Chapter 1 - The Accounting Environment

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How a business works

Financial reporting is the language of business. You’re basically telling a story behind the numbers in a unbiased, objective way.

Provides financial information to lenders, investors and creditors to make an economic decision (i.e. buy, sell or hold shares in a company)

The objective of financial reporting is to provide information about the financial position, performance, changes in financial position that is useful to investors, lenders and credits in making an economic decision.

Users:

Primary users (investors, lenders and creditors) because they basically finance the business.

Other/Secondary users (government, the public, employers, SARS)

Management does NOT use financial statements for decision making. Management already has access to management accounting. More product/pricing decisions than profit/loss (not that it’s not important).

The forms of business ownership: (minimum membership, max membership)

Unincorporated entities (there are no legal requirement to start up or trade with this type):

Sole trader/proprietorship

Partnership

Incorporated entities:

Company

Close Corporation

The entity concept: keep the transactions of the business separate to the affairs of the owner.

A complete set of financial statements comprises of:

A statement of financial position

A statement of profit and loss/income statement/statement of comprehensive income

Notes to the financial statements

Statement of changes in equity

Statement of cash flow