Chapter 2 - Fundamental Accounting Concepts

SME: no public accountability (issues shares to the public i.e. listed company/banks [hold assets on a trust basis]), does not publish general purpose financial information for external users. 99% of the world’s companies fall under SME’s. The main constraint: all the shares are usually owned by the owner, and is involved in the day-to-day activities of the company. The Statement of Financial Position: reflects resources/position of resources at a point in time Asset: a resource controlled (the ability to restrict the flow of benefits to others, substance-over-form) by the enterprise, past event (purchase agreement/document signed), inflow of future economic benefits. Recognition criteria: A cost that can be reliably measured It must be probable that future economic benefits to flow Example: a company car. The company controls the car (resource). Purchased, and provides future economic benefits from delivery costs. The car is valued for R100 000. Therefore the car is an asset valued at R100 000 Liability: present obligation [legal: tax; constructive: indications by patterns of past practise] of the entity, past event, outflow of resources Owner’s Equity: if it’s not an asset/liability, it’s owner’s equity. Income minus expenses. Accrual Basis: Only income has been earned and the expenses have been earned, not when the money has been exchanged. The Statement of Profit or Loss Income: economic benefits in form of increases in A decreases in L that increases equity, excluding contributions from owner Harmonisation Project: Fundamental Qualitative Characteristics Enhancing Qualitative Characteristics Understandability: users of financial statements are assumed to have a reasonable knowledge of accounting. Relevance: information in financial statements must be relevant i.e. must assist primary users in evaluating the past, the present and the future trends of the company. Materiality: an amount/amount of assets/amount of liability that is being neglected/included in financial statements. For example, individual CCMA cases are often excluded because they are considered immaterial. Reliability: financial statements must have fair presentation i.e. faithful representation. Substance over form: look at the economic reality of the asset and not it’s legal form/entitlement of the asset. Prudence: exercise a degree of caution. Never overstate your assets, never understate your liabilities. Completeness: all the items that are incomplete are immaterial in nature; the cost of producing the statements do not exceed the viable amount you’re willing to give. Comparability: financial statements must be compared to different stages in the company’s timeline or other companies that are similar. Timeliness: financial statements need to be issued within a relevant time (within 3 months) otherwise it will become irrelevant (unless it’s being used for trend analysis) Balance between the cost and benefit: basically the cost should never exceed the benefits.