INTRODUCTION &

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

• Read through Ch 1 in textbook

• 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 800 BC:
Agriculture + Coins using an
stock counts invented by
bookkeepers alloy of gold
using clay and silver
balls, e.g. 1 → used clay
tablets on were made.
clay ball = 1 Counterfeiting
animal which
markings originated!
were made
1200-1350 AD:
Double entry
8000 BC: system was
Jericho →
trade centre HISTORY OF developed
for salt + ACCOUNTING
bartering was
in use

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

Identification Measurement Recording Reporting

Of transactions
 PURPOSE OF ACCOUNTING

1. To provide
financial
information
(monetary
4. To users terms)
2. Regarding
of financial economic
statements activities
(to make (resources
financial employed to
create value)
decisions)
3. Of an entity
(independent
economic unit)
 FINANCIAL RESULTS

Financial Financial
position performance

State of affairs at a In terms of profit or loss

specific point in time for a 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 Prepare financial reports →

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

External users Internal users

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

Controlling
Investors Creditors Customers
interest

Want to know if Determine Can entity pay Will entity be

their invested profitability & its debts? able to deliver
funds have been financial state of goods/services?
appropriately affairs for further
utilised & investments and/or
managed withdrawals

Employees Community State

Need job security with Donations Payment of

regard to remuneration taxes & levies
& career opportunities
 INTERNAL USERS

Employees Dept managers Top management

Require Require Requires

information on a information for information to
continuous basis planning and make strategic
to carry out daily control decisions with
duties 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 ➢ Net wealth = assets (possessions)

position? less liabilities (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 ➢ Performance for a specific period
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
performance position
 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 user’s decisions 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