Financial Accounting Principles for Law Practitioners PDF

Learning unit 1 FINANCIAL ACCOUNTING PRINCIPLES FOR LAW PRACTITIONERS LEARNING UNIT 1 THE NATURE AND FUNCTION OF ACCOUNTING Contents 1.1 Introduction................................................................................................................................3 1.2...

Learning unit 1 FINANCIAL ACCOUNTING PRINCIPLES FOR LAW PRACTITIONERS LEARNING UNIT 1 THE NATURE AND FUNCTION OF ACCOUNTING Contents 1.1 Introduction................................................................................................................................3 1.2 What is accounting?...................................................................................................................3 1.3 The nature of accounting...........................................................................................................4 1.4 Forms of business ownership and users of financial statements...............................................4 1.5 Internal controls.........................................................................................................................5 1.5.1 Built-in control measures...............................................................................................6 1.5.2 Internal control systems/procedures..............................................................................6 1.6 Financial frameworks.................................................................................................................7 1.6.1 The Conceptual Framework..........................................................................................7 1.6.2 Accounting standards and statements...........................................................................8 1.6.3 Accounting policies........................................................................................................8 1.6.4 Fundamental theoretical principles that all general financial statements must be based on in terms of the IAS....................................................................................................9 1.7 Financial statements................................................................................................................11 1.7.1 The statement of financial position..............................................................................12 1.7.2 The statement of profit or loss and other comprehensive income................................14 1.8 The double-entry principle.......................................................................................................15 1.9 What is a contra account.........................................................................................................16 1.10 Activities...................................................................................................................................17 1.10.1 Find the accounting terms............................................................................................17 1.10.2 Solution.........................................................................................................................18 1.11 Accounting crossword puzzle...................................................................................................19 1.11.1 Crossword puzzle........................................................................................................19 1.11.2 Crossword clues..........................................................................................................19 1.11.3 Solution......................................................................................................................21 1.12 Flashcards...............................................................................................................................21 1  Learning unit 1 The following concept cards are available for this learning unit: CONCEPT o What is accounting? CARDS o The nature of accounting o Forms of business ownership and users of financial statements o Fundamental theoretical principles in term s of IAS Learning outcomes After working through this learning unit, you should be able to: define what accounting is discuss the nature of accounting explain the different users of financial information and their needs explain the difference between financial and management accounting describe internal controls discuss the built-in control measures in a law practice discuss the internal control system and procedures applicable to a law practice explain acronyms IFRS, IASB, FRSC and SAICA name the financial frameworks that are regarded as acceptable in terms of the Rules of the Attorneys’ Profession describe the concept “Conceptual Framework” describe the objectives of creating accounting standards and statements define what accounting policies are discuss fundamental theoretical principles that all general financial statement must be based on in terms of the IAS discuss each of the following terms relating to underlying assumptions, fundamental qualitative characteristics, enhancing qualitative characteristics and the cost versus the benefit of financial reporting per IAS1 going concern accrual basis of accounting relevance materiality and nature faithful representation completeness, neutrality and free from error comparability, verifiability, timeliness and understandability 2  Learning unit 1 Acronyms, Rules of the Attorney’s Profession and Accounting Standard IFRS International Financial Reporting Standards IASB International Accounting Standards Board FRSC Financial Reporting Standards Council (South African Body) SAICA South African Institute of Chartered Accountants The Rules The South African Legal Practice Council Rules made under the authority of sections 95 (1), 95 (3) and 109 (2) of the Legal Practice Act, 28 of 2014 (as amended) IAS 1 Presentation of Financial Statements 1.1 Introduction Accounting is the bookkeeping method, which generates a financial record of all the business transactions entered into by a business (entity). An accounting system generates the financial records of the business and produces a summary of the income and expenses (statement of profit or loss) and assets and liabilities (statement of financial position). Therefore, the accounting system generates financial information in the format of financial statements. As the physical and digital worlds have integrated over time, today's accounting information systems are typically computer-based methods with special accounting software. Whether the accounting information is computerised or written up by hand the principles of the debits, credits and the double-entry system are still relevant and form the basis for the accounting system. This module deals with the financial accounting concepts and principles that are relevant to law practitioners as well as the accounting and recording of transactions that are specific to the practice of a law practitioner. 1.2 What is accounting? Accounting is a process consisting of the following three activities: The first activity involves identifying those events that are evidence of economic activity (transactions) relevant to the particular business or entity. and The second activity relates to the recording of the monetary value of the economic events (transactions) in order to provide a permanent history of the financial activities of the business. Recording involves keeping a chronological diary of measured events in an orderly and systematic fashion. This means that economic events are also classified and summarised. 3  Learning unit 1 and The third activity encompasses the communication of the recorded information to interested users. The information is communicated through the preparation and distribution of accounting reports, the most common of which are known as financial statements. 1.3 The nature of accounting Accounting is a means of communication used to convey Accounting uses words and figures to specialised information about the finances of an entity. convey financial information to the users of such information. These words and If the recipient of this specialised information (the user of figures are known as the financial information) does not understand it, the  concepts, information, which is conveyed, will have no value.  principles, and  procedures of accounting. This knowledge will ultimately result in an understanding of the message contained in financial statements Every person involved in an entity uses financial information to a greater or lesser extent. Accounting is a ‘‘language’’ used to Financial resources are limited, or ‘‘scarce’’, and if convey financial information to we are to spend them, we must plan properly. interested parties, i.e. users of the Each of us also needs to know something about information. accounting to manage our personal financial affairs. Knowledge of accounting is thus also useful in this area. 1.4 Forms of business ownership and users of financial statements The four main forms of ownership are:  sole traders,  partnerships,  close corporations  companies Many users, who analyse the information for various decision-making purpose, require financial information. The following are the most common users:  Investors  Creditors  Employees  Government  Management 4  Learning unit 1 Users of financial information – Are divided into the following two categories:  Internal users, such as management or employees  External users, such as investors, creditors, or government The fields of accounting –  Financial accounting is concerned with the provision of financial information to mainly external parties,  Management accounting is concerned with the provision of financial information to people within the entity. Financial Accounting is concerned with the recording of transactions and the preparation of the financial statements for the entity as a whole. International Financial Reporting Standards (IFRS) govern financial accounting reporting, which consists of adhering to external international standards. These standards ensure the comparability of financial statements between entities and countries. Management Accounting provides financial information for specific purposes. Managers use this information in their decision-making, which leads to the attainment of the objectives of the entity. Without this financial information, it would be difficult for management to manage the business effectively. In this module, we will be concentrating on financial accounting. 1.5 Internal controls Internal controls are the mechanisms, rules, and procedures put in place by an entity to ensure the integrity of financial and accounting information, promote accountability and prevent fraud. Internal control further ensures that the financial information provided by such a system is complete, accurate and reliable, that the assets of the entity are protected against loss or fraud, that management policies are implemented and that all parts of the system function properly. The success of any accounting system depends on a good system of internal control. An attorney’s practice is particularly dependent on such a system for its continued existence. Internal control systems must be designed to suit the type of entity concerned, for example, a sole proprietor, a partnership, or a personal liability company. Rules 54.14.7.1 (54.14.7.1.1 to 54.14.7.1.4) of the South African Legal Practice Council Rules (hereafter referred to as the Rules) require that internal controls are implemented to ensure compliance with the Rules and to ensure that trust funds are safeguarded. 5  Learning unit 1 1.5.1 Built-in control measures Built-in control measures include:  numbered source documents  dates on source documents  control accounts (refer to section 4.6 in learning unit 4) in respect of clients (also known as trade receivables) and trust creditors (also known as trust payables)  separate bank accounts (business and trust bank accounts)  the keeping of petty cash according to the imprest 1 system  the accurate analysis of all income and expenses  a monthly trial balance which ensures that all accounts are properly balanced  the reconciliation of bank accounts with bank statements  the reconciliation of business creditors (also known as trade payables) with creditor statements  a non-current asset register. 1.5.2 Internal control systems/procedures Internal control procedures include separation of duties, access controls, physical audits, standardised documentation, trial balances, periodic reconciliations, and approval authority. Examples of internal control procedures are:  efficient banking of all cash received  all payments must be made by EFTs (electronic fund transfers)  proper authorisation for all transactions  proper demarcation (limits) of authorisation  the separation of duties (e.g. the person who issues receipts may not record them in the relevant cash receipts journals)  an internal checking system (e.g. at least two staff members to check important transactions; rotation of staff etc.)  the keeping of registers for receipt books, invoice/debit notebooks and credit notebooks  the keeping of unused receipt books, invoice/debit notebooks and a credit note  the review of receipts against deposits  the initialling of changes and receipts  cash to be banked regularly  only authorised signatories are allowed to sign on behalf of the entity  no cash to be issued. 1 The imprest system is a financial accounting method for paying out and subsequently replenishing a fund such as petty cash. At any point in time the cash on hand plus the value of the petty cash vouchers for expenses paid should be equal to the original fixed imprest petty cash amount. 6  Learning unit 1 1.6 Financial frameworks Rule 54.6 requires that a law firm shall keep in the official language of the Republic such accounting records, which record both business account transactions and trust account transactions. The Rules also require the preparation of financial statements, which reflect fairly the state of affairs and business of the firm and explain the transactions and financial position of the firm. The financial statements must also comply with an acceptable financial framework as applied in South Africa. The financial frameworks that are acceptable in terms of the Rules are:  the International Financial Reporting Standards (known as “IFRS”), and  the International Financial Reporting Standards for Small and Medium Entities (known as “IFRS for SME’s”) The International Accounting Standards Board (IASB) issues these frameworks from time to time. 1.6.1 The Conceptual Framework Accounting, as a specialised medium of communication (refer to 1.3 above), has its own specific language (language of business) or jargon. If each business were to prepare financial statements and reports according to its own accounting rules and its own interpretation of accounting theory and principles, there would be chaos in the world of economics and business. The conceptual framework is a group of interrelated objectives and theoretical principles that serve as a frame of reference for financial accounting and more specifically for general purpose financial reporting. The objective of the conceptual framework is to provide information that is useful to potential and existing investors, lenders, and other creditors. All general-purpose financial statements must have the same objectives and must be based on the same fundamental theoretical principles. The objective of general-purpose reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity. These decisions involve buying, selling, or holding equity, debt instruments, and providing or settling loans and other forms of credit. Potential and existing investors are interested in the returns they expect, while creditors and other lenders are interested in principal repayments and interest payments they expect. The objective of creating standardised accounting rules, called accounting standards, for particular issues (e.g. for the treatment of taxation in financial statements, etc.) is to limit the variety of available accounting practices and the elimination of undesirable alternatives. The accounting standards are not always rigid rules. Some standards allow more than one desirable alternative for example inventory (refer to section 3.2 in learning unit 3) and depreciation (refer to section 3.3 in learning unit 3). 7  Learning unit 1 1.6.2 Accounting standards and statements In South Africa, the Financial Reporting Standards Council 2 (FRSC) plays an important role in the development of IFRS. The standardised accounting rules of the International Financial Reporting Standards 3 (IFRS) and the International Accounting Standards 4 (IAS) are the documented generally accepted accounting standards and practices as prepared by the International Accounting Standards Board 5 (IASB), approved by the FRSC for use in South Africa and thereafter issued by the South African Institute of Chartered Accountants 6 (SAICA). The objective of creating accounting standards for particular issues (e.g. for the treatment of interest paid in financial statements), is to limit the variety of available accounting practices, but without striving for strict uniformity or creating a set of rigid rules for all circumstances. The ultimate aim of accounting standards is to encourage widespread use of particular standards in financial reporting and to eliminate undesirable alternatives. 1.6.3 Accounting policies Transactions of a repetitive nature frequently occur, and the requirement of consistency means that an entity must establish an accounting policy, which determines how such transactions will be treated. LBL An accounting policy is thus a set of decisions about how the entity See will treat the same type of transactions in order to ensure consistent FAC1503 Glossary performance. In the case of transactions that can be dealt with in various ways, it is necessary that the entity discloses the accounting policy it adopted in its notes to the financial statements. For example, an entity has to indicate what basis it has used to deal with the depreciation of property, plant, and equipment. 2 https://www.thedtic.gov.za/legislation/legislation-and-business-regulation/statutory-committees/financial-reporting-standards-council/ 3 https://www.ifrs.org/ 4 https://www.investopedia.com/terms/i/ias.asp 5 https://www.ifrs.org/groups/international-accounting-standards-board/ 6 https://www.saica.org.za/ 8  Learning unit 1 1.6.4 Fundamental theoretical principles that all general financial statements must be based on in terms of the IAS (a) Underlying assumptions In accordance with the conceptual framework for financial reporting and the framework for the preparation and presentation of financial statements issued by the IASB, the financial statements are prepared on the accrual basis and based on the assumption that the business is a going concern. (i) Going concern (ii) Accrual basis A business is a going concern when it will The effect of transactions and events continue to trade in the foreseeable future on a business’s resources must be and is not likely to cease trading imminently included in the periods in which those and have its assets liquidated (sold off). The transactions and events occurred and elements of the financial statements, i.e. not when the cash flow took place. assets, liabilities, owners’ equity, income, Expenses incurred to produce income and expenses. Assets, liabilities, and must be included in the same financial owners’ equity will be included in the financial period, even if they occurred in statements at their original cost less different periods. This is referred to as depreciation/impairment and not at the “matching of costs with revenue”. liquidation values (forced selling values). Income and expenses will, however, be included in the financial statements at their actual costs. (b) Fundamental qualitative characteristics The information in the financial statements must be useful to the users of the statements. To be useful, the information should be relevant and faithfully presented. (i) Relevance (ii) Faithful representation Only relevant information needs to be Financial information must faithfully disclosed separately in the financial represent transactions and other statements. The relevance of the information events. The following characteristics is based on the nature and materiality of the will ensure faithful representation: information. Completeness, neutrality and free from error. Materiality Nature Information that is significant enough In certain instances, the nature of the is disclosed separately. Minor items information alone is sufficient to determine its are included in the financial relevance, for example, where information, 9  Learning unit 1 statements but are not separately irrespective of its materiality, can affect the disclosed. decisions of the user. Completeness All the information that a user needs in order to be able to understand the economic events and transactions should be included in the financial statements. Neutrality Reliable information should be neutral (without bias) in that it should not present information in a manner that will achieve a predetermined result. Free from error The faithful representation of information does not imply that the information is accurate. It implies, however, that the event or transaction is free from error and that the process followed to provide the reported information was without errors. (c) Enhancing qualitative characteristics The enhancing qualitative characteristics improve decision-usefulness of financial reports. The conceptual framework also recognises that the enhancing qualitative characteristics cannot make information useful if that same information is irrelevant or not faithfully represented. Comparability Information should be comparable between different entities or time periods. Verifiability Independent and knowledgeable observers are able to verify the information. Timeliness Information is available in time to influence the decisions of users. Understandability Information shall be classified, presented clearly and concisely. 10  Learning unit 1 (d) The cost versus the benefit of financial reporting The cost of providing financial reporting must be justified by the benefits of reporting that information. 1.7 Financial statements The objective of financial statements is to provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions. To meet that objective, financial statements provide information about an entity's:  assets  liabilities  equity  income and expenses, including gains and losses  contributions by and distributions to owners (in their capacity as owners)  cash flows. [IAS 1.9] In terms of IFRS, a complete set of financial statements of an entity should comprise the following: which reflects all assets, liabilities and equity of a statement of financial position an entity at a particular date which reflects the financial performance of the a statement of profit or loss and entity, indicating a net profit or loss for a specific other comprehensive income period which reflects the movement in: (a) the capital and current accounts of the a statement of changes in equity partners in a partnership; or (b) the shareholding and retained profits or losses of a company for a specific period which reflects the actual cash movements in and a statement of cash flows out of the entity for a specific period which reflect the accounting policy of the entity and expand on the line items in the statement of notes to the financial statements financial position and the statement of profit or loss and other comprehensive income 11  Learning unit 1 Before we can discuss the basics of accounting, we need to know what the statement of financial position and the statement of profit or loss and other comprehensive income consist of. In terms of the Conceptual Framework, the information that must be used in the preparation of financial statements is grouped into elements according to their economic characteristics, which make up the financial statements. These elements are grouped under two headings, namely, the elements that pertain to the financial position in the statement of financial position and the elements that pertain to the financial performance in the statement of profit or loss and other comprehensive income. Statement of Statement of financial Statement of financial position at the financial Contributions position at the beginning of performance by and end of the the period distributions period to equity Assets minus Income holders Assets minus liabilities minus liabilities equal equity expenses equal equity 1.7.1 The statement of financial position The statement of financial position provides information about the following:  The economic resources available to the entity to generate future benefits.  The financial structure of the entity with emphasis on own and borrowed capital, which may also be used to predict future borrowing needs.  The liquidity position of the entity. Liquidity is an entity’s potential ability to pay its short- term debts. In other words, it is the availability of cash and other items, which can easily be converted into cash to pay short term debt. This information may also be used to predict the availability of cash, after the settling of debts for the same period.  The solvency of the entity’s position. Solvency refers to the extent to which an entity’s assets exceed its liabilities. It may also be used to predict the availability of cash over longer periods to meet debts as they fall due.  The elements that are directly related to the financial position are assets, liabilities and equity. (a) Assets Assets are defined as a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits. The asset definition identifies all cash accounts as assets because the economic benefits have already flowed to the entity. In other words, bank accounts, savings accounts, petty cash accounts and cash float accounts are classified under assets if the balances are favourable. 12  Learning unit 1 There are also items, which are expected to result in future economic benefits flowing to the entity i.e. trade receivables (also called client accounts). Debtors are individuals/firms, which owe money to the entity. The money they owe is expected to flow to the entity in future (a potential inflow) when the debtors pay their accounts. All items that an entity has control over or can be resold will be regarded as assets. These include inventory, vehicles, property, equipment, furniture, etc. Stationery and other consumables are meant to be consumed by the entity within one year and are therefore treated as expenses during the year. At year-end, if there are material consumables and stationery on hand, it is considered to be inventory, and a stocktake will be done to determine a value for the statement of financial position. (b) Liabilities Liabilities are debts. If you have a liability in financial terms, it means that you owe money to someone or some entity. A liability is defined as a present obligation of the entity to transfer an economic resource as a result of past events. Examples of liabilities are mortgages, loans from owners, loans from banks and other external parties, trade payables (business creditors) and bank overdrafts. (c) Owners’ equity Equity is defined as the residual interest in the assets of the entity after deducting all its liabilities. Equity represents the interest of the owners in the net assets of an entity, which means the part of the assets against which there is no claim from other parties. Equity differs from liabilities in that liabilities are obligations which must be settled out of the assets of the entity, whilst equity is not an obligation which has to be settled. Equity is not a claim against assets; it is what is left over after all liabilities are deducted from assets. There are two methods by which the owner’s equity in an entity can be calculated.  The first method is to make use of the basic accounting equation. If you have the total value of the assets of the entity, as well as the total value of the liabilities of the entity, then you can calculate the owner’s equity by subtracting the liabilities from the assets. The figure you arrive at should indicate how much money the owner(s) may withdraw from the entity if the business activities were to be terminated on that day. The basic accounting equation can also be expressed as follows: Equity = Assets ― Liabilities Notes – or + – or + – or + A decrease in an account is a – and an increase in an account is shown as a + 13  Learning unit 1 Please note: Refer to Learning unit 2.5 for a discussion of the accounting equation and illustrated examples.  The second method that can be applied to calculate the value of the owner’s equity in the entity is to do the following calculation: In the case of a sole proprietor or a partnership: Capital contributions by the owner/partners, plus profits and minus losses (past and current) of the entity, minus drawings by the owner/partners. In the case of a company: Issued share capital, plus accumulated reserves, plus retained earnings (accumulated profits minus accumulated losses). 1.7.2 The statement of profit or loss and other comprehensive income Profit or losses is used as a measure of performance or as the basis for other measures such as return on investments or earnings per share. The elements that are directly related to the financial performance are income and expenses. Profit or losses for the year is calculated by subtracting the expenses from the income of an entity. [Profit/Losses = Income less expenses] (a) Income Income is defined as increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims. The entity earns income through its normal everyday business operations. For instance, in the case of the sale of goods, the inflow of assets will be the money banked in the bank account and the increase in profit is an increase in equity. Income consists of revenue and gains. Revenue arises from the ordinary business activities of the entity and examples are sales, fees, interest, dividends and rental income. Gains may or may not arise from ordinary business activities of the entity. An example of a gain that arises from the ordinary business activities is a profit on the sale of depreciable non-current assets such as machinery. Examples of gains that do not arise from ordinary business activities are profit on the sale of office buildings and profit on the sale of non-current assets. 14  Learning unit 1 Revenue and gains Revenue and gains arising from ordinary Gains not arising from ordinary business activities business activities  sales,  profit on the sale of office buildings,  fees, and  interest received,  profit on the sale of non-current  dividends, assets.  rental income  profit on the sale of depreciable non- current assets such as machinery (b) Expenses Expenses are defined as decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims. Expenses are costs incurred by the business in order to run the business for the financial accounting period. Expenses include both losses and costs that arise in the course of the ordinary activities of the entity. These are known as operating expenses, which are related to the entity’s primary functions. Examples of operating expenses include the cost of goods sold, administrative fees, office supplies, salaries and wages and rent. These expenses are incurred through the entity’s routine, day-to-day operations. On the other hand, expenses that do not arise from the entity’s regular business activities are referred to as non-operating expenses. These are recorded separately from operating expenses in accounting to help determine the earnings from core activities. Non-operating expenses are not directly related to the main operations and occur outside of daily business activities. Examples of non-operating expenses include interest charges, borrowing costs, restructuring, and reorganizing, and obsolete inventory. 1.8 The double-entry principle In accounting, an account is a record of an entity’s financial transactions, and a place to store that information. Accounts are part of an entity’s financial ledger or balance sheet. An account consists of a left-hand side and a right-hand side and is presented in a “T” format. The left-hand side is referred to as the debit side and the right-hand side is referred to as the credit side. The name of the “T-account” is written across the centre at the beginning of each account (i.e. Motor vehicles). 15  Learning unit 1 The double-entry principle states that for every debit entry into an account, there must be a corresponding credit entry into another account, with each entry referring to its corresponding entry in the other account. (https://www.youtube.com/watch?v=j71Kmxv7smk) The reality for a financial accounting student is that the double-entry rules are not a concept to understand – These are rules that must be learned. When analysing a transaction, always ask the following four questions: 1. Which two accounts are involved in the transaction? 2. Do the accounts form part of assets, equity and/or liabilities? 3. Did the assets, equity and/or liabilities increase or decrease? 4. Which one (or more) of the accounts must be debited and which one (or more) must be credited? 1.9 What is a contra account As a general rule, we use the opposite or contra account to describe a transaction. In a transaction, the contra account is capital. The source of this increase to the bank account is capital - the owner investing in the business. If we were to describe each transaction occurring within the T-account above as "bank," it would not adequately describe why our bank account increased or decreased. All transactions would just be listed as "bank." Using the opposite or contra account gives us a much better description of the transaction. 16  Learning unit 1 1.10 Activities 1.10.1 Find the accounting terms T F R T L M A T E R I A L I T Y C D E P R E C I A T I O N Q R I X E E U S A D P R O F I T Z J M G B R B H C N G E P U N U Q W L C I P M T C O S E U R C E C K I R T R Q A O G H A R N O F A C A W M O E M U R Y P C I M V I O B I H P X H N R S D H T E F N Z I D Z E P F T D R L A U I A V B L G C R E D I T O R S R Q O E A I M Z T N G N Z R T E E W C N N T O K Y S T G J A S S E T R T K Y K J F E V F V F U H T U E O F H N Y F S E Q U I T Y O S D R M A E Q U I P M E N T J A D I Y O O C Q V D O U B L E - E N T R Y A Accounting Property Creditors Expenses Debit Equipment Journal Profit Credit Furniture Ledger Materiality Transaction Debtors Depreciation Purchases Income Inventory Equity Bank Asset VAT Liability Double-entry 17  Learning unit 1 1.10.2 Solution Notes 18  Learning unit 1 1.11 Accounting crossword puzzle 1.11.1 Crossword puzzle 1 2 3 13 4 5 15 6 7 8 9 10 11 16 17 12 14 18 1.11.2 Crossword clues Across Down 2. The residual interest in the assets of the 1. A complete collection of all the accounts and entity after deducting all its liabilities. (6) transactions of a company. (6) 5. Any items that are bought with the 3. A present obligation of the entity to transfer intention of selling the item to a customer. an economic resource as a result of past (9) events. (8) 10. An instructed attorney acting on an 4. A qualitative characteristic of accounting instructing attorney’s behalf. (13) information that makes a difference in 11. An accounting entry that either increases decision-making. (9) an asset or expense account or 6. What money must be deposited in a decreases a liability or equity account. (5) separate banking account? (5) 12. A tax that governments impose on income 7. A concept or convention within accounting generated by businesses and individuals. relating to the importance/significance of an (6) amount, transaction, or discrepancy. (11) 14. All transactions with credit suppliers will 8. A set of rules or procedures, which are be recorded in the........... ledger. (9) followed by an entity to prepare its financial 15. The acronym for Value Added Tax. (3) statements. (6) 19  Learning unit 1 18. Any items sold to customers in the normal 9. An accounting entry that either increases a course of business. liability or equity account or decreases an asset or expense account. (6) 11. All transactions with credit customers will be recorded in the......... ledger. (7) 13. Acronym for “Basic Accounting Equation”. (3) 16. A present economic resource controlled by the entity because of past events. (5) 17. A.......... is a detailed record of all the transactions done by a business. (7) Word Bank Policy Credit Correspondent Equity Liability Income Debit VAT Debtors Ledger Purchases Relevance Creditors Asset Sales Trust Materiality Journal Notes 20  Learning unit 1 1.11.3 Solution 1 L 2 E Q U I T Y D G 3 L E B 4 R I 5 P U R C H A S E S 15 V A T E L B 6 T E 7 M I R V A L 8 P 9 C U A T I 10 C O R R E S P O N D E N T L E T C R Y I D 11 D E B I T 16 A C I E A S Y T B L 17 J S T 12 I N C O M E O T U T 14 C R E D I T O R S Y R S N A 18 S A L E S 1.12 Flashcards A flashcard is a card containing a small amount of information, i.e. a question or a statement, with the answer or description on the back. A flashcard can be used as an aid to learn by increasing your retention of information. (Print out the pages with the flashcards, cut out the shapes and stick the statement and answer back-to-back. Use the flashcards to test your knowledge.) The following flashcards relate to accounting transactions: (a) Identify how each of the following transactions affects the assets, liabilities or equity of the business. 21  Learning unit 1 1. Increase in Assets (Bank) The owner pays capital into the bank. Increase in Equity (Capital) 2. Increase in Assets (Goods purchased) Goods are purchased on credit terms. Increase in Liabilities (Trade and other payables) 3. Assets (Goods purchased) increase and Goods are purchased for cash. decrease (Bank) 4. Assets (Bank) increase and Equipment is sold for cash. (Equipment) decrease 5. Decrease in Assets (Bank) Trade and other payables is Decrease in Liabilities settled in cash. (Trade and other payables) 6. Assets increase (Bank) and decrease Trade and other receivables is (Trade and other receivables) settled in cash. 22  Learning unit 1 7. The owner takes cash for personal use. Decrease in Equity (Drawings) Decrease in Assets (Bank) 8. Decrease in Liabilities The owner pays a liability of the business from personal funds. (Trade and other payables) Increase in Equity (Loan to Owner) 9. Assets (Equipment) increase and Equipment is purchased using cash. decrease (Bank) 10. Decrease in Assets (Bank) and Employee wages are settled in cash. Decrease in Equity (Expense - Wages) 11. Increase in Assets (Supplies) and Purchased supplies on account. Increase in Liabilities (Trade and other payables) 12. Increase in Assets (Bank) and Received cash for performing a service. Increase in Equity (Services rendered) 23  Learning unit 1 (b) What are the following general ledger accounts used for? 1. Trade and other receivables Amounts due from customers or clients 2. Trade and other payables Amounts owed to suppliers for goods and services purchased Notes 24