FRAMEWORK

OF
FINANCIAL
REPORTING

CHAPTERS 1 – 3
CHAPTER 4
CHAPTER 8
LEARNING OUTCOME

 Users of financial information and significance of the information to each user.

 The elements of accounting equation.

 The recording of financial transactions using the elements of the accounting equation.
ASSESSMENT CRITERIA

 Users of financial information can be identified and to describe how the information will influence the economic
decision of each user;
 The objective of financial statements and the underlying assumptions are listed, explained and discussed;

 The elements of financial statements (assets, liabilities, equity, income and expenses) are identified, defined,
classified and applied accurately by calculating and substituting the equation;
 The recognition criteria for the elements of financial statements (assets, liabilities, equity, income and expenses) is
defined and applied correctly;
 Transactions are recorded using the accounting equation worksheet;

 The process for recognising transactions from source documents through to the financial statements is explained
and discussed as a theoretical overview.
ACCOUNTING TERMS (STUDY GUIDE)

 Accounting
 Double entry
 Accounting assumptions/concepts/principles
 Expenditure
 Accounting entity
 Going concern
 Accounting equation
 Matching principle
 Accounting period
 Prudence concept
 Accrual basis
WHAT IS ACCOUNTING?

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

information about economic entities.
 “Language of business community.”

page 2
ECONOMIC ENTITIES/TYPES OF ENTITIES

 Sole Proprietor
 Partnership
 Non-Profit Company (NPC or NGO)
 Close Corporation
 Profit Company
 Private company
 Public company

page 6 -9
USERS OF ACCOUNTING INFORMATION

Users of accounting information (page 9 – 11) Why?

Investors Profits
Management Performance bonuses
Payables/ Suppliers (Creditors) Will money owed to them be repaid
Investment analysts Assess the investment risk for investors
Government Policy development and SARS
Financial institutions Loans
Employees Prospect of future employment

Note: The list is not exhaustive you can lookup other users of financial information on the internet.
OBJECTIVE OF FINANCIAL STATEMENTS

 Primary objective of accounting is to provide information that will be useful for making economic decision.

 Accounting is communication means sending information from source, via a channel, to the receiver.

 The objective of financial statements is to provide information about the financial position, performance and
changes in financial position of an enterprise that is useful to a wide range of users in making economic
decisions (IASB Framework). https://accounting-simplified.com/purpose-of-financial-statements.html

page 24 & 124

 Accounting Principles and concepts page 25 - 27

 Money is common unit of account

UNDERLYING  The cost principle

ASSUMPTIONS  The entity principle
 The principle of duality
 Other principles
UNDERLYING ASSUMPTIONS

 The use of money as a unit implies that

information that cannot be measured in rand
terms is often excluded in the financial
statements.
 Money as common unit of account
 Meaningful description of financial position
is done in monetary terms
 Performance of its operations results in a
profit or loss made (monetary terms)
UNDERLYING ASSUMPTIONS

 Most fundamental and controversial concept

used in accounting.
 The cost principle  Assets are reflected at cost
 Onus is on the users to establish real value on
the basis of information provided
UNDERLYING ASSUMPTIONS

 It is accepted that entity or business can be

identified.
 All accounting practices then relate to this
particular business.
 The entity principle  Personal financial affairs of owner NEVER
intermingle with business.
 Any personal transaction of the owner, other
than depositing funds into (Capital) or
withdrawing funds from (Drawings) the
business, are not recorded.
UNDERLYING ASSUMPTIONS
 Financial situation of entity is represented in
terms of the basic accounting equation
(BAE).
 Every transaction by the entity has a two fold
influence on BAE, balance should be
 The principle of duality maintained at all times.
(double-entry principle)  For every debit there has to be a credit

ASSETS = OWNER’S EQUITY +

LIABILITIES
Basic Accounting Equation (BAE)
UNDERLYING ASSUMPTIONS

 Materiality principle
 Going concern concept
 Accrual concept
 Matching concept
 Other Principles

Will be covered in chapter 8 in the context of

preparation of financial statements.
Page 124 – 125
UNDERLYING ASSUMPTIONS (OTHER PRINCIPLES)

 Accrual concept/basis
 Materiality principle
Financial statements are prepared on accrual basis, it matches
income earned during the accounting period to expenses information is material if omitting it or misstating it could
incurred during that period. influence decisions that users make on the basis of
financial information about a specific reporting entity.
Transactions are recorded as an when they happen, not on
receipt of cash.
 Going concern concept  Matching concept
Financial statements are prepared on the assumption that the An accounting concept that matches expenses incurred with
business will continue with operations in the foreseeable income earned in order to arrive at net profit or loss.
future (at least another 12 months after reporting date)
  Asset
 Liabilities
 Equity

ELEMENTS OF  Income
FINANCIAL  Expenses
STATEMENTS
CHAPTER 3 AND 8

page 28-29

page 128 -131

ELEMENTS OF FINANCIAL STATEMENTS

Before January 2020 After January 2020

Assets Assets
 A resource  A present economic resource

 Controlled by the entity  Controlled by the entity

 As a result of past events  As a result of past events

 From which future economic benefits are

expected to flow to the entity. An economic resource is a right that has a
potential to produce economic benefits
ELEMENTS OF FINANCIAL STATEMENTS

Before January 2020 After January 2020

Liability Liability
 A present obligation of an entity  A present obligation of an entity

 Arising from past event  To transfer an economic resource

 Settlement of which will result in outflow of  As a result of past event.

economic benefits from the entity

An obligation is a duty of responsibility that the

entity has no practical ability to avoid .
ELEMENTS OF FINANCIAL STATEMENTS

Before January 2020 After January 2020

Equity Equity
 Residual interest in assets of the entity  Residual interest in assets of the entity
 After deducting all liabilities  After deducting all liabilities
ELEMENTS OF FINANCIAL STATEMENTS

Before January 2020 After January 2020

Income Income
 Increases in economic benefits  Increases in assets or
 During the accounting period
 Decreases of liabilities
 In a form of inflows or enhancements of assets
 That results in increases in equity
or
 Decreases of liabilities  Other than those relating to contributions from
 That results in increases in equity
holders equity claims
 Other than those relating to contributions from equity
participants
ELEMENTS OF FINANCIAL STATEMENTS

Before January 2020 After January 2020

Expenses Expenses
 are decreases in economic benefits during the accounting
 Decreases in assets or
period
 in the form of outflows or depletions of assets  Increases in liabilities

or  Other than those relating to distributions to

 incurrences of liabilities that result in decreases in equity, holders of equity claims.
 other than those relating to distributions to equity
participants
  Recognition is appropriate if it results in both relevant
information about the elements of financial statements and a
RECOGNITION faithful representation of those items,
CRITERIA OF
After all the aim is to provide information that is useful to the
ELEMENTS OF users of financial statements.
FINANCIAL
STATEMENTS
CHAPTER 8

page 128 -131

RECOGNITION CRITERIA

Before January 2020 After January 2020

An item that meets the definition of an element
should be recognised if:
1. It is probable that any future economic
benefits associated to the item will flow to or from the
entity.
2. The item has a cost or value that can be measured
reliably.
An item that meets the definition of an element
should be recognised if it results in:
1. Relevant information about
the elements.
2. Faithful representation of those items,
RECORDING  Accounting Equation states that in any business at any point in

TRANSACTION time :

S USING BASIC ASSETS = OWNER’S EQUITY +

LIABILITIES
ACCOUNTING
A = OE + L
EQUATION
DEBIT = CREDIT
CHAPTER 3 AND 4
 ACCOUNTING EQUATION
ASSET = OWNERS EQUITY
Land (purchased +/ sold -)
Buildings (purchased +/ sold -)
Furniture (purchased +/ sold -)
Equipment (purchased +/ sold -)
Machinery (purchased +/sold -)
Investment (purchased + sold -)
Debtors : when goods are sold on credit – debtors account
increases (+),
and decrease (-)when debtors pay.
Bank payment (-)
Bank receipt (+)
Cash (on hand +/ withdraw-)
N.B. (+) IS AN INCREASE=DEBIT(DR)
(-) IS A DECREASE = CREDIT(CR)
ITEMS THAT INCREASES (+)OE
Income items
Rent expense( -)
Services rendered (+ )
Discount received ( +)
Commission received (+ )
Credit loss recovered ( + )
Interest on savings ( + )
Interest on fixed deposit( + )
Other items that increases OE
Capital contribution
Sales
N.B (+ )IS INCREASE= CREDIT
(OE) + LIABILITIES
ITEMS THAT DECREASES (-)OE
Expense items
Packing material ( -) Loan /mortgage bond increases(+) when the business is given a
Advertising ( - ) Rent received (+ ) loan/bond and
decrease -when the business pay.
Salaries (-) Creditors/payables
Discount allowed( -) Increase (+) when the business purchase goods on credit, and
Rates (-) decrease ( -) when the business pay or return
Credit loss( -) goods back to the suppliers/creditors.
Interest on loan( -)
Water and electricity /
Municipal expenses( -)
Printing costs (-)
Insurance (-)
Telephone (-)
Other items that decrease OE
Drawings (-)
Cost of sales( -)
Sales returns/debtors
Allowance( -)
(-) DECREASE= DEBIT
RECOGNISING 1.
TRANSACTIO Transaction
NS FROM 6. Financial 2.
SOURCE statements Document
DOCUMENTS
THROUGH TO
THE 5. Trial
3. Journals
FINANCIAL Balance
STATEMENTS 4. General
Ledger
CHAPTER 4