Key Concepts (Grade 12 NSC Matric Accounting): Revision Notes
Key Concepts
Understanding companies and their operations is essential for any accounting student. This section covers the fundamental concepts, key people, documents, and principles that govern how companies function in South Africa.
People involved in companies
Companies involve various stakeholders who each play important roles in ensuring the business runs smoothly and transparently.
Directors are individuals chosen by shareholders to manage and oversee the company's daily operations. They make strategic decisions and are responsible for the company's direction and success.
Independent auditors work as external professionals who review a company's financial records and provide an unbiased opinion about whether the financial statements are accurate and trustworthy. Importantly, they don't work for the company, which helps maintain their objectivity.
Internal auditors are employees of the company who focus on monitoring the preparation of financial statements and ensuring proper internal controls are in place. Unlike independent auditors, they work directly for the company.
The key difference between independent and internal auditors lies in their relationship to the company. Independent auditors provide external, unbiased oversight, while internal auditors work within the company to ensure proper procedures are followed.
Shareholders are the actual owners of the company. They invest money to buy shares and therefore have ownership rights, including voting on important company decisions.
South African Revenue Services (SARS) is the government tax authority that companies must deal with. Companies are required to pay income tax on their profits and VAT when it becomes due.
Important company documents
Several key documents help stakeholders understand a company's financial health and performance.
Auditor's reports represent professional opinions from qualified auditors about whether a company's financial statements can be trusted. There are different types:
- A qualified auditor's report means the financial statements are mostly acceptable, but there are some issues that need attention or investigation
- An unqualified auditor's report indicates the financial statements are acceptable in all areas
- A disclaimer occurs when auditors cannot provide an opinion because the financial statements are too unreliable
Understanding auditor's reports is crucial for assessing company reliability. An unqualified report is what investors and stakeholders want to see, as it indicates the company's financial statements can be trusted completely.
Balance sheets show a snapshot of what the company owns (assets), what it owes (liabilities), and the owners' stake in the business (equity) at a specific point in time. You might also see this called a "Statement of Financial Position."
Cash flow statements track how money moves in and out of a company during a specific period. This helps stakeholders understand whether the company generates enough cash to meet its obligations.
Income statements reveal whether a company made a profit or loss from its business activities by comparing income against expenses. This document is sometimes called a "Statement of Comprehensive Income."
Tax assessments are official documents from SARS confirming how much income tax the company must pay based on its profits.
Additional company concepts
Understanding these terms will help you better grasp how companies operate financially and legally.
Authorised share capital refers to the maximum number of shares a company is legally allowed to sell to investors.
Dividends represent the portion of profits (after paying taxes) that shareholders receive. There are interim dividends paid during the year and final dividends declared at the end of the financial year.
Income tax is what companies pay to SARS based on their profits.
Issued share capital represents the actual number of shares that have been sold to shareholders. This number is used when calculating dividends per share.
Limited liability is a crucial protection for shareholders, meaning they can only lose the money they invested in the company - they cannot be held responsible for the company's debts beyond their investment.
Limited liability is one of the most important advantages of company ownership. This protection encourages investment by ensuring that shareholders' personal assets are safe even if the company faces financial difficulties.
No par value means shares don't have a fixed value when they're first issued.
Provisional tax involves payments made to SARS during the year based on estimated profits, typically every six months.
Retained income consists of profits that the company keeps for future growth instead of paying out as dividends to shareholders.
Issue price is the cost at which shares are sold to the public when first offered.
Buy back shares occur when a company repurchases its own shares from the market, effectively reducing the number of shares available.
Important acronyms
Key Company Acronyms to Know:
- AGM: Annual General Meeting
- CA: Chartered Accountant
- CIPRO: Company and Intellectual Property Commission
- GAAP: Generally Accepted Accounting Practice
- IFRS: International Financial Reporting Standards
- JSE: Johannesburg Securities Exchange
- MOI: Memorandum of Incorporation
- SAICA: South African Institute for Chartered Accountants
- SAIPA: South African Institute for Professional Accountants
These abbreviations appear frequently in business and accounting contexts, so familiarising yourself with them will help you understand company documents and discussions more effectively.
Fundamental accounting principles (GAAP)
These principles guide how companies prepare their financial statements to ensure consistency and reliability.
Business entity rule ensures that a company's finances are kept completely separate from the shareholders' personal finances. This separation is crucial for accurate reporting.
Going concern assumes that the company will continue operating in the future when financial statements are prepared. This affects how assets and liabilities are valued.
The going concern principle is fundamental to financial reporting. If a company is unlikely to continue operating, its assets and liabilities must be valued differently, often at liquidation values rather than normal operating values.
Historical cost means assets are recorded at the price originally paid for them. For example, land and buildings appear on financial statements at their purchase price, not current market value.
Matching requires that income and expenses are recorded in the correct financial year. For instance, sales revenue and the cost of those sales must be recorded in the same period.
Materiality focuses on including information that's significant enough to influence decision-making. Important items like directors' fees must be shown separately, but small amounts might be grouped together.
Prudence promotes conservative financial reporting by showing realistic figures rather than overly optimistic ones. The principle suggests recording the worst-case scenario and not overstating the company's position.
Key Points to Remember:
- Directors manage companies on behalf of shareholders who are the actual owners
- Independent auditors provide unbiased opinions about financial statement reliability
- Key financial statements include the balance sheet, income statement, and cash flow statement
- Limited liability protects shareholders from losing more than their investment
- GAAP principles ensure consistent and reliable financial reporting across all companies