Professional Documents
Culture Documents
Topic 1
Introduction History and Development of Accounting Definitions of Accounting Introduction to Financial Statements Roles Accounting profession and professional bodies Accounting standards, principles, assumptions and conventions.
Introduction
What is accounting?
Early history
Accountancy's infancy dates back to the earliest days of human agriculture and civilization (the Sumerians in Mesopotamia), when the need to maintain accurate records of the quantities and relative values of agricultural products first arose. Using system called stewardship. The document facilitate the owner to control and identify their asset, which is under the custody of the steward Simple accounting is mentioned in the Christian Bible (New Testament) in the Book of Matthew, in the Parable of the Talents [4]. The Islamic Quran also mentions simple accounting for trade and credit arrangements [5].
Twelfth-century A.D. Arab writer Ibn Taymiyyah mentioned in his book (literally, "verification" or "calculation") detailed accounting systems used by Muslims as early as in the mid-seventh century A.D. These accounting practices were influenced by the Roman and the Persian civilisations that Muslims interacted with. The most detailed example Ibn Taymiyyah provides of a complex governmental accounting system is the Divan of Umar, the second Caliph of Islam, in which all revenues and disbursements were recorded. The Divan of Umar has been described in detail by various Islamic historians and was used by Muslim rulers in the Middle East with modifications and enhancements until the fall of the Ottoman Empire.
Luca Pacioli (1445 - 1517), also known as Friar Luca dal Borgo, is credited for the "birth" of accounting. His Summa de arithmetica, geometrica, proportioni et proportionalita (Summa on arithmetic, geometry, proportions and proportionality, Venice 1494), was a textbook for use in the schools of northern Italy, where the sons of merchants and craftsmen were educated. Includes the first printed description of the method of keeping accounts that Venetian merchants used at that time, known as the double-entry accounting system. Although Pacioli codified rather than invented this system, he is widely regarded as the "Father of Accounting".
The system he published included most of the accounting cycle as we know it today. He described the use of journals and ledgers, and warned that a person should not go to sleep at night until the debits equaled the credits! His ledger had accounts for assets (including receivables and inventories), liabilities, capital, income, and expenses the account categories that are reported on an organisation's balance sheet and income statement, respectively. He demonstrated year-end closing entries and proposed that a trial balance be used to prove a balanced ledger.
Source: http://en.wikipedia.org/wiki/Accounting#Early_history
Industrial Age: In 19th century the emergence of large corporations, separation of the owners from the managers, makes the businesses reports became more complex. Needs to prepare financial statements to the shareholders. Post Industrial Age: Accounting is a need for decision making information element.
Definitions
What is accounting?
Accounting is an information system that provides quantitative, financial information to stakeholders about the economic activities and condition of a business so that they can make business/economic decisions.
Accounting: Definition
The process of identifying, measuring, recording and communicating economic information to permit informed judgment and decisions by users of the information. (Refer: Jalila et al. (2005), page 2)
Identifying
Measuring
Recording
Communicating
INTERNAL USERS
EXTERNAL USERS
Identifying: Identify those events that are considered as an evidence of economic activity relevant to the business Measuring: all identifiable related economic activity will be measured in RM and cents Recording: Keeping of a chronological diary of measured events in an orderly and systematic manner Communicating: Communicate through the preparation and distribution of accounting reports to the interested parties.
External Users
Resource providers
e.g. investors, employees, creditors
Reviewers
e.g. regulatory agencies, media, governments, trade unions, special interest groups
Financial statements are a structured financial representation of the financial position of and the transactions undertaken by an enterprise.
To meet this objective, financial statements provide information about an enterprises: assets; liabilities; equity; income and expenses, including gains and losses; and cash flows. This information, along with other information in the notes to financial statements, assists users in predicting the enterprises future cash flows and, in particular, the timing and certainty of the generation of cash and cash equivalents.
Components of FS
1. Balance Sheet 2. Income Statement 3. A statement showing: All changes in equity Changes in equity other than those arising from capital transaction with owners and distribution with owners 4. Cash Flow Statement, and
FINANCIAL STATEMENTS
Balance Sheet
Reports assets and claims to those assets at a particular point in time
Income Statement
Reports revenues less expenses for a particular period of time
WONG PTY LTD Balance Sheet as at 31 October 2008 Assets Cash Accounts receivable Advertising supplies Prepaid insurance Office equipment Total assets Liabilities and equity Liabilities Accounts payable Interest payable Revenue received in advance Salaries payable Bank loan Total liabilities Equity Share capital Retained earnings 31/10/08 Total equity $ 2 500 50 800 1 200 5 000 $ 9 550 10 000 2 360 12 360 $21 910 $15 200 200 1 000 550 4 960 $21 910
Income Statement
Wong PTY LTD Income Statement for the year ended 31 October 2008 Service revenues Expenses Salaries expense $3 200 Supplies expense 1 500 Rent expense 900 Insurance expense 50 Interest expense 50 Depreciation expense 40 Profit before tax Tax expense Profit after tax $10 600
WONG PTY LTD Cash Flow Statement Cash Flow Statement for the month ended 31 October 2008 Cash flows from operating activities Cash receipts from operating activities Cash payments from operating activities Net cash provided by operating activities Cash flows from investing activities Purchased office equipment Net cash used by investing activities Cash flows from financing activities Issue of shares Proceeds from bank loan Payment of dividend Net cash provided by financing activities Net increase in cash Cash at beginning of period Cash at end of period
$11 200
(5 500)
$ 5 700 (5 000) (5 000) 10 000 5 000 (5 000) 14 500 15 200 -$15 200
Roles
Language of Business Decision making tool Create accountability and control As an Information system
DECISION TOOLKIT
Are the business operations profitable? Does the business rely mainly on debt or equity to finance its assets? Does the business generate sufficient cash from operations to fund its investing activities? Is the company using its assets effectively?
PROFESSIONAL BODIES
MICPA
Established in 1965 under Company Act 1965. Sole professional accounting body in Malaysia. Function : Provides training and sets professional examinations. To become a member : must pass all the examinations set by the body. has relevant working experiences. (http://www.micpa.com.my)
What is a CPA?
CPA: Certified Public Accountant
Has taken a minimum number of college-level accounting classes. Has passed the exam administered by the MICPA. Has met other requirements set by his/her state.
MICPA: Malaysian Institute of Certified Public Accountants The national organization of CPAs in the Malaysia. Not a government agency.
MASB
The functions and powers of the MASB as provided under the Act are to: issue new accounting standards as approved accounting standards and to review, revise or adopt existing accounting standards as approved accounting standards; issue statements of principles for financial reporting; sponsor or undertake development of possible accounting standards; conduct public consultation as necessary; develop a conceptual framework for the purpose of evaluating proposed accounting standards; make such changes to proposed accounting standards as considered necessary; seek the view of the FRF in relation to new and existing standards, statement of principles, and changes to proposed standards; determine scope and application of accounting standards; and to perform such other function as the Minister of Finance may prescribe.
Accounting Standard
Accounting Standard is a set of rules to guide the application of accounting principles in a specific situation while preparing the financial statement.
Purpose:
1. A guideline in preparing the financial statements. 2. To improve the quality of financial reporting 3. Define and explain the concept of reporting entity; which should be reported and which is not. 4. Identifying the common information needs of the various users of financial reports. 5. Determine a qualitative characteristics of financial information.
Accounting Policies
Management should select and apply an enterprises accounting policies so that its comply with MASB Standards. - Definition: Accounting policies are the specific principles, bases, convention, rules and practices adopted by the enterprise in preparing financial statements.
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If there is no specific requirement management should develop policies to ensure the financial statement is; a) Relevant b) Reliable represent faithfully, neutral, free of bias, prudent and complete.
Concepts ..
Entity Concept
a. Each and every economic entity stands apart from other organizations and individuals as a separate economic unit. b. Preparation of financial statements for each business entity must be made so as not to include those transactions that do not belong to the entity.
The Stable-Monetary-Unit Concept a. Unit of measure commonly used and in Malaysia, the currency used is ringgit and sen. b. By using ringgit as a medium of exchange the users of financial statements are able to determine the performance and financial position of a company. c. Financial statements are still prepared based upon the concept that the value of ringgit is stable and any changes in the value of ringgit is assumed insignificant.
Principles..
Disclosure principle
a. This principle requires all material information to be disclosed or published.
Materiality principle
a. Places importance on that information which will affect ones ability in making decisions. b. Information, which will affect ones ability in making decision, is known as material information. c. The materiality level really depends on judgment and not on any fixed rules. d. The general guideline on materiality is that if an item is important enough in terms of decision-making then it is to be considered material.
Objectivity principle
a. This
principle places importance in disclosing objective information in the financial statements. Objective information means information, which is true and can be verified by another party.
Cost principle
a.
According to this principle, assets, which are acquired by a business, must be recorded at the price paid in the transaction. Even though the market value or the economic value of the asset, which is in a business, fluctuates but the value that is recorded remains unchanged. b. The value reflected in the balance sheet is not current value.
Consistency principle
a. This principle requires each entity to use the same accounting methods over consecutive time periods i.e. with no changes from year to year.
Conservatism principle
a. In valuing assets such as debts and inventory the lower cost must be opted for. b. Must not overstate profits or assets.
Matching principle
a. Expenses of a business must be recognized when the revenue related to the said expense is recognized.
a. Fikri owns a small business in Shah Alam. He prepared the accounts of the business showing profit of RM25,000. With this situation, he has no intention to sell off the business. b. Fikri only takes into account all the transactions that relate to his business, ignoring transaction made for himself. c. Fikris business made credit sales to Irfan Bhd amounted RM7,000 in July 2008. Irfan Bhd only paid RM3,000 in September that year; the balance will be paid early next year. Farhan still takes into account the RM4,000 in preparing the financial statements for 2007.