myself a place in business, as I
hoped to do, that he would then be better able to say whether I might
speak to you or not. And then—how good he is!—he gave me the
chance to show what I could do. Lettice, am I presumptuous? Could
you? Do you?”
“Oh, here is the bridge! We shall have to stop and pay toll.” But
before the bridge was crossed, more than one toll was paid.
“I don’t care if he has but one hand,” pouted Lettice to Betty’s teasing
remarks, when the latter came up for the grand illumination.
“And he is a Yankee.”
“Well, suppose he is?”
“And he’ll take you away from your father, whom you have sworn
never to leave.”
“Indeed, then, he will not; for we are all to live together, and so much
the better for my dear dad. Aha! a valentine! See, Betty! It has come
by a special messenger. Danny found it under the door. Isn’t it a
beauty, with that pretty filigree paper, and those roses? And what
lovely verses! They are original, I know, for perhaps you are not
aware that my sweetheart has a gift for making rhymes. Listen:—
“‘LINES TO THE LADY OF MY LOVE.
“‘God bless thee, dearest, for thy love,

Whose pure and holy light,
Upon my pathway here below
Hath shed its radiance bright.
God bless thee for the tenderness
Thy spirit aye hath shown
Midst all the darkness, doubt, and gloom
Thy fond, true heart hath known.
My dearest, I think but of thee
In evening’s silent hour.
And when fond mem’ry bears me back
I gladly own thy power.
Where’er I go, whate’er betide,
One only love is mine.
Thro’ sunshine and thro’ storm my heart
Is wholly, truly thine.’”
“Isn’t that lovely, Betty? My Valentine, you truly are.” And she kissed
the verses so rapturously that Betty laughed merrily.
“It does me good to see you really in love at last, Lettice. I used to
think you ‘quite gone’ when Robert Clinton was with us.”
“Do not speak of that; yet, by the way, what do you think? Ellicott
saw him in Philadelphia last week, and instead of fighting a duel, as
they had both vowed to when they should next meet, they actually
shook hands over the good news of peace at last. And Ellicott told
him of me, and, so he says, Mr. Clinton looked quite pale at what he
told him of our engagement, but wished him joy and congratulated
him as bravely as his best friend would do. He sent me his best
wishes, too, and so I may consider that he has forgiven me. On top
of all this, to-day comes a letter from Rhoda to Aunt Martha, a dutiful
letter, as Rhoda’s always are. Here it is; I will read you what she
says: ‘My father has long been anxious to make a match between
myself and Robert Clinton, and so I have consented. Robert and I
have a warm affection for each other and have known each other
from childhood. I think I know all of his faults as well as his virtues.
Each of us has a past to confess, as you well know, my dear aunt,
but it is a past that can never be recalled, and I shall not be a less
dutiful daughter and wife because of mine.’”
“Poor Jamie!” sighed Betty.
“Yes, but I am glad of this piece of news. I shall not care to meet Mr.
Robert Clinton again, but Rhoda I shall always love, and I believe
she loves me.”
And indeed, Rhoda came all the way from Boston to be Lettice’s
bridesmaid, for the wedding took place in the spring. Lettice declared
that she would never leave her father, and since Joe and Patsey had
come to Baltimore to live, it was high time that they were leaving her
uncle’s.
“Bless me!” said Betty, “we shall be ruined in preparing for so many
weddings; Patsey’s first, and then yours, before we have taken
breath. Will you come down and be married from our new house,
Lettice? It isn’t as big as the old home, but it will hold a warm
welcome for our friends. To be sure, we can kill no fatted calf, for all
the British left us is one old ewe, and William and I are counting
upon starting life over again, depending upon her as our sole
prospect of future wealth.”
Lettice laughed. “Patsey might spare you a goose; she tells me she
has already a brood of young goslings.”
“I don’t have to go to Patsey to find a goose,” replied Betty, saucily;
“you haven’t taken your eyes from that note you just received. I
suppose it is from that precious Yankee of yours. Is it a receipt for
brown bread? Mother promised me a hen; she actually has two
whole ones left, and if I can get eggs I’ll have some chicks before
long. And father has a heifer which he traded for, with some old Tory
or other, and which he has promised me. But I can’t promise you any
great fixings, Lettice, dearly as I want to have you married from our
house. Will you come?”
Lettice shook her head. “No, we shall be married at St. Paul’s. I think
I would rather not go down again just now, Betty.” And Betty
understood. “There should be no sad memories to mar the girl’s
wedding,” she reflected.
Yet Lettice did go down once more to her old home, and she stood
with her lover in the old graveyard which had been the scene of so
many experiences.
“Do you remember the night we first came here together?” Ellicott
asked. “I loved you then and was desperately jealous of Robert
Clinton.”
“Were you really?” said Lettice. She stood thinking it all over. “You
had some reason to be, sir,” she acknowledged. Then she drew
closer to him. “But there can never be a cause for that again. No one
can ever come between us now, my beloved.” And what answer he
made, only the mating birds in the trees above them heard.
A pretty wedding it was, with a goodly array of uniforms to offset the
bright gowns. The church was crowded, many bronzed faces were to
be seen, and more than one empty sleeve. Lutie, carried away by
the occasion, bore her mistress’s train half-way up the aisle, and
when she discovered what she had done, she retreated, overcome
by confusion, to be scolded by Aunt Hagar, who made her first
journey to Baltimore to see “Mars Jeems’s Miss Letty git ma’ied.”
“I prosefy dat match long whiles ergo,” she said to Mammy who, in
all her glory, was in charge of Betty’s baby, and waiting to ride to
church “lak white folkses.”
“Yass, ma’am, I prosefy dat,” Aunt Hagar reiterated.
“Go ’long,” said Mammy. “Ennybody prosefy dat. Hit don’ tek no
preacher ner no luck-ball ter jint dem two f’om de fust. I see dat
whilst I nussin’ him dat time.”
“Humph!” Aunt Hagar gave a mighty grunt. “Ef I ain’ hed de
prosefyin’ an’ de ’intment, an’ de cunjurin’ o’ dey inimies, whar yuh
reckon dem young folkses be now?”
But Mammy had no answer to make, for the carriage was ready, and
it was too important an occasion to spend time in “argyfyin’.”
“Lettice certainly has a lot of friends,” said Betty, as the carriage
bearing the newly wedded pair drove off. “I believe the entire
American army must have reserved their discarded footwear to
throw after that couple. Did you ever see such a pile of old shoes?”
A week later Rhoda returned to her home to make ready for her own
wedding. Lettice kissed her good-by with more emotion than she
believed possible. Would they ever meet again? Rhoda herself,
looking back through a mist of tears, saw the picture which ever after
remained with her: a fair young wife in her new home, standing
between husband and father, loyal to both, as she had always been
to the cause for which they had suffered.
Transcriber’s note
Minor punctuation errors have been changed
without notice. Inconsistencies in hyphenation have
been standardized.
Page 9: “_Frontispiece_ 12” “_Frontispiece_ 1”
Page “this side of the
“this side the street”
13: street”
Page “the Patapsco, and “the Patapsco, and
116: that” that”
Page “present alone were “present alone was
131: the” the”
Page
“as one’s relative” “as one’s relatives”
140:
Page “stepped into a “stepped into the
185: cabin” cabin”
Page “Aunt Hager has “Aunt Hagar has
191: been” been”
Page
“to know them qui.e” “to know them quite”
212:
Page
“take care c myself.” “take care of myself.”
267:
Page “morning, and “morning, and
267: perhaps ” perhaps I”
Page “key of the side
“key to the side door”
275: door”
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Fundamentals of Financial Accounting,

5th Edition Mohammadali-Haji

Fundamentals of financial accounting Seventh Edition

Financial Accounting Theory 5e 5th Edition Craig Deegan

Principles of Accounting, Volume 1: Financial

Financial Accounting Robert Libby

Financial Accounting Jerry J. Weygandt

Financial accounting Tenth Edition John Medlin

Financial Accounting, 8th Edition Craig Deegan

Financial Accounting 10th Edition John Hoggett

ISBN 978 1 776 17470 6 (softback)

First Edition 2012

Printed by Pinetown Printers

Changes made for the fifth edition

A few remarks regarding the layout of this work

Financial accounting – an introduction

The nature of financial accounting

The development of financial accounting

The influence of technological development

The influence of the development of forms of entities

18 Entrepreneurs wishing to form a business entity consider a number of factors in deciding

The influence of the professional movement

Related fields of study

38 As mentioned above, management is also interested in the information contained in the

International Financial Reporting Standards

Preface to International Financial Reporting Standards

The objectives of the IASB

Scope and authority of International Financial Reporting Standards

International Reporting Standards and this work

Why study accounting?

General purpose financial reports

Objective of general purpose financial reports

Users of financial reports

Components of financial statements

x the statement of cash flows;

Statement of financial position

Statement of profit or loss

Statement of cash flows

Statement of changes in equity

Reporting entity and related concepts

Reporting period and the reporting date

Accrual accounting – the basis on which financial statements are

Underlying assumption – going concern

Qualitative characteristics of useful financial information

Fundamental qualitative characteristics

Enhancing qualitative characteristics

The cost constraint on useful financial statements

Transactions and events

Elements of financial statements

Statement Objective of financial reporting Element

Assets = Liabilities + Equity

The element assets

The definition of the element assets

Potential to produce economic benefits

d) receive cash or other economic resources by selling the economic resource; or

Obtaining a right to claim

The element liabilities

The definition of the element liabilities

existence uncertainty is resolved – for example, by a court ruling – it is uncertain whether

Transfer of an economic resource

Present obligation as a result of past events

The definition of the element equity (shareholder’s interest)

Equity = Assets – Liabilities