INTRODUCTION &

CONCEPTUAL
FRAMEWORK
STUDY UNIT 1
ALL-IN-1 CH. 1
 Homework

• Read through Ch 1 in textbook

• Watch slides video
• Complete Assignment 1
• Print Assignment memo
• Make corrections to your own answer
 OUTCOMES

• Define accounting
• Define and discuss following:
– purpose of accounting
– financial results
– financial period
• Define and discuss the users of financial statements
• Name and discuss the domains of accounting
• Name the different types of entities
• Name the five reports that comprise financial statements
• Name the five elements of financial statements
• Explain the accrual concept of accounting
• Name and discuss following:
– underlying assumption of accounting
– qualitative characteristics of financial statements
NEED FOR ACCOUNTING

What does this picture tell you?

 7500 BC: 3200 BC:
Writing invented by 800 BC:
Agriculture + stock Coins using an
counts using clay bookkeepers 
used clay tablets on alloy of gold and
balls, e.g. 1 clay silver were made.
ball = 1 animal which markings
were made Counterfeiting
originated!

1200-1350 AD:
Double entry
8000 BC: system was
Jericho  trade developed
centre for salt + HISTORY OF
bartering was in use ACCOUNTING

1980’s: 1868:
Balance sheet 1494 AD - Luca Pacioli:
Current format of
the trial balance Mathematician and friend of
Leonardo da Vinci  wrote a
Before WWII: was developed
book  first complete
Income statement description of double entry
was developed system
 DEFINITION OF ACCOUNTING

Identification Measurement Recording Reporting

Of transactions
 PURPOSE OF ACCOUNTING

1. To provide
financial
information
(monetary terms)
4. To users of 2. Regarding
financial economic
statements (to activities
make financial (resources
decisions) employed to
create value)

3. Of an entity
(independent economic
unit)
 FINANCIAL RESULTS

Financial Financial
position performance

State of affairs at a specific In terms of profit or loss for a

point in time specific period

Financial period
 Period between the measurement of one financial position
and the next, for example, 1 March 2020 to 28 February
2021
 Need not necessarily be a calendar year
 DOMAINS OF ACCOUNTING

Financial accounting Management accounting

Prepare formal financial statements Prepare financial reports  specific

for study by external users requirements of different depts of an entity
(internal users)

External users Internal users

• not directly involved with entity • employees who require specific
information to perform daily duties
• desire to study formal FS
and make informed decisions
 EXTERNAL USERS

Controlling
Investors Creditors Customers
interest

Want to know if their Determine profitability &Can entity pay its debts? Will entity be able to
invested funds have financial state of affairs for deliver goods/services?
been appropriately further investments and/or
utilised & managed withdrawals

Employees Community State

Need job security with regard to Donations Payment of taxes &

remuneration & career levies
opportunities
 INTERNAL USERS

Employees Dept managers Top management

Require information on Require information for Requires information to

a continuous basis to planning and control make strategic decisions
carry out daily duties with regard to the
management of the
entity
 TYPES OF ENTITIES

Private
Sole trader 1 owner
company 1-50 owner(s)

Public
Partnership 2-20 owners Unlimited
company

Close Non-profit
1-10 owner(s) Unlimited
corporation entity
 CONCEPTUAL FRAMEWORK

Why does Conceptual Framework exist?

To:
 limit differences & diversity between FS of different entities
 eliminate undesirable alternatives
 avoid being too strict
 achieve reasonable presentation
• People have different ways of doing things  cause confusion if each business
prepared FS according to their own preference
• CF was thus established to provide useful information to users
CONCEPTUAL FRAMEWORK
FINANCIAL STATEMENTS

Statement of financial position

Statement of profit or loss and other

comprehensive income

Statement of changes in equity

Notes to the financial statements

Statement of cash flow

 Statement of financial position

What is financial  Wealth = assets (possessions) less liabilities

position? (debts) = Equity
 Assets, liabilities & equity  financial
position

When is financial
 Position on a specific date
position measured?
 Statement of profit or loss and other
comprehensive income

What is financial  Income (earnings) less expenses

performance?  Profit or loss

When is financial
 Performance for a specific period
performance measured?
 Statement of changes in equity

Owner’s interest in the business (equity)

Capital Withdrawals Profit/loss

contribution
 Explanatory notes

Consist of detailed information

 Income
 Expenses
 Equity
 Assets
 Liabilities
 Declaration of
accounting policy
 Statement of cash flow

Indicates the inflow and outflow of cash during a

specific period
ELEMENTS OF FIN. STATEMENTS

Financial
Financial position
performance
 ACCRUAL ACCOUNTING

Transaction takes place on one date & payment on a different date  on

which date must transaction then be recorded?

 Transactions must be
recorded when they
occur, not necessarily
when cash is
received/paid
 Date on which cash
accrues = date of
transaction
 GOING CONCERN

Management makes the decision

Is it a going concern? Prepare FS in accordance with going

concern principle unless liquidate or discontinue

Not a going concern  measure elements at e.g. liquidation

values (cash values)

Not a going concern  disclose fact, reason, basis used

QUALITATIVE CHARACTERISTICS

FUNDAMENTAL ENHANCING

Relevance Comparability

AND Verifiability

Faithful Understandability
representation Timeliness
 Fundamental characteristics

Relevance Faithful representation

Completeness

Capable of making a difference

in a decision Neutrality

 Nature Free from error

 Materiality  judgment
 Enhancing characteristics

Comparability

Verifiability

Timeliness

Understandability
ML CONSULTANTS/TRADERS

STATEMENT OF FINANCIAL POSITION

ON 31 DECEMBER 200Y

200Y 200Y 200X 200X

R’000 R’000 R’000 R’000

Assets

Non-current assets: 68 58

Property, plant and equipment 60 50

Financial assets 8 8

Current assets: 60 49

Inventory 15 12

Trade and other debtors 43 36

Cash and cash equivalents 2 1

Total Assets 128 107

Equity and liabilities

Equity: 101 88

Capital 101 88

Non-current liabilities: 1 2

Interest-bearing loan 1 2

Current liabilities: 26 17

Trade and other creditors 16 15

Short-term loan 2 1

Short-term portion of long-term loans 1 1

Bank overdraft 7 0

Total Equity and Liabilities 128 107

For more information, refer to your textbook