Chapter 7: Introduction to accounts
(continue…)
Accounting standards are based on concepts
and conventions.
Accounting standards placed greater emphasis
on neutrality rather than prudence
And also…
Moved away from historical cost towards fair
values
 Non-current
assets: disclosed at cost less
depreciation less any impairment
Depreciation is a write off every year due to
diminishing value of the asset due to usage
 Example: Machinery / Office furniture /
Vehicles
 Investment type assets recorded at fair value
(market value) Conservative, move towards
the market value
E.g. Securities / derivatives
 Example page 20
 AFS
is restricted to what can be measured in
monetary terms
 Do not include for example the value of its
customer base or value of its brand names
(goodwill)
A
business is an entity for accounting
purposes and its finances is kept separate
from the owner’s finances
 A limited company has its own legal identity
 Sole traders and partnerships – owners need
to keep financial affairs separate from
business
Realisation:
 Income is recognised
when earned, not
when cash is received
 Example:
Edgars clothing account
income is recognised
when the customer
buyes the clothes on
account not when the
account is settled
Accrual:
 Expenses are
recognised when
incurred and not
when paid for.
 Example: On 1 Feb
2013 Company A pays
R30 000 rentals for
Feb, March and April.
Year end = 31 March.
How much rent
should be disclosed in
2013’s AFS?
 Income
and expenses relating to each other
should be disclosed in the same Income
Statement….when earned/incurred
 Every
transaction will affect two figures
 Example: Pay employees:


Salaries expense
Cash
 Forms
the basis for double-entry
bookkeeping
 Not
all detail disclosed – some meaningless
 Disclose issues only if material and …“would
add to the reader’s understanding of the
business”
 Material if effect on users economic decisionmaking
 Materiality principle has to be interpreted
carefully for example if company is fined for
breaching guidelines the fine should be
disclosed even though amount is
insignificant
 AFS
should not present unduly optimistic
results
Assets and profits: lowest reasonable figure
 Liabilities and expenses: highest reasonable
figure
Prudence only applied when uncertainty:
 Provision made for known liabilities, expenses
and losses (actual amount known or best
estimate)
 Profits are not anticipated
 Profits only reflected in I/S when realised (cash
received)


 Assumes
that the business will continue in
operational existence for the foreseeable
future (at least the next 12 months)
 If not: liquidation basis (winding-up)
 Directors should report that “the business is
a going concern” and auditors need to
comment on the statement that “the
business is a going concern”
 AFS
figures should be comparable from one
year to the next
 Changes to accounting policies should


Only be done if circumstances changed or
required to do so and
be disclosed + the impact explained
 If
no accounting rule exists, disclose as such
that info is relevant and reliable
 Information is relevant if it informs
decisions taken by users of AFS
 Reliable when:





Faithful representation of financial position,
performance and cashflows
Reflects economic substance of the transactions,
rather than legal form
Neutral and free from bias
Prudent
Complete in all material aspects
 Question
7.2 p6 AFS
 Question 7.4 p8 True and fair view
 Find a set of AFS (internet / Newspaper) and look
for the elements per page 12
 Question 7.6 p17 Auditor’s opinion
 Question 7.8 p22 Accrual concept
 Question 7.9 (good question!)
 Also work through the example on page 26
 During
lecture time 15:30
 No sick notes will be accepted (if you do not
write no mark for the test)
 Scope: Chapters 1 & 2 (LA 1 & 2)
 The venue:
GW / HB 4 - 2
 Wednesdays
 Thursdays
 By
9:30 – 12:00
14:30 – 16:15
appointment only!! Please book me in
advance on
Liesel.JansenVanVuuren@gmail.com