Accounting 101 (ACC101)

Chapter 1:
Accounting in Context

Prepared by
Dr Msizi Mkhize
INTRODUCTION
What is to Account?
According to Sharlee (2008), the word account means “a story,
description or explanation”. For example a student (child) could give a
parent an account or explanation of how the pocket money was spent at
school. The student will be accounting when actually giving an account
or explanation (Figure 1). Hence, accounting is a method of telling a
story or giving a description of events.

According to Deodutt and Malcolm (2015) to account for something implies

keeping records

You were given R30 as pocket money.

You are now required by your parent to account/explain
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 Accounting/Explaining
Figure 1: Student/Child telling a story or giving a description of events

T-account
Left hand side, strong + (debit entry) Right hand side, weak - (credit entry)

Dr + Child - Cr
Money received Money paid
2014 5 Pocket money R30 2014 5 Chips R3
Feb. Feb. Drink 8
Pie 10
Balance c/d 9
30 30

6 Balance b/d 9

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 Definition of Accounting
Kew & Watson (2018) define accounting as a “system that communicates the
financial effects of all the decisions made by a business”

Or

The American Accounting Association (1941) defined accounting as a “process of

identifying, measuring, analysing and communicating economic information to
permit informed judgements and decision making by users of the information”

Or

The American Institute of Certified Public Accountants (AICPA) (1966) defined

accounting as “the art of recording, classifying, and summarizing in a significant
manner and in terms of money, transactions and events which are, in part at
least of financial character, and interpreting the results thereof”
Bookkeeper (Junior level position) Accountant (High level position)
Collates and records business Takes the information that is
transactions enabling financial produced by the bookkeeper
reporting at a later stage and produces meaningful
financial reports

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 Bookkeeper Accountant
Business daily activities: Annual business activities (Financial
Transactions reporting)
Source Statement of financial position
documents
Recording to journals (Balance sheet)
Statement of comprehensive income
Posting to ledger accounts

Draw up Trial balance end of month

(Income statement)
Statement of changes in equity

Cash Flow statement

Notes to the Financial statements

Primary objective of accounting is to record business transactions and communicate

financial information.

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 The Accounting Cycle is important

Steps in the accounting cycle

Analysis &
Decision Prepare
Interpretation
making by financial
Transaction financial statements
management
statements

Journalise and post the closing

Complete source transfers
document

Accounting
Prepare Post-adjustment trial
cycle
Record into balance
journals

Journalise and post to ledger the

Post to the ledger adjusting entries
accounts

Draw up trial balance

end of month

Accounting cycle not the same as Business cycle (next slide)

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 BUSINESS CYCLE Actual GDP

Peak
Recession/
Economic Contraction Long-
Activity Term
(GDP) Growth
expansion Recovery

Trough

Time

The business cycle refers to the recurring (and fluctuating) levels of economic activity
over a long period of time

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The relation between mathematics and accounting or bookkeeping is ancient and
the first published treatise on the double-entry principle appeared in 1494 in a
book on mathematics by Luca Pacioli entitled Summa de Arithmetica, Geometria,
Proportioni et Proportionalita (Mattessich, 2005;
Warsono, Darmawan, and Ridha, 2009).

Commenting on Pacioli’s book, Ellerman (2007, p. 1) states that “The success in

maintaining the two-sided accounting debits and credits, the double-entry
principle, and the trial balance in both cases provide strong evidence that the
formulation correctly captures the double-entry method in mathematical form.”

In short, the double-entry principle means that the financial transaction contains
two or more entries – flow of money from one account to one or more other
accounts. For every debit (credit) entry there is a corresponding credit (debit)
entry, and the value of debits must be equal to the value of credits. This ensures
arithmetical accuracy of the recordings of financial transactions (Ellerman, 2007;
Haiden, 2009; Myburgh, Fouche, and Cloete, 2011; Warsono et al., 2009).

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 For example, if the first account is credited (Cr) with an amount, then the second
account must be debited (Dr) with the corresponding amount, as shown in Figure 2.

e.g. KwaMashu Travel Agency buys additional office equipment on credit for R7 000 from Durban Office Furnishers.

Dr Creditors control Cr Dr Office equipment Cr

Office Creditors
Equipment 7 000 control 7 000

If the first account is debited (Dr) with an amount, then the second account must be credited (Cr) with the
corresponding amount, as shown in Figure 2.

e.g. A retailer purchased goods for R13 680 that includes VAT input of R1 680 from a wholesaler.

Dr Purchases Cr Dr Creditors control Cr Dr VAT Input Cr

Creditors Purchases Creditors

control 12 000 &VAT Input 13 680 control 1 680

The majority of accounting definitions assert that accounting requires numerical and
analytical skills which are also integral elements of mathematics (Shaftel and Shaftel,
Prepared by2005).
Dr Msizi Mkhize
The majority of accounting definitions assert that accounting requires numerical and
analytical skills which are also integral elements of mathematics (
Shaftel and Shaftel, 2005).
Study prescribed book, Page 8

Study prescribed book, Pages 8 - 13

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Fundamental of economics:
•People have unlimited wants
•There are limited resources to produce what people want

RESOURCE CATEGORIES

Capital Property, Machinery & Equipment required to produce goods and services

Enterprise Spirit/energy of employees who use resources (CLL)

Land Mineral resources and water

Labour Services of individuals required to produce

Study prescribed book, Page 13-15

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Study prescribed book, Page 16-17

Study prescribed book, Page 18

Study prescribed book, Page 18-20

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 Financial information must be useful
for making decisions
What decisions do they need to make? Study prescribed book, Page 21-
23
What information will assist people in making economic decisions?

Internal (economic decision makers) External (economic decision makers)

 Business owners/Shareholders  Investors

 Managers  Customers
 Board of Directors  Lenders
 Employees  Financial institutions
 Government
 Vendors/suppliers
 Labour unions
 SARS
 Competitors
 General public
 Students
 Financial analysts, etc.
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The Elements of Financial Statements

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 Elements of Financial
Measure financial position (status) at specific date
Statements in RED
Traditional Balance sheet – Horizontal format (Stat of Financial position – Vertical format)
ASSETS (A) OWNERS EQUITY (O or E)

Non-current assets
LIABILITIES (L)
Current assets
Non-current liabilities

Current liabilities

A = E+L
Measure financial performance/profitability over a specific period
Profit and loss - Horizontal (Stat of Comprehensive income – Vertical format)
Expenses (E) Income (I)

Profit Loss
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 Assets
School level: Assets
Possessions or Belongings of the business

Tertiary level: Assets

An asset is:
•A present economic resource controlled by the business as a result of past
events
* An economic resource is a right that has the potential to produce economic
benefit.

Non current assets

•Tangible or fixed assets = Property, plant and equipment (capital expenditure)
(Property, Plant, Equipment, Machinery, Vehicles, Office Equipment, Fittings etc.)
•Financial asset (Investment)
•Goodwill, Patents, Copyrights, Trade marks (Intangible asset)

Current assets (short-term, 12 months and are trading purposes)

•Inventory (Stock and consumable stores on hand),
•Trade and other receivables (Debtors , Accrued income, Prepaid expenses)
•Cash and cash equivalents (Bank, Petty cash, Cash float, short-term deposits.)
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 Equity
Equity (Capital)

•Is the residual interest in the assets of the enterprise after deducting all its
liabilities

Owner’s net worth or Net asset Value or Residual value

Equity = capital, wealth, worth, solvency, interest, net assets, rich etc.

OWNER(S) EQUITY
Capital
Drawings
Net profit (Net loss)/Retained earnings

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 Liabilities
Business obligation to pay debts or
Claims another persons have against the assets of the business

A liability is:
•A present obligation of the business to transfer an economic resource as a
result of a past events.
* An obligation is a duty or responsibility that the entity has no practical ability to
avoid.
Non current liabilities
Loan, mortgage bonds, debentures

Current Liabilities
Trade and other payables (Creditors, Accrued expenses, income received in
advance)
Bank overdraft
Short-term loan

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 Income
Income is recognised as an increase in assets or a decrease in liabilities that result in
increases in equity, other than contributions by owner.
Examples:
Cash or credit sales, Rent income, etc.

Expense
An expense is a decrease in assets or an increase in liabilities that results in a decrease in
equity, other than distributions (drawings) to (by) owners.
Examples:
Telephone, Salaries and wages, packing material, etc.

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 A complete set of financial statements

• Statement of financial position (Balance Sheet)

• Statement of comprehensive Income (Income Statement)
• Statement of changes in equity
• Statement of cash flows
• A summary or statement of accounting policies and notes
to the financial statements

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