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 About
Financial Accounting
Volume 1
Seventh Edition
 About
Financial Accounting
Volume 1
Seventh Edition

Contributing authors

F Doussy (editor)
D Scott

Volume 2
Seventh Edition

Contributing authors

RN Ngcobo
A Rehwinkel
D Scheepers (editor)
Members of the LexisNexis Group worldwide
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© 2018

ISBN 978 0 6390 0365 8

E-book ISBN 978 0 6390 0366 5

First edition 2005, reprinted 2006

Second edition 2007
Third edition 2008
Fourth edition 2011
Fifth edition 2014
Sixth edition 2016

Full acknowledgement is given to the IFRS Foundation for quotes and definitions used in this publication.

Copyright subsists in this work. No part of this work may be reproduced in any form or by any means without
the publisher’s written permission. Any unauthorised reproduction of this work will constitute a copyright
infringement and render the doer liable under both civil and criminal law.
Whilst every effort has been made to ensure that the information published in this work is accurate, the
editors, authors, writers, contributors, publishers and printers take no responsibility for any loss or damage
suffered by any person as a result of the reliance upon the information contained therein.

Editor: Lisa Sandford

Technical Editor: Liz Bisschoff
Preface

The accelerating globalisation of business has affected South Africa in many ways and
the discipline of accounting has not been left untouched. Accounting is a challenging
subject because it is always changing. These changes are reflected in this book, but
the authors have not lost sight of the fact that the basic principles of accounting have
not altered since the invention of double-entry bookkeeping centuries ago.
One has to learn to crawl before one can learn to walk. This is a fact of life and a re-
flection of life itself. With this in mind, many aspects of the intricacies of disclosure and
the exact or complete disclosure requirements of generally accepted accounting prac-
tice were left for the more advanced student of accounting. This book is not intended
to be a reference book. Rather, the following guidelines were adopted by the authors:
• simplicity
• basic principles
• creating knowledge blocks
• practical application
• demonstration by way of examples.
To achieve this goal, the focus is on a handwritten system, thus avoiding the notion
that the basics of accounting, like the processing of data and closing-off procedures,
are mysterious activities that take place inside a computer. This notion seems to be a
growing problem for serious students of accounting.
The book is divided into two volumes. Volume 1 deals with the concepts, principles
and procedures of financial accounting. Volume 2 (suitable for NQF level 6) deals with
accounting for partnerships, close corporations, branches and manufacturing entities.
Volume 2 also covers some management accounting principles such as budgets and
the analysis and interpretation of financial statements. It introduces the reader to com-
panies and discusses ordinary shares and different types of preference shares, the
calculation of dividends in respect of the different share types, conversions and de-
bentures issues at par, at a discount and at a premium. This edition has been updated
with the March 2018 Conceptual Framework and introduces International Financial
Reporting Standards (IFRSs) to readers. The standards that are covered in Volume 2
are IAS 1 (presentation of financial statements), an introduction to financial instruments,
and IAS 7 (cash flows).
The authors of this book represent a large pool of lecturing and practical experience
gained over many years of work and study. This book reflects the hard work and deter-
mination of these authors, for which we are very grateful.

The editors
November 2018
v
Table of abbreviations

APB Accounting Practices Board

EFT Electronic Fund Transfer
FRS Financial Reporting Standard
GAAP Generally Accepted Accounting Practice
IAS International Accounting Standard
IASB International Accounting Standards Board
IFRS International Financial Reporting Standard
JSE Johannesburg Stock Exchange Limited
SAICA South African Institute of Chartered Accountants

vii
Contents

Page
Preface .................................................................................................................... v
Table of abbreviations ............................................................................................ vii
1. The basic concepts, principles and objectives of accounting ..................... 1
2. The financial position .................................................................................... 21
3. The financial performance ............................................................................ 33
4. The recording of transactions ....................................................................... 45
5. Processing accounting data ......................................................................... 71
6. Adjustments .................................................................................................. 109
7. The closing-off procedure, determining profit and
preparing financial statements ..................................................................... 127
8. Cash and cash equivalents .......................................................................... 163
9. Credit granted: Trade and other receivables ............................................... 197
10. Inventory ....................................................................................................... 233
11. Property, plant and equipment ..................................................................... 249
12. Other non-current assets and financial assets ............................................. 283
13. Current liabilities ........................................................................................... 295
14. Non-current liabilities .................................................................................... 311
15. Financial statements of a sole proprietorship ............................................... 323
16. Non-profit entities .......................................................................................... 339
17. Incomplete records ....................................................................................... 369
Index ....................................................................................................................... 385

ix
CHAPTER 1
The basic concepts, principles and objectives
of accounting

Contents
Page
Overview of financial accounting ............................................................................ 3
1.1 Introduction ................................................................................................... 3
1.2 What is bookkeeping and what is accounting? ............................................ 4
1.3 Why study accounting? ................................................................................ 5
1.4 Developments in accounting ........................................................................ 5
1.5 The function of accounting ........................................................................... 6
1.6 The reporting entity concept ......................................................................... 7
1.7 The nature of and the need for financial information .................................... 8
1.8 Users of financial information ....................................................................... 9
1.9 The objective of general purpose financial statements ................................ 10
1.10 Financial performance, changes in equity, financial position and
cash flow ....................................................................................................... 10
1.10.1 Statement of profit or loss and other comprehensive income ......... 10
1.10.2 Statement of changes in equity ....................................................... 11
1.10.3 Statement of financial position......................................................... 11
1.10.4 Statement of cash flows................................................................... 13
1.11 The accounting process ............................................................................... 13
1.12 The domains of accounting .......................................................................... 14
1.13 Going concern assumption .......................................................................... 14
1.14 Fundamental qualitative characteristics of financial statements .................. 15
1.14.1 Relevance ........................................................................................ 15
1.14.2 Faithful representation ..................................................................... 16
1.14.3 Further enhancements to the qualitative characteristics of
financial information......................................................................... 16
1.14.3.1 Comparability .................................................................. 16
1.14.3.2 Verifiability ....................................................................... 16
1.14.3.3 Timeliness ....................................................................... 16
1.14.3.4 Understandability ............................................................ 17
1.14.3.5 Applying the enhancing qualitative characteristics ........ 17
1.14.4 The cost constraint on useful financial reporting............................. 17

1
2 About Financial Accounting: Volume 1

Page
1.15 The elements of financial statements ........................................................... 17
1.16 Recognition of the elements of financial statements .................................... 17
1.17 Measurement of the elements of financial statements ................................. 18
1.18 Summary ....................................................................................................... 19
 Chapter 1: The basic concepts, principles and objectives of accounting 3

Overview of financial accounting

ACCOUNTING

Bookkeeping
• Orderly & systematic
• Reporting on the financial results
of these transactions • Identification &
• Provision of financial information recording of
monetary value
• Generating financial statements as
of economic
basis for decision-making
transactions

1.1 Introduction
Study objectives
After studying this chapter you should be able to:
l describe how accounting developed over the ages;
l define accounting;
l describe the function of accounting;
l explain the entity concept;
l explain why an accounting framework is necessary;
l describe the nature of and the need for financial information;
l identify the various users of financial information;
l describe what the objectives of financial statements are;
l explain what is meant by financial performance, changes in equity, financial
position and cash flow;
l describe what the accounting process entails;

continued
4 About Financial Accounting: Volume 1

l distinguish between the two main types of financial information;

l describe the assumptions underlying the preparation of financial statements;
l explain what the qualitative characteristics of financial statements are;
l identify the elements of financial statements;
l describe the recognition of the elements of financial statements; and
l explain what is meant by the measurement of the elements of financial
statements.

Accounting is a means of communication. To communicate, one must know at least

the basics or the foundation of the language of the party with whom one is
communicating. The first two chapters of this book deal mainly with accounting history
and theory, providing a foundation of the basics of the accounting “language”. Without
the theory regulating the subject of accounting, it would be very difficult, perhaps
impossible, to communicate in accounting terms.
In accounting, the conceptual framework and other rules are laid down by the South
African Institute of Chartered Accountants (SAICA) after approval by the Accounting
Practices Board (APB). To comply with international accounting standards the
Conceptual Framework for Financial Reporting 2018 (the IFRS Framework) was
approved by the International Accounting Standards Board (IASB). Although these
rules are important, the detail presented in the framework is not required for
understanding the basic accounting concepts, principles and procedures. The
present volume of About Financial Accounting will therefore only make limited
reference to the framework.
The purpose of this chapter is to explain the function and objectives of accounting, the
need for financial information, who the users of the financial information are, the
processes by means of which this information is generated and how this information is
communicated to the users thereof.

1.2 What is bookkeeping and what is accounting?

Bookkeeping involves the identification and recording of economic events. This
is only one part of the accounting process.

Accounting can be defined as the orderly and systematic identification and

recording of the monetary values of the economic transactions of an individual
entrepreneur (person) or a business enterprise (entity or institution), the reporting
on the results of these transactions and the provision of financial information by
submitting financial statements which information is used as a basis for decision-
making. Accounting therefore includes bookkeeping.

The above definition indicates that accounting must fulfil the following requirements:
l the orderly and systematic recording of
l the monetary values of
l economic transactions of
 Chapter 1: The basic concepts, principles and objectives of accounting 5

l an individual person or an institution (entity);

l the reporting on the results of these transactions; and
l the provision of the information in financial statements,
l which information is used as a basis for decision-making by the users of the
information.

1.3 Why study accounting?

Knowledge of accounting is needed:
l by the users of financial information; and
l by the preparers of financial information.
All users of financial information need not be trained accountants. Anyone who has to
make financial decisions, based on information disclosed by the accounting process,
should, however, at least have a basic knowledge of accounting. The decision-maker
must have an understanding of the information disclosed in the financial statements in
order to make proper decisions. The more complex the information on which the
decision is to be based, the greater the required knowledge of accounting. Knowledge
of accounting will also enable any individual to manage his or her personal financial
affairs more effectively.
The preparer of financial information, i.e. the accountant who accepts responsibility for
the design of accounting systems, the processing of financial information in the
accounting process and the preparation and interpretation of financial reports,
requires a profound knowledge of the theory and practice of the subject.
In addition, a wide variety of career opportunities exist for those with accounting
training. The accounting profession enjoys a high level of prestige in society and
provides a great deal of job satisfaction and security. The accountant, in the
performance of normal responsibilities, acquires a thorough insight into all the aspects
of the activities of a business. An accounting qualification is an excellent entry
opportunity into the business world.

1.4 Developments in accounting

Accounting had been developed over many centuries as a result of the need to
account for assets entrusted to people and/or entities who have the responsibility of
dealing with these assets in a particular manner.
Although evidence exists that business transactions were recorded more than 6 000
years ago, Benedetto Cotrugli was probably the first person who wrote a chapter on
accounting, in a book published in 1458 about the commercial function. In that
chapter, he presented a brief discussion of bookkeeping. The first published work with
a full description of the double-entry system was completed by Luca Pacioli in his
Summa de arithmetica geometria proportioni et proportionalitate, which was published
in 1494 in Venice. His Summa, which was a mathematical work, contained a section on
the Venetian method of double-entry bookkeeping. In the rest of Europe, the first works
on double-entry bookkeeping appeared towards the middle of the sixteenth century in
Antwerp in 1543, in London in 1547 and in Germany in 1549.
6 About Financial Accounting: Volume 1

The 300 years between Pacioli’s Summa and the more scientific accounting of the
nineteenth century was a period of refinement and elaboration of the procedures
described by Pacioli. The Summa became the standard reference work for book-
keepers and a model for numerous textbooks that provided a record of bookkeeping
innovations between the fifteenth and the nineteenth centuries.
The development of bookkeeping can be divided into three phases:
l The period from 1450 to 1560: Business practices were more sophisticated than
textbooks, and authors tried to promote bookkeeping mechanics as developed by
merchants.
l The period from 1560 to about 1800: Major improvements were made to the
bookkeeping model and theoretical research on bookkeeping began, especially
with the emergence of financial statements and the acknowledgement of
enterprises as being separate and distinct from their owners.
l The period since 1800: Manufacturing operations, income tax and the emerging
accounting profession have acted as major stimulants to the development of
bookkeeping.
The early literature mainly described the technique of bookkeeping, i.e. how
transactions could be recorded according to the double-entry system. The
development of the theory of accounting, i.e. the why as opposed to the how, began
only in the nineteenth century.
Towards the middle of the nineteenth century, the formation of professional accounting
societies began in many countries. The purpose of the various institutes and societies
was to make recommendations on accounting practice to their members. This was to
improve uniformity in dealing with financial transactions and to formulate basic
principles applicable to financial statements. Today, the issuing of recommendations
on accounting practice is one of the most important functions of professional societies
of accountants and auditors throughout the world.
The first organised society of accountants in South Africa came into being in 1894,
with the formation of the Institute of Accountants in the then South African Republic
(the ZAR). Today, the profession in South Africa is organised into various provincial
and national accounting institutes and societies, the most prominent being the South
African Institute of Chartered Accountants (SAICA).
Currently, the Audit Profession Act 26 of 2005 controls the practising section of the
accountancy profession in South Africa. This legislation regulates the Public
Accountants’ and Auditors’ Board, whose functions include registering accountants
and auditors who are permitted to practice in public, ensuring discipline in the
profession and training accountants.

1.5 The function of accounting

The main goal of accounting is to capture information about a business and its
financing activities so that it can be reported to decision-makers, both inside and
outside the business.
A trading entity purchases merchandise which is sold at a price higher than the
purchase price plus other related costs. The difference between the purchase price
 Chapter 1: The basic concepts, principles and objectives of accounting 7

and costs on the one hand and the higher selling price on the other is called a profit.
The proceeds from the profit increase the assets of the entity and are available for use.
The financial results of economic activities therefore have two aspects:
l the value added to the net worth of a person or an entity during a particular period;
and
l the accumulated net worth of that person or entity.
A single statement may not be enough to fulfil all the needs of a user of the information
since information about one transaction may be included in different statements. For
example, the information disclosed on the statement of profit or loss and other
comprehensive income may give an incomplete picture of the entity’s performance
and the information in the statement of financial position and statement of cash flows,
or even that disclosed in the notes or schedules, may be necessary.
The notes and schedules include aspects such as risks and uncertainties that may
influence the future results or position of the entity. Resources and obligations not
disclosed on the statement of financial position (such as insurance claims against or
by the institution) are also included in the notes. It would therefore be necessary to
make a study of the complete set of financial statements before a decision can be
made.
Information about the financial results of an entity is provided in a complete set of
financial statements consisting of:
l a statement of financial position as at the end of the period;
l a statement of profit or loss and other comprehensive income for the period. It can
also be called the statement of financial performance;
l notes comprising a summary of significant accounting policies and other
explanatory information;
l a statement of cash flows for the period;
l a statement of changes in equity for the period; and
l the methods, assumptions and judgements used in estimating the amounts
presented or disclosed and changes in those methods, assumptions and
judgements.

1.6 The reporting entity concept

An entity is an economic unit whose financial results are determined on its own. In
practice, all economic activities are undertaken by a single person, a group of persons
in partnership, a business undertaking or group of business undertakings, a church,
school, university, or any other institution for which it is necessary to report separately
on the finances thereof. Accounting reports on the financial results and position of an
entity. All transactions relating to a specific entity are recorded in the accounting
records of that entity; transactions not relating to that entity are thus excluded.
The accounting process treats an accounting entity as a unit independent of its
owners. A business owned by a particular person is thus regarded as being a
separate entity from the owner. The person owning the business is in turn regarded as
being separate from the business. For the financial information to be meaningful, the
8 About Financial Accounting: Volume 1

entity to which the information relates must be clearly defined. A person using the
financial information must be sure about the identity of the entity concerned.
Most entities are defined legally, i.e. by statute – for example, companies registered in
terms of the Companies Act or close corporations registered in terms of the Close
Corporations Act – or by common law, and can be identified fairly easily. In terms of
the Companies Act, an incorporated (registered) company is a legal person and is
therefore an independent entity.
Specifications regarding the accounting concepts, principles, procedures and
methods are not given in the Act. These have been laid down by the accounting
profession. The same requirement applies to close corporations and other institutions
created by statute.
An accounting entity does not necessarily have to be an acknowledged legal entity.
Any economic entity, whether it exists as an individual legal entity or not, for which
separate financial statements must be prepared, can be considered to be an
accounting entity.
In the private sector, there are mainly four types of business organisations with profit
motives that can be considered as individual entities:
l sole traders (or sole proprietors);
l partnerships;
l close corporations; and
l companies.
A wide variety of private-sector organisations with various objectives and without a
profit motive can be regarded as individual entities:
l clubs;
l charitable organisations;
l churches;
l educational institutions;
l associations; and
l trusts.
In the public sector, the state as a whole or individual government establishments
such as provinces, state departments, municipalities, boards and commissions are all
regarded as accounting entities.

1.7 The nature of and the need for financial information

The main function of information is to support decision-making. Financial information
supplied by the accounting process is primarily used for decisions directed at
planning or at exercising control.
l For planning decisions, financial information is used in determining future actions
to be taken, often based on what happened in the past. The accounting process
provides historical information – it records what happened in the past and reports
on this. Decision-makers often require information in order to forecast future
financial results. The historical information provided by the accounting process
serves as a basis for forecasting the future.
 Chapter 1: The basic concepts, principles and objectives of accounting 9

Planning decisions are sometimes very simple as in, for example, the case of
routine activities, sometimes very complex when, for example, decisions regarding
the financial strategy and planning of an entity for the next financial year are to be
made.
l Control decisions entail using financial information to evaluate the results of
financial activities. A control decision can be that the decision-maker is satisfied
with the results and that no further action is required. If the decision-maker is not
satisfied with the results, action, which will lead to additional corrective steps being
taken, may be necessary.
The most important control function of financial information is the provision of
accountability and stewardship. Financial accountability is the responsibility of a
person to whom assets have been entrusted and entails giving account to the
provider of the assets regarding the use of the assets. The provider of the assets
exercises control over the use of the assets through the enforcement of
accountability.
The different decision-makers have different needs and use the information disclosed
in the financial statements differently.

1.8 Users of financial information

The users of financial information as presented in the financial statements include:
l Investors: Investors are the providers of capital. They are concerned with the risk
involved in their investment and the return (interest or dividends) they will receive
on their investment. They need information to decide whether they should invest
(buy), hold or withdraw (sell) shares.
l Employees: Employees are interested in information about the stability and
profitability of the business. They also want to know whether the entity will be able
to pay remuneration and retirement benefits and whether there are any
employment opportunities.
l Lenders: Lenders need information to determine whether their loans and the
interest on the loans will be paid on due dates.
l Suppliers and other trade creditors: These users need information that will assure
them that amounts owed to them will be paid when due.
l Customers: Customers want to know whether the business will continue to exist,
especially when they will be involved with the entity for a long time or are
dependent on it.
l Government and their agencies: These users are interested in the allocation of
resources and therefore in the activities of the entity. They also need information in
order to regulate the activities of entities, determine taxation policies and use the
information as a basis for national income and similar statistics.
l Public: Members of the public are affected in several ways. Entities often
contribute to the local economy by employing people and supporting local
suppliers.
It is the primary responsibility of the management of an entity to prepare and present
the financial statements. Since management is also a decision-maker, it needs the
10 About Financial Accounting: Volume 1

information disclosed in the financial statements. Management has, in addition, access

to other management and financial information that helps it to carry out its planning,
decision-making and control functions. For this, it has the ability to determine the
format and content of the additional information to meet its own needs. Published
financial statements are based on the information used by management about the
financial position, performance and changes in equity and the cash flows of the entity.

1.9 The objective of general purpose financial statements

The objective of financial statements is to provide users with useful information about
the financial performance, financial position and changes in the financial position to
enable them to make economic decisions. Financial statements meet the common
needs of most users but do not always provide all the information that users may need.
Financial statements largely disclose the financial effects of past events, but do not
necessarily provide relevant non-financial information.

1.10 Financial performance, changes in equity, financial position

and cash flow
1.10.1 Statement of profit or loss and other comprehensive income
The financial results of an entity consist of economic activities which are measured in
two ways: firstly, the financial performance for a particular period and, secondly, the
financial position at a particular point in time. This is illustrated in diagram 1.1.
Diagram 1.1
FINANCIAL RESULTS

Financial performance Financial position

over the financial period at a specific point in time

The financial performance reflects the profit made or the loss incurred by the entity
over a specific period of time. It is reported in a statement of profit or loss and other
comprehensive income. A statement of profit or loss and other comprehensive income
reports the two elements of financial performance, i.e. revenue that was earned and
expenses that were incurred to earn the revenue. The difference between the revenue
and the expenses results in the profit or loss for that specific period. The various types
of revenue and expenses are shown as separate items on the statement of profit or
loss and other comprehensive income.
Information about the performance of an entity is required to assess potential changes
in the economic resources that the entity may control in the future. This type of
information is useful in predicting the capacity of the entity to generate cash flows from
its existing resources. It may also help in assessing the effectiveness of the way in
which new resources will be managed. Example 1.1 shows the statement of profit or
loss and other comprehensive income of Alpha Services.
 Chapter 1: The basic concepts, principles and objectives of accounting 11

Example 1.1
Alpha Services
Statement of profit or loss and other comprehensive income for
the year ended 31 March 20.2

R
Revenue 850 000
Income from services rendered 850 000
Distribution, administrative and other expenses (579 000)
Salaries 520 000
Wages 50 000
Telephone expenses 4 000
Stationery 2 000
Insurance 3 000

Profit/Total comprehensive income for the year 271 000

1.10.2 Statement of changes in equity

Information regarding changes in the equity of an entity must be reported in a
statement specially formatted to show those changes. This statement also forms a
“link” between the statement of profit or loss and other comprehensive income
(reflecting the profit or total comprehensive income for the year) and the statement of
financial position (reflecting the capital or equity) of the entity.
In its simplest form, a statement of changes in equity starts with the balance of the
capital at the beginning of the financial period and ends with the balance of the capital
at the end of the financial period. Example 1.2 shows the statement of changes in
equity of Alpha Services.
Example 1.2
Alpha Services
Statement of changes in equity for the year ended 31 March 20.2

R
Balance at 1 April 20.1 409 000
Additional capital invested 100 000
Profit/Total comprehensive income for the year 271 000
Drawings (90 000)
Balance at 31 March 20.2 690 000

1.10.3 Statement of financial position

The financial position is usually determined at the end of the period, i.e. after the
financial performance for that period has been determined on the statement of profit or
loss and other comprehensive income. The financial position reflects the net worth of
the entity at a specific point in time. This position is determined in terms of assets and,
against that, the interests of the various parties that funded the assets.
12 About Financial Accounting: Volume 1

The financial position is reflected in a financial report known as a statement of financial

position. The financial position of an entity is affected by the entity’s:
l economic resources;
l financial structure;
l liquidity;
l solvency; and
l capacity to adapt to changes in the environment in which it operates.
The statement of financial position of a small entity, Alpha Services, is shown in
example 1.3.
Example 1.3
Alpha Services
Statement of financial position as at 31 March 20.2

R
ASSETS
Property, plant and equipment 500 000
Trade and other receivables 100 000
Cash and cash equivalents 300 000
900 000

EQUITY AND LIABILITIES

Equity: Capital 690 000
Long-term borrowings: Sand Bank 150 000
Trade and other payables 60 000
900 000

The first part of the statement of financial position reflects the assets of the entity, while
the second part reflects the sources from which the assets were financed.
The first part of the statement of financial position in example 1.3 shows that assets to
the value of R900 000 were in the possession of Alpha Services as at 31 March 20.2.
The statement of financial position also shows a breakdown of the total assets into the
various types of assets.
The second part of the statement of financial position shows the sources from which
the assets were financed. The owner, Mr Alpha, made a personal contribution of
R690 000 which he invested in Alpha Services. The entity therefore owes this amount
to the personal account of Mr Alpha. Alpha Services also borrowed an amount of
R150 000 from the bank. Creditors supplied goods and/or services to Alpha Services
to the value of R60 000. Alpha Services must repay these amounts in future.
Two main types of sources of finance are distinguished, namely equity and liabilities.
The contribution by the owner is the equity. Equity represents the interest of the
owner(s) in the assets of the entity. Liabilities are the amounts owing to creditors, for
purchases or services received which are to be paid for at a later stage, or financial
institutions from which the entity borrowed money. Liabilities reflect the claims of
creditors against the assets of the entity. The statement of financial position therefore
 Chapter 1: The basic concepts, principles and objectives of accounting 13

reflects the three elements of the financial position – assets, equity and liabilities, as
indicated in diagram 1.2:

Diagram 1.2

ASSETS = EQUITY + LIABILITIES

The preparation of financial statements is discussed in detail in later chapters of this

book.

1.10.4 Statement of cash flows

Information about a reporting entity’s cash flows during a period also helps users to
assess the entity’s ability to generate future net cash inflows and to assess
management’s stewardship of the entity’s economic resources. This information
indicates how the reporting entity obtains and spends cash, including its borrowing
and repayment of debt, cash dividends or other cash distributions to investors, as well
as other factors that may affect the entity’s liquidity or solvency. Information about
cash flows helps users understand a reporting entity’s operations, evaluate its
financing and investing activities, assess its liquidity or solvency and interpret other
information about financial performance.
All entities must prepare a statement of cash flows. The preparation of a statement of
cash flows will be discussed in detail in volume 2 of this book.

1.11 The accounting process

The definition of accounting given in paragraph 1.2 above means that the accounting
process comprises methods and procedures for the identification, recognition,
measurement and recording of financial transactions and events that change the
financial results and position of an entity. This includes the processing, presentation,
interpretation and use of the information supplied, which is a result of the economic
transactions related to the particular entity.
All transactions and events that have an impact on the financial position of an entity
must first be identified before they can be recognised, measured and recorded in the
accounting process. Recognition is a process of deciding whether an element or item
is valid (applicable to that particular entity) and that it should be included in the
accounts of the entity. Measurement is the process of determining what monetary
amounts are to be disclosed for each item in the financial statements. Accounting
systems have been developed and designed to identify, recognise, measure and
record all routine transactions at the amounts at which they are concluded, as they
occur.
As soon as transactions and events have been recognised and measured, they should
be recorded in the accounting records. A proper accounting system consists of
various types of records in which the information is initially recorded and processed.
The design of the accounting records and accounting system is very important as the
information recorded is processed in the accounting records by collecting, classifying,
sorting and summarising it into a format in which it will serve as useful information.
14 About Financial Accounting: Volume 1

The information processed in the accounting records is then presented in the financial
statements and communicated to the users of the information. The accounting process
will be explained in detail from chapter 2.

1.12 The domains of accounting

Accounting can be divided according to the nature of the information it provides into:
l financial accounting; and
l management accounting.
Financial accounting deals primarily with the external users of financial information.
External users are people and institutions who exist outside the entity and who are not
directly involved in the management and day-to-day operations of the entity. They may
be outside owners, creditors, clients, employees or other institutions that have no
direct financial interest in the entity. The latter may include government institutions, the
community within which the entity functions, interest groups, or even the general
public.
Financial accounting produces the formal financial statements (i.e. statement of profit
or loss and other comprehensive income, statement of changes in equity, statement of
financial position and statement of cash flows, and notes to the statements) which
contain financial information about the entity as a whole.
Management accounting caters mainly for the internal users of financial information of
the entity. These users may include the internal management and operational
personnel of the entity, who require a wide variety of financial information in order to
manage the entity on a day-to-day basis. Management accounting produces reports
about specific aspects of the entity’s business according to the needs of the various
internal users. A study of management accounting falls outside the scope of this book.

1.13 Going concern assumption

Financial statements are normally prepared on the assumption that the reporting entity
is a going concern and will continue to operate for the foreseeable future. Hence, it is
assumed that the entity has neither the intention nor the need to enter liquidation or to
cease trading. If such an intention or need exists, the financial statements may have to
be prepared on a different basis. If so, the financial statements describe the basis
used.
The entity’s owners and/or auditor must consider whether the use of the going concern
assumption is appropriate and whether there are material uncertainties about the
entity’s ability to continue to operate as a going concern that need to be disclosed in
the financial statements. An owner and/or auditor considers items such as negative
trends in operating results, loan defaults and denial of trade credit from suppliers in
deciding whether there is a significant going concern issue and issues an opinion
reflecting this.
So, the going concern assumption assumes that the business will remain in existence
long enough for all the assets of the business to be fully utilised – in other words, long
enough for complete benefit to be obtained from the assets’ earning potential. For
example, if you recently purchased equipment costing R50 000 that had 5 years of
productive or useful life, under the going concern assumption the accountant would
 Chapter 1: The basic concepts, principles and objectives of accounting 15

write off only one year’s value R10 000 (1/5 of the cost) in the first year, leaving R40 000
to be treated as a fixed asset with future economic value for the business.
The going concern concept supports the assumption that when a business buys
assets like land, equipment or buildings, it does so intending that these assets will
produce income over a number of years. In other words, the business did not
purchase these assets with the intention of closing operations soon afterwards and
then reselling them.
The going concern assumption can be summarised as follows:

GOING CONCERN ASSUMPTION

Assumes an entity Allows costs and Provides a more Allows fixed assets
will continue to trade revenue to be realistic value of the to be written off
or do business for the allocated to future entity’s assets. proportionally over
foreseeable future. accounting periods. their useful life.

1.14 Fundamental qualitative characteristics of financial

statements
Qualitative characteristics are the attributes that make the information provided in
financial statements useful to users.
Users of the information supplied by the accounting process and in financial
statements would like to be certain that the information given accurately portrays the
results and financial position presented. For this reason, information disclosed in the
financial statements must comply with the fundamental qualitative characteristics,
namely relevance and faithful representation.

1.14.1 Relevance
For financial statements to be useful to their users, the information included must be
relevant. Users must be able to use the particular information to make decisions based
on it.
Relevant information plays both a forecasting or predictive role and a confirming role.
It serves as the basis on which forecasts can be made, and can be used to confirm to
what extent the previous forecast has materialised.
Materiality is an entity-specific aspect of relevance. It is judged in relation to the nature
and extent of the activities of the entity. When the economic results of transactions are
immaterial to the overall activities of the entity, they can be treated in any way the
accountant deems fit. Deciding whether an issue is material is a matter of professional
judgement.
Thus, if an entity with an annual turnover of R50 million purchases merchandise at
R1 000 per unit and if, at the end of the financial year, there are 2 000 of these items in
stock, the inventory will be valued according to the historical cost basis at R2 million.
This value is material and must be disclosed separately in the financial statements. If
the same entity buys 100 pencils for R100, and at the end of the financial year there
are only 20 of these pencils in stock, the inventory of pencils (20 @ R1 = R20) will, in
accordance with the materiality principle, not be disclosed separately (because the
value is immaterial).
16 About Financial Accounting: Volume 1

1.14.2 Faithful representation

Information must represent transactions and other events faithfully. Most financial
information, however, is subject to the risk that it represents less than faithfully that
which it means to reflect. It thus must represent the substance of the reporting entity.

1.14.3 Further enhancements to the qualitative characteristics of financial

information
1.14.3.1 Comparability
Users must be able to compare the information disclosed in the financial statements of
an entity over time, in order to identify trends in the entity’s financial position and
performance. Comparison of different entities must also be possible, so that their
relative financial positions, performances and changes in financial position can be
evaluated. Similar transactions must be disclosed consistently in an entity from one
period to another. Different entities must disclose similar transactions in a similar way
for comparison purposes.
For this reason, the accounting policies used in the preparation of the financial
statements should be disclosed as well as any changes and their effect on those
policies. Users must be able to identify differences between policies followed by an
entity for similar transactions from one period to another. This will help when entities
are compared with one another.
The need for comparability should not be confused with a need for uniformity and
should not be allowed to become the reason for a change in accounting standards.
The accounting policy applied must be for the sake of relevance and reliability. When
more reliable alternatives exist, entities should change their policies accordingly.
Corresponding information for the preceding periods must be included in financial
statements to enable users to compare the financial position, performance and
changes in the cash position of an entity. Thus, to be useful, information in financial
statements should be comparable to information from prior periods and to
corresponding information of similar entities. There must therefore be consistency in
the way in which similar transactions or items are dealt with in financial statements
both within an accounting period and from one period to the next. The presentation
and classification of items in the financial statements of consecutive periods should
therefore be the same, unless:
l significant changes have occurred in the activities of the entity;
l a change will result in better disclosure; or
l a new IFRS is published.
In such cases, the comparative figures should also be disclosed on the new basis.
1.14.3.2 Verifiability
Different analysts and independent observers should come to the same conclusions
regarding the representation in the financial statements.
1.14.3.3 Timeliness
Financial statements must provide useful information to interested parties. It can be
assumed that the longer it takes to make the information available, the less useful the
 Chapter 1: The basic concepts, principles and objectives of accounting 17

information becomes. Information should be made available on time, as and when

required, but still be reliable.
1.14.3.4 Understandability
Users of financial statements must be able to understand them otherwise such
statements serve no purpose. This means that financial statements should be such
that an average person with a reasonable knowledge of business and accounting will
have no problem understanding them. This does not mean, however, that complex
information that should be included in financial statements must be omitted solely on
the grounds that it might not be understood by some users.
1.14.3.5 Applying the enhancing qualitative characteristics
Applying the above qualitative characteristics should always be done as objectively as
possible. Information that is irrelevant does not provide a faithful representation of what
it tries to represent.

1.14.4 The cost constraint on financial reporting

Cost can be a pervasive constraint on the quality of financial information. When
statements are prepared, the benefits derived from the information should exceed the
cost of providing it. The weighing up of benefits and costs is mainly a judgement
process. The cost to some users may be to the benefit of other users.

1.15 The elements of financial statements

Grouping transactions and other events in the financial statements into broad classes,
according to their economic characteristics, reflects their financial effects. These
broad classes are termed the elements of financial statements. The elements used to
measure the financial position on the statement of financial position of an entity are:
l assets;
l liabilities; and
l equity.
The elements that measure the financial performance on the statement of profit or loss
and other comprehensive income are:
l income; and
l expenses.
The disclosure of these elements on the statement of financial position and statement
of profit or loss and other comprehensive income requires some sub-classification in
most cases: for example, assets and liabilities may be classified according to their
nature or function as non-current or current, depending on the business of the entity.
These elements will be discussed in detail in later chapters.

1.16 Recognition of the elements of financial statements

The materiality considerations discussed in paragraph 1.14.3 should be taken into
account when deciding whether an item should be disclosed separately on the
statements. Since there is a relationship between the elements, the recognition of one
18 About Financial Accounting: Volume 1

element, for example an asset, requires the recognition of another element, for
example income or a liability.
l The probability of future economic benefit: The concept of probability is used in the
recognition criteria to refer to the degree of certainty with which future economic
benefits associated with the item will flow to or from the entity. When it is probable
that there will be a future inflow or outflow of resources, the influence must be
recognised. When there is no evidence that a debtor will not pay his or her
account, the total trade and other receivables amount must be disclosed as an
asset. If non-payment is probable, an expense that represents the reduction in
economic benefits (for example, credit losses) must be recognised.
l Reliability of measurement: An item must also possess a cost or value that can be
measured reliably before it can be recognised, as is discussed in paragraph
1.14.3. The fact that cost or value must sometimes be estimated reasonably will not
undermine reliability. If a reasonable estimate cannot be made, the item must not
be disclosed on the statements but should be included in a note to the financial
statements.
If an item does not meet the recognition criteria at a certain date, it can be recognised
at a later stage. When an item fails to meet the criteria, but still possesses the
characteristics of an element, it should be disclosed in the notes to the statements in
order to provide the users of the statements with the relevant information.

1.17 Measurement of the elements of financial statements

Measurement is the process of determining the amounts to be disclosed for each item
in the financial statements. There are several ways in which the amounts can be
determined:
l Historical cost is the actual amount paid in cash (or cash equivalents) for the
particular asset, or the fair value of the item at the time it was acquired. The
historical cost of liabilities is the amount of the proceeds received in exchange for
the obligation. In some cases, it will be the amount to be paid to satisfy the liability.
l Current cost is the amount that an entity would have to pay currently to acquire the
same type of asset as that which it carries in the normal course of business.
Liabilities are shown as the amount of cash that will be required to settle the
amount currently.
l Realisable (settlement) value is the amount of cash (or cash equivalent) that will be
received currently if the asset is sold (disposed of) in an ordinary disposal.
Liabilities are shown at their settlement values, i.e. as the amounts to be paid in
order to satisfy liabilities in the normal course of business.
l The present value of an asset is the current discounted value of the net cash
inflows which the asset should generate in the future in the normal course of
business. Discounted value is the present value of an amount at a specific rate of
interest over the specified period to an end value.
The historical cost basis is the most common basis for the measurement of assets and
liabilities. It must be combined with other measurement bases in subsequent
measurements.
Other documents randomly have
different content
"There's nothing amiss with my character," said Lizzie in an
indignant tone.

"Cannot you see that you are making your character

anything but what it should be by so frequently changing?
People will say you are so discontented, it is useless to take
you into their homes; and the better the place may be, the
less likely they are to give you a trial. Now, make up your
mind to turn over a new leaf, and stay where you are for a
year. If you will promise to do this, I will look over the past,
and give you another trial; for I am thinking of the sort of
character I should have to give you, if you left me now."

"Oh! You needn't trouble about that," said the girl pertly, "I
shan't want you to give me a character. I'm not going to
service again."

"Not—going—to—service—again!" repeated Mrs. Spencer in

great astonishment. "Why, your Sunday-school teacher told
me that your mother was so thankful you were out, for your
father's work had been so very slack lately."

Lizzie hung her head, and looked rather foolish.

"What do you think of doing, if you are not going to service

again?" asked the lady.

The question had to be repeated more than once before

Lizzie would answer, but at length she muttered, "I'm going
home to help Mother with the washing—she takes in
washing now."

The lady looked puzzled; but still this did not seem such an
unreasonable thing, only she thought it was rather a short-
sighted business to take the girl away and put her to the
wash-tub when she could do so much better for herself in
service.
This she thought was a question for her mother to consider,
however; and so she said no more to Lizzie upon the
subject, but resolved to call and see her mother about it.

So an hour or two afterwards, just as Mrs. Betts was busy

ironing, she was surprised by a visit from Mrs. Spencer, and
greatly astonished when she heard the errand upon which
she had come.

"I told her distinctly last night that I could not have her at
home, and her father said the same thing," said the poor
woman looking greatly troubled over the account the lady
gave of Lizzie's behaviour. "I'm very much obliged to you,
ma'am, for the trouble you have taken with her; and if you
could persuade her to stop with you I should feel very
grateful. Tell her, ma'am, she can't come home—we can't
afford to keep her; and as to taking in washing and having
her home to do it, why, I might as well be without it."

"I think you are wise in trying to induce her to stay in

service," said the lady; and she went back to see what she
could do with the foolish girl, who seemed bent upon
running into trouble, and causing distress and anxiety to
her friends.

She did not know what to say when she heard that her
mistress had been to see her mother.

"What did you want to go for?" she said sullenly. "I know
Mother will want me at home, for she is going to have some
more washing, and so I should like you to suit yourself by
this day month," added Lizzie.

"No, Elizabeth; I shall not take your warning," said her

mistress firmly. "You must try and do better in future, and
for your mother's sake put up with what you do not like."
"I hate service, and I never shall like it," said Lizzie, now
beginning to cry; but she did not say any more about
leaving, and her mistress hoped things would smooth down,
and she would grow reconciled when she found it was
impossible for her to go home to live.

On Sunday, Mrs. Betts told her again she must not think of
giving up her situation. She had heard from Emma Russell
about the new washing, and had seen her mistress, and she
had told her that Emma was so kind to the children, so
considerate and obliging, that she intended to buy her a
new dress as soon as the children get better.

"She came soon after your mistress was here; and I could
not help comparing the two accounts I had heard, and
wishing it was my girl that was being praised," added poor
Mrs. Betts.

"I don't," said Lizzie doggedly. "I might be quite as good as

Emma, but nobody would ever think any more of me for it;
and so I mean to take things easy. It's Emma's luck to be
thought so much of," she concluded.

"Luck has nothing to do with it," said Mrs. Betts. "She has
earned a character for being good-natured and obliging,
while you have got one for discontent. I tell you, though,
that you must be contented where you are, for I cannot and
will not have you at home, though this fresh washing has
come in," concluded her mother.

So Lizzie went back feeling greatly disappointed and very

unhappy; for she had made up her mind that when her
mother got this washing, she would certainly be compelled
to have her home in spite of what she had told her
mistress. In fact, the foolish girl began to think it was
entirely owing to her, that her own plans had failed. If she
had not gone to her mother as she did, Lizzie felt sure that,
having secured the washing for her, she could easily have
persuaded her that it was best to give up her place and
come home to help with it; but the premature disclosure of
these plans had spoiled them altogether.

So it was in no pleasant mood that she went back on

Sunday evening. And far from resolving to try and do better
in future, she made up her mind to do all she could to vex
and annoy her mistress. By this means, too, she might be
able to compel her mother to let her go home, and once at
home, she would turn over a new leaf, and be so steady
and industrious, that her mother would not want to part
with her again.

Just as she was about to turn into the street where she
lived, her attention was attracted by half-a-dozen caravans
that slowly rolled along the road, a group of men and
women talking loudly in dispute beside them.

Lizzie paused a minute to look at the gaudily-painted

picture on the outside of one, when an elderly red-faced
woman stepped up to her.

"My dear, can you tell me the way to Snowfields?" she said.

Lizzie's head was full of the pictures painted on the caravan,

and she wondered whether she could go and see the wax-
work figures they represented.

"Are these shows going to Snowfields?" she said, after she

had taken some pains to point out the way to the woman.

"Yes, my dear, we shall be there for a week; and if you like

to come round some evening and ask for Mrs. Stanley, why,
you shall see the wax-works, and maybe have your fortune
told if you can bring a bit of silver with you, just to cross
your hand with," said the woman.

Lizzie looked doubtful. "I haven't got much money," she

said in a faltering tone.

"Oh! A little bit will do, my dear; or an old silver spoon that
your mother has thrown away."

The silly girl felt flattered that the woman should think her
mother was rich enough to throw away old silver spoons,
and went on holding her head a trifle higher, while the
woman hurried to overtake her friends, smiling as she
thought how easy the girl could be taken in.

Lizzie reached home in a rather better mood than when she

set out on her walk, and was altogether more pleasant and
obliging during the next day; so that her mistress thought
the advice she had doubtless received at home had made
some impression upon her, and that she had resolved to do
better in future.

So when on Wednesday morning she asked if she might go

out for an hour in the evening, Mrs. Spencer thought it
would encourage her to persevere if she let her have some
relaxation, and so gave her permission, but told her not to
stay out so late as she had done the previous week.

As soon as the tea-things were cleared away, Lizzie went

upstairs to dress herself; for she had made up her mind to
go as smart as she could to see Mrs. Stanley. She had
trimmed the sleeves of her dress with white lace, and
tacked a broad piece round the neck, and put on her best
hat and gloves, thinking to impose still further on the
woman's notion that she was a lady.
She was careful to button her black cloth jacket close when
she went out, so that her mistress did not notice how smart
she had made her frock look; but before she got to
Snowfields, she took it off and carried it across her arm.

There was little fear that she would meet Emma Russell or
any of her friends on the road to Snowfields; for this was a
piece of waste ground lying at the back of the town, and
altogether out of the way of the general traffic, although
there seemed a good many people on their Way thither this
evening.

Fortunately, or rather unfortunately, there was no one

walking along the road who recognized Lizzie, and she
reached the ground feeling quite elated over her success so
far. She had brought sixpence—all the money she
possessed, and she carefully pulled out her lace ruffles,
drew up her gloves, and put on an air that she thought
must convince everybody of her right to be considered a
lady.

The business of the evening was just beginning when she

reached the ground. There was a steam roundabout, a stall
for shooting at a target, besides the wax-work show, in
front of which a girl about her own age, dressed in red
velveteen and spangles, walked up and down a narrow
platform in front of the picture that had caught her
attention on Sunday night, and expatiated on the wonders
to be seen inside.

Lizzie stood still to have another look at the picture; for it

was nearly dark on Sunday, and only a few of the most
glaring points could be seen. And as she looked, she noticed
that the name of "Stanley" appeared on the show, and over
the roundabout—in fact, the whole fair seemed to belong to
the Stanleys, so that Lizzie felt doubly glad she had put on
her best frock to visit a lady of such wealth and importance.

After looking about her for some minutes, hoping to see

Mrs. Stanley appear from behind some of the caravans,
Lizzie stepped up to the edge of the platform, and tried to
make the girl understand that she wanted to speak to her,
but the din of the steam roundabout, the crack, crack,
bang, bang, of the rifles, and the grinding of an Italian
organ just inside the wax-work exhibition itself, made this
perfectly impossible, and all the notice the girl vouchsafed
to her, was to call in a louder tone:

"Walk up, ladies, walk up, the performance is just about to

begin. Only one penny to see all the wonders of this
marvellous exhibition." And as she repeated these words,
the girl moved the gilded stick she carried in front of the
gaudily-painted picture, and walked on in lofty disregard of
Lizzie's beseeching looks.

At last, as there seemed no other way open to make her

arrival known to the lady she was in search of, Lizzie went
up the few steps, and presented herself to the man who
was taking money in front of the curtain that hung over the
entrance to the show.

"I want to see Mrs. Stanley, if you please," she said, putting
on her most ladylike air.

The man looked at her with a puzzled expression, and just

at that moment the curtain was pushed aside, and two or
three boys and girls came out of the exhibition, looking very
hot, and bringing an overpowering smell of sawdust and
paraffin with them.

"You want to see Mrs. Stanley," said the man slowly, looking
the girl all over, and noting every point about her dress and
appearance. "And what may you want her for?" he said,
resting his elbows on the little green baize-covered table
the more easily to look at the girl more closely.

She drew herself up and looked indignant. "I have come to

see her," she said; "she told me to come on Sunday
evening."

"Oh! She did, did she? Well, then, it's all right, I s'pose.
Only she ain't got time to see many visitors, I can tell you,
young lady;" and then the man poked his head inside the
curtain and called, "Tottie, Tottie, come here."

A pale cross-looking girl, dressed in bright pink tarlatan,

came presently to the front.

"What do you want now?" she demanded.

"Open t'other door and call your mother; here's a lady come
to see her," and Lizzie thought she saw the man wink as he
spoke.

Certainly the girl stared at her before she dropped the

curtain and went to open the door.

This show did not seem to be largely patronized, in spite of

the pictures and the shrill invitations to "walk up, walk up"
constantly uttered by the girl outside. People seemed to
prefer riding on the wooden homes and swans of the
roundabout or shooting for nuts.

In a few minutes the girl in pink came back, and said

shortly, "She's to go round."

"Rosina, Rosina," called the man, still sitting with his elbows
on the table.
But if Rosina heard, she did not choose to answer the call,
until in her regular walk up the little platform she came near
the entrance, and then putting her head round she said
sharply, "What now?"

"Just show this lady the way round to the general's

quarters," he said in a lofty tone, and he motioned Lizzie to
go down the steps again.

And the girl with the wand in an equally dignified manner

pointed to a little opening between the caravans, which
gave access to the space at the back, where horses were
tethered, ugly lurcher dogs sprawled about, and the kitchen
arrangements for the whole fair seemed to be carried on.
But a neatly painted caravan, with pretty lace curtains at
the little windows, stood in the midst of the nondescript
litter, and at the door stood the woman she had seen on
Sunday night.

Lizzie gave another pull at her lace and gloves, and Mrs.
Stanley, who noticed it, said in a less boisterous tone than
she usually adopted, "So you've kept your promise, miss,
and come to see the show people."

"Yes," said Lizzie, in the most languid tone she could

assume. "I've come, but I shan't be able to stop long."

"Oh! That's a pity now; for I might ha' showed yer all the
sights o' the fair, besides telling your fortune. You've
brought the bit of silver I spoke about, ain't yer?"

"Yes, I've brought sixpence," said Lizzie.

"Well, come up here now, and we'll shut the door and have
a quiet chat to ourselves," said the woman; and Lizzie,
feeling very much gratified at this distinction, went up the
little flight of steps.
She was amazed when she stepped inside to find herself in
a cosy little room, with a bright carpet on the floor, a chintz-
covered sofa at the opposite end, and chairs ranged along
the sides, and a mahogany table in the centre.

"You see, I've got a tidy room to ask a lady into," said the
woman, placing a chair for her guest and one for herself
near the table.

"Ye-es, I did not think these places were so comfortable,"

said Lizzie, lost in amazement at her surroundings.

"Well, miss, I wouldn't tell everybody, but I must confess

the show business isn't bad for making money. This is very
well when we're on the road, but you should see our winter
quarters. Oh! We're in clover in the wintertime. Like the
bees, we make our honey or money in the summer, and
spend it in the winter. And now for the bit of silver to cross
the palm with. Take off your gloves, my dear, and hold your
hand up to the light so that I can see the lines, and then
we'll have a look at the cards and see what they say," and
Mrs. Stanley produced a dirty pack of cards from her
capacious pocket, and proceeded to shuffle them.

CHAPTER III.

THE FORTUNE-TELLER.
"WELL, to be sure!" And in well-feigned astonishment, Mrs.
Stanley threw down the cards and looked at Lizzie, who sat
close by, watching the performance with great interest.

"What is it—what is the matter?" she asked.

"What is the matter?" repeated the woman. "Why, you've

got such a lucky hand, that I ought to have half-a-crown for
telling it; and if you can't give it me now, you must
remember me when you're a rich lady riding in your
carriage in silks and satins."

"Oh! Yes, I will," said Lizzie with a smile of supreme

satisfaction, taking up her gloves and preparing to put them
on again.

"Wait a minute, my dear. I'll go through the cards once

more, just to be certain there's no mistake about it, and
maybe I shall be able to tell which way the riches are
coming—whether from mother and father, uncle or aunt."

But Lizzie shook her head at this suggestion.

And the woman, watching her, presently said, "No, it ain't

through either of these ways it'll come; and it won't be just
yet either, for I can see you'll travel a bit and see the world
—a good deal more of it than this little town can teach you."

While she was saying this the woman was moving the cards
about, and pretending to read her predictions from those
she turned up; but she kept her eyes on Lizzie, watching
her face more than the cards. After this mummery had been
gone through for several minutes, she suddenly threw down
the cards with an angry expletive.

"If I wasn't afraid it 'ud turn out like that," she exclaimed,
thumping the table with her clenched fist.
"Why, what is it?" said Lizzie with whitening lips, "Am I to
be a servant after all?"

"Well, it won't last long. I see by the cards you are in

service now, though nobody would think it to look at you.
People say fortunetellers are deceivers, and they may be
sometimes; but it's the stars are at fault. And I'll tell you
how, my dear. A wise woman looks at a hand, and she sees
fortune writ there plain as the nose on your face, then she
turns up the cards and sees fortune there again, and of
course she thinks it safe enough, and she tells the party, for
it's taken her some time to find out this much, and she
don't stop to look no further, 'cos there's no time to spare to
learn any more, and so the thing that ought to be done ain't
known nothing about—ain't made itself seen, 'cos it wants
looking for, and so a fortune's lost. Ah! Many a fortune's lost
that way, my dear."

"But have you found out all about it for me?" asked Lizzie
quickly; for it was getting dark now, and she had a long way
to go home.

"Yes, my dear. I've got to the bottom of the matter at last,

though it seemed as though the stars didn't want to disclose
all their secrets about you;" and she went on talking about
the "stars" as though they were intimate friends of hers,
who could not resist her blandishments when she was
determined to wring their secrets from them.

"But you have not told me what I am to do," said Lizzie,

rising from her seat at last, and drawing her gloves over her
fortunate hands.

"No, my dear. Because it's rather a disappointing thing I've

got to tell you; and I'm soft-hearted enough to feel sorry
when I see a girl disappointed, and maybe lose the fortune
that's waiting for her, because she can't make up her mind
to stretch out her hand and lay hold of it."

"Oh! I'm not like that," said Lizzie. "I'd get it, I know, if I
had the chance!"

"Well, my dear, you certainly have got the chance. The

fortune's there sure enough, but I can see it'll never drop
into your lap. It wants seeking. You must go and meet it,
for it will never come to you in this miserable town, nor
while you are in service; I can see that plain enough."

"But what am I to do?" said Lizzie in a tone of perplexity.

"Well, I ain't quite clear about that yet," said the woman. "I
must study the cards and the stars a bit deeper; such
things as that ain't found out in a hurry."

"Oh! But I can't stop any longer," said Lizzie in a tone of

alarm; for as she spoke a church clock struck nine, and she
ought to have been home by this time.

"No, no, you can't stay to-night, I know that, my dear; but
still I should be sorry for you to lose this fortune when you
are willing to get it."

While she was speaking the woman took down her bonnet
and shawl from the peg and put them on. "I'll walk back
with you," she said; "for it's hardly safe for a pretty girl like
you to be so late. And as we go along, we'll think of a plan
to meet again; for I take a great interest in young people,
'specially them as are the favourites of the stars, as you
are."

"I expect I shall catch it when I get home," said Lizzie,

looking round the lighted fair as they stepped out beside
the wax-work show.
"Never mind, my dear, it won't be for long," said Mrs.
Stanley; "the stars speak plain enough on that. You've but a
short time to be in service, that's plainly writ—over six
months I should say, but under a year."

"Then it won't be long," said Lizzie in a relieved tone; "for

I've been out ten months."

"Ah! I thought it was about that time Jupiter indicated, and

I should say it'll end in a few days now."

"The sooner the better," said the girl; "for I hate service."

"Of course you do, my dear; the fortune that hangs over
you won't let you settle to it as other girls can. And now let
us see about our meeting again. I suppose you won't be
able to get out any more this week?"

"Not till Sunday," replied Lizzie with a sigh.

The woman reiterated it. "That's awkward," she said; "for I

shall be miles away from here by that time."

"But—but you won't go away till you've told me what I've to

do to get this fortune?' she said.

"Well, my dear, I'll help you to get it, if I can," said the
woman in a tone of benevolent pity; "but, you see, I'm only
the servant of the stars like the rest of mankind, and I must
move on at their bidding, and I know I've got to go the last
thing on Saturday night, or first thing on Sunday morning. I
tell you what, though," she said, as though she had just
thought of something, "I might come and see you one night
about dusk. Is there a side gate at your house?"

"Yes," said Lizzie eagerly; "and my mistress will be out to-

morrow night, and I shall be alone. So if you come about
eight o'clock, you might tell me what I ought to do, and I'll
pay you well for your trouble when I get my fortune."

"Of course you will, my dear. You'll be worth your weight in

gold by and by, and able to help old Mother Stanley and a
good many people besides."

And she talked of the splendid silk dresses she would wear,
and the number of servants and carriages she would keep,
and the grand things she would do for all her friends by and
by, until the silly girl's head was completely turned; which
was exactly what the artful woman designed, for this would
enable her to carry out the plan she had formed when she
first saw Lizzie, and the discontent on her face told her she
was dissatisfied with her lot in life, and ready to incur any
risks to change it.

Mrs. Stanley went to within a few yards of the house where

Lizzie lived, carefully noted its appearance, and then turned
back, laughing to herself over the girl's folly, and how easily
she had been taken in.

She was careful to be near the house about eight o'clock

the next night, and, as she expected, she soon saw Lizzie
peeping out of the side gate looking for her. She held up her
finger warningly as she drew near, and looked up and down
the street to make sure no one was watching her, and that
no policeman was in sight, and having satisfied herself that
nobody was about, she darted inside the gate and carefully
bolted it after her, and then followed Lizzie to the
comfortable little kitchen at the side.

"Well, my dear, I've had a deal of trouble to find out all you
wanted to know," she said, seating herself in the chair Lizzie
had placed ready for her. "Are we all alone—is that woman
who calls herself your mistress safe out of the way?"
"Yes, she's gone out to supper," said Lizzie, "and will not be
home till ten o'clock, and master has gone with her."

"Master?" repeated the woman in a scornful tone. "Didn't I

tell you, you'd soon be worth your weight in gold, and able
to buy these half-and-half people up over and over again.
Take that horrid cap off, my dear. I do hate to see a lady
who is on the edge of coming into a fortune in a thing like
that," and Mrs. Stanley loosened her own bonnet-strings
and unpinned her shawl by way of making herself
comfortable, while Lizzie took off the obnoxious cap and put
it out of sight.

"My dear, you've got lovely hair. You'll set off the jewels and
satins you'll wear by and by," said the woman, apparently
lost in admiration of the girl as she seated herself at the
other side of the table, and prepared to listen to the further
unfoldment of her "fortune."

"Now you want to know what secrets the stars have

disclosed since I saw you last," went on Mrs. Stanley. "Well,
my dear, it's all summed up in one word—travel. You've got
to travel—to go right away from this dull out of the way
misfortuned place; for I can see plain enough that the
malefic stars rule over this town, and the sooner you're out
of it the better."

"But how am I to go?" asked Lizzie in some anxiety. "My

mother and father and all my friends live here, and I don't
know where else to go."

The woman crossed her arms and looked at Lizzie. "Ain't

there nobody as knows you anywhere—not in London or
some other big city?" she said.

The girl shook her head dolefully. "I haven't got a friend in
the world outside of this town," she said.
"Well, now, that is unfortunate. And worth your weight in
gold you'll be by and by," said her visitor, as if in great
perplexity.

"Could—could you help me to get away, do you think?"

asked the girl with some hesitation in her tone.

It was just what the woman had been waiting for, but she
would not appear eager about it. "Well, suppose we talk it
over a bit," she said in apparent reluctance. "Are you quite
sure you ain't got no friends outside this town?"

"Yes, quite sure; and I haven't a penny in the world unless

my mistress pays me my month's wages to-morrow," said
Lizzie with tears in her eyes.

"Well, perhaps she'll pay you; and then you can go by

yourself and seek your fortune," said Mrs. Stanley.

But the girl shook her head. "I shouldn't know where to
look," she said. "I don't know anything about the stars; but
if I could come with you, I should be sure not to miss it."

"That's true enough," said the woman meditatively; "but do

you think your friends would agree to the plan?"

"I shouldn't ask them," said Lizzie, smiling at the absurdity

of such a suggestion. "My mother thinks there is nothing
better than service for a girl like me, and so I'm sure she
wouldn't let me look for anything else, if she could help it.
No! If I am to come with you, I should take care not to let
anybody else know about it, or hear where I am until I get
my fortune. Then, of course, I shall want to come back and
help them all. I shall set my father up in a good business,
and let my brother Jack learn to be an engineer."
"Of course you will help your friends, my dear, when you
get your fortune; and it will be a pity to lose it for the want
of going to seek it."

"I won't lose it," said Lizzie confidently, "if you will only let
me come with you."

"Very well; as it seems the only way we can do it, perhaps

you'd better. You know what sort of a place you'll have to
travel in. But I shall have to coax my husband over to let
you join us."

"Do you think he will object?" asked Lizzie anxiously.

"Well, if you get your wages to-morrow it can be managed

easily enough I think; for you can pay that to him for your
travelling expenses. How much did you say you would
have?"

"Twelve shillings," answered Lizzie.

"Only twelve shillings! It ain't much, my dear to pay us for

the risk and trouble, and—"

"Oh! But I will pay you for that by and by, Mrs. Stanley,"
interrupted Lizzie. "I will give you the twelve shillings as a
little present."

The woman smiled to think how completely she had duped

the silly girl, and how bitterly she would repent her folly by
and by. But she took care not to betray any of these
thoughts now. She only said, "Ah! When you are worth your
weight in gold, my dear, you will be a generous friend, I
know."

"Yes, that I will," said Lizzie, feeling sure that it would be

easy to do this when she had plenty of money to do as she
liked with.

"Now, then, we must talk about how you are to get away,"
said practical Mrs. Stanley, who was beginning to grow tired
of the comedy. "How many clothes have you got?"

"Shall I have to bring my clothes with me?" said the girl, a

little disappointed at this prospect.

"Yes, you must bring your clothes to wear until you can get
better."

"I thought I should so soon get the silk dresses you spoke
about, I need not trouble myself with these common
things," and Lizzie looked down disdainfully at the neat print
dress she wore.

Mrs. Stanley, however, regarded the dress with different

feelings. "Those clothes are too good to leave behind," she
said. "You might give them to me, and it would help make
up for the cost of your journey."

"Very well, you shall have them then. But how am I to carry
my box if nobody is to know I am going away?" she
suddenly asked. "Am I to go with you to-night?"

"No, no, that'll never do. You must meet me about a mile
out of the town by six o'clock on Sunday morning," said
Mrs. Stanley quickly.

"But how am I to carry the box?"

"You must leave the box behind. Only bring all your clothes
except your caps, you won't want them any more," said the
woman.
"It'll be a big bundle to carry," said Lizzie, mentally passing
in review the new underlines and cotton frocks, to say
nothing of the hats and jackets that were included in that
one word "clothes."

"I might take some of them with me to-night, if you like,"

said Mrs. Stanley in an indifferent tone.

"Oh! If you would not mind doing that, I could get away
easier on Sunday morning," said Lizzie. "I will go up and
pack up my clean clothes, and I can put on my best frock to
come in."

"No, no, that won't do," said the woman; who thought that
a girl like Lizzie, dressed in her best frock so early in the
morning, would be sure to attract attention. Besides, the
best frock and hat might possibly be recognized by
someone she might meet, and so, to make sure that this
risk was not incurred, she suggested that the best frock and
hat, and as many underclothes as she could put up, should
be taken away that night.

"I'll bring you a bonnet and shawl to wear on Sunday

morning. One that will screen your face so that nobody shall
see who you are, as they might do if you wore one of your
own hats," said Mrs. Stanley.

"I wish I could go with you to carry the bundle," said Lizzie,
as she lighted the candle to go to her bed-room, which was
at the top of the house. "I won't be long," she said as she
left the kitchen.

"Don't hurry, my dear; mind you bring all the things," said
her visitor.

And while she was speaking, she untied her shoes, and
before Lizzie was up the first flight of stairs she had taken a
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