Topic 1

Introduction to Accounting

Objectives:
Define what is accounting Briefly describe history and development of accounting List prospect of accounting profession & professional bodies in Malaysia Outline the development of accounting standard Discuss the function of accounting Outline the components of financial statements and their function Accounting principle, assumption and conventions

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 System
The procedures and processes used by a business to analyse transactions, handle routine bookkeeping tasks, and structure information so it can be used to evaluate the performance and health of the business

What are the functions of an accounting system?

Analysis

Analyze business events to determine if information should be captured by the accounting system.
Day-to-day keeping track of things. Use summary information to evaluate the financial health and performance of the business.

Bookkeeping

Evaluation

Describe The Accounting Cycle

1. Analyze business event
2. Record,
Investment, purchase, sale, or transaction

3. Classify, and
4. Summarize transaction

Account, amount, classification

5. Report summaries

Balance sheet, Income statement, Statement of cash flows

The Accounting Cycle

The different between accounting and bookkeeping:

Accounting: a process of identifying, recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the result thereof (AICPA, 1961) Bookkeeping: only involves activities of collecting and recording financial data

What is the Nature of Accounting?

Quantitative Deals with numbers. Focused on the financial dimension of business. Past information can only be useful if it impacts decisions about the future.

Financial

Decision Making

3 PHASES OF ACCOUNTING DEVELOPMENT

Stewardship accounting Financial accounting and reporting Management Accounting

Stewardship accounting
The accounting activity concerned with simple record keeping and the discharge of stewardship. Wealthy men employed stewards to manage their property. These stewards will provide periodical account of their management of the resources to their master It involves the orderly recording of business transaction

Based on the concept of give and take.

Financial accounting and reporting

Started from the Industrial Revolution (IR) in Britain The size of business has increase and more complex Results to the need for more sophisticated methods by which business was financed. (Large amount of capital is needed) Led to the introduction of the joint stock company (many people invest in one company) and also the UKs Joint Stock Companies Act (1844) financial account must be audited before it is presented to their owners (shareholder) and creditor

The age of scientific accounting

Fixed Asset

Industrial Revolution

Large Capital

Capital vs Expenses depreciation Reporting Creative accounting New accounting practice Recognition Measurement Accounting concepts

Professional Society

Various Sources of Capital (Owner + SH)

Large Scale Business

failure

SH Trust Research

Management accounting
Associated with the introduction revolution (IR) in 18th century. Business more concern to reduce cost of industrial

delopment of cost accounting technique and use as a guide to management decisions.

The introduction of management accounting shows the ability and capacity of accounting to develop and meet changing socio-economic needs

Introduction to Financial Statements Definition: FRS 101 (MASB 1)

Financial statement is a structured financial representation of the financial position of an enterprise and the transaction undertaken by an enterprise

Objectives and purposes of Financial Statement

1. Provide information about the financial position, performance and cash flow of an enterprise 2. Show the results of managements stewardship of the resources entrusted to it 3. Assists users in predicting the enterprises future cash flow and 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

5. Accounting policies and explanatory notes

Primary Financial Statements These financial statements answer

basic questions: What is the companys current financial status? What were the companys operating results for the period? How did the company obtain and use cash during the period?

The Balance Sheet

Assets: cash, accounts
receivable, inventory, land, buildings, equipment, and intangible What are the resources of the company? items.
Summary of the financial position of a company at a particular date.

Sometimes referred to as a Liabilities: accounts Statement of payable, notes payable, Financial and mortgages payable. Position

What are the companys existing obligations?

What are the companys net assets?

Owners Equity: net

assets after all obligations have been satisfied.

Balance Sheet
Hershey Foods Corporation Balance Sheet
December 31, 2001 (in thousands)

Assets
Cash Note that the date $ 134,147 Accounts receivable is a specific point 361,726 Inventories 512,134 in time Prepaid expenses 62,595 Property, plant, and equipment 1,534,901 Intangibles 429,128 Other assets 212,799 Total assets $3,247,430

Continued

Liabilities

Accounts payable Accrued liabilities Notes and other debt Income taxes Total liabilities
Stockholders Equity Capital stock Retained earnings Repurchased stock and other equity items Total stockholders equity Total liabilities and stockholders equity

$ 133,049 462,901 1,245,939 258,337 $2,100,226

$ 183,213 2,755,333 (1,791,342) $1,147,204 $3,247,430

Matches total assets

Describe Three Balance Sheet Limitations.

Assets recorded at historical value. Only recognizes assets that can be expressed in monetary terms. Owners equity is usually less than the companys market value.

The Income Statement

Revenues Assets (cash or AR) created through business operations Expenses Sometimes Assets (cash or AP) referred to consumed through business operations as a Statement of Net Income or (Net Loss) Earnings Revenues - Expenses
Shows the results of a companys operations over a period of time. What goods were sold or services performed that provided revenue for the company? What costs were incurred in normal operations to generate these revenues?

What are the earnings or company profit?

Income Statement
Hershey Foods Corporation Income Statement
For the Year Ended December 31, 2001

Revenues: Sales Expenses: Cost of sales Selling and administrative Other expenses Interest Net income (-)Income taxes Net income after tax

$4,557,241 $2,665,566 1,269,964 209,077 69,093

4,213,700 $ 343,541 (136,385) 207,156

Income Statement
Hershey Foods Corporation Income Statement
For the Year Ended December 31, 2001

Revenues: Sales Note that the time Expenses: Cost of sales period for the $2,665,566 Selling and administrative statement is in the1,269,964 Other expenses 209,077 heading. Interest 69,093 Net income (-)Income taxes Net income after tax

$4,557,241

4,213,700 $ 343,541 (136,385) 207,156

Statement of Cash Flows

Reports the amount of cash collected and paid out by a company in the following three types of activities:
1. Operating activities

2. Investing activities
3. Financing activities

Hershey Foods Corporation Statement of Cash Flows

For the Year Ended December 31, 2001 (in thousands)

1-46

Net cash flows from operating activities Cash flows from investing activities: Investments in property, plant, and equipment Proceeds from sale of property, plant, and equipment Net cash flows used in investing activities Cash flows from financing activities: Cash receipts from financing activities, including debt Dividends paid to stockholders Repurchase of stock Other, including repayment of debt Net cash flows used in financing activities Net increase in cash during 2001 Cash as of January 1, 2001 Cash as of December 31, 2001

$ 706,405 $(187,029) 63,042 $(123,987) $ 30,589 (154,750) (40,322) (315,757) $(480,240) $ 102,178 31,969 $ 134,147

Limitations of Financial Statements

1. Limited to information which can be expressed in quantitative terms. 2. Largely confined to an analysis of past events. 3. Accounting is not an exact science. 4. Most information monetary units expressed in

Role of Accounting?

Accounting role in business

As business language
use accounting knowledge to interpret accounting number to understand financial information of a business

As an information system
Acctg. gather information and communicate them to the user Business transaction will be processed and analyzed to make it useful to the user From raw data financial statement

Accounting role in business

As a decision making tool
We use accounting information to make decision. Each user will have different decision and will used different type of accounting information.

As a planning and control tool Manager are important users of financial information Accounting help them to plan and control business activities

Identify the primary users of accounting information.

Business Stakeholders
A business stakeholder is a person or entity that has an interest in the economic performance and wellbeing of a business.

Their interest is on the report produce by a business before they can make sound decision

What are the Two Types of Reports from Accounting Information? Internal Reports
(Management Accounting)

External Reports
(Financial Accounting)

Management

Lenders Investors Suppliers/Customers Employees Competitors Government Agencies The Press

What Are Accounting Reports Used For?

Used by management for

planning implementing plans controlling costs making decisions

Used by external parties who have an economic interest in the firm.

Balance sheet

Income statement Statement of cash flows

Financial Accounting & Management Accounting

Financial Accounting Provision of financial information on a businesss recent financial performance targeted at external users such as shareholders Backward-looking Double-entry bookkeeping Profit and loss account, balance sheet and cash flow statement Management Accounting Internal needs of business Unlike financial accounting, not required by law

Management accounting can be split into cost accounting and decision-making

User Information Requirements

Overview of Financial and Management Accounts

Qualitative Characteristic Of Financial Information - What are the characteristics?

Qualitative Characteristic Of Financial Information

Relevance The information has predictive value- helps users to make decisions about the future Has confirmatory value helps users to evaluate their past decisions

Reliability Complete information and free from significant error and bias

Qualitative Characteristic Of Financial Information

Comparability The information can be comparable with: Information produced in the previous year Information produced by other businesses Understandability Means that the users should understand and can make a good decision from such information Timeliness Cost effective and; The information is ready when it is needed

Accounting Professional bodies in Malaysia

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 experience. (http://www.micpa.com.my)

MIA
A regulatory body formed in 1969 under Sec 23 Accountant Act 1967. Functions : To oversee development and growth of the accounting bodies. Sole body where the accountants must register. Conducts training and courses for members to ensure they remain with developments in the profession. http://www.mia.org.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
A statutory body established under the Fin. Rep Act 1997. Functions : To issue accounting standards. To issue statements of principles for financial reporting. To review or to adopt existing accounting standards. To issue technical pronouncements. To develop conceptual framework. To change the structure or contents of proposed accounting standards. (http://www.masb.org.my)

FRF
A statutory body established under the Fin. Rep Act 1997. Functions : Oversees MASB performance, financial & funding requirement Reviews proposed standard by MASB

Accounting Professional Bodies

FRF

Oversees MASB performance, financial & funding requirement Reviews proposed standard by MASB

APB

MASB

Adopt international accounting standard o Develop new accounting standard

MICPA MIA

Advance the accounting theory & practice Provide education, training & examination to accountants

Adopt international accounting standard o Develop new accounting standard

ACCOUNTANTS JOB SCOPE

Accounting Opportunities
Public Accounting Industry
Government or Nonprofit Graduate Education
Government Agencies: GAO, Auditor J.D. (Law) Controller IRS, FBI

Tax Consultant Ph.D. State and Local Internal Auditor

Agencies

Management M.Acc. Advisory Hospitals, Services Financial Schools, Nonprofit Executive MBA Organizations Consultant

Why Study Accounting?

Everyone makes financial decisions. What types of decisions?
Budge ting
Inves ting

ACCOUNTING STANDARD, CONCEPT AND CONVENTION

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. (satu kerangka berkonsep dan aturan yang perlu dipatuhi oleh semua entiti perniagaan dan perakaunan)

Purpose:
1. A guideline in preparing the financial statement. 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.

Financial Reporting Act 1967

FRF

MASB

Leading businessman
KLSE

SEC

Senior members Accounting Profession

Financial Analysts

Senior Rep BNM

Accountant

ROC

Accounting Profession

Financial Analysts

Finance Directors

OVERALL CONSIDERATION IN PREPARING FINANCIAL STATEMENT:

1. Fair presentation and compliance with MASB Standards. - Fair presentation presentation fairly the financial position, performance and cash flows of an enterprise by application of appropriate MASB Standards. - Compliance with MASB comply with all the MASB Standard and other technical pronouncements issued by MASB. - If departure from requirements to achieve fair presentation, an enterprise should disclose the four reasons outlined by MASB (refer MASB 1 page 7 para 14). a) that management has concluded that the FS fairly present the enterprises financial position, financial performance and cash flows;

b) that it has complied in all material respects with applicable MASB Standards except that it has departed from a Standard in order to achieve a fair presentation; c) the Standard from which the enterprise has departed, the nature of departure, including the treatment that the Standard would require, the reason why the treatment would misleading in the circumstances and the treatment adopted; and d) the financial impact of the departure on the enterprises net profit or loss, assets, liabilities, equity and cash flows for each period presented.

2.

3.

Accounting Policies - Management should select and apply an enterprises accounting policies so that its comply with MASB Standard. - Definition: Accounting policies are the specific principles, bases, convention, rules and practices adopted by the enterprise in preparing financial statements. - 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. Going Concern - assuming that the business will continue to operate for the foreseeable future.

4.

5.

Accrual Basis of Accounting - transaction and events are recognized when they are occur (not as a cash received or paid) and they are recorded in the accounting recorded in the accounting record and reported in financial statements of the period to which they are relate. - Expenses are recognized on direct association basis between cost and income (matching). Consistency in Presentation - presentation and classification of items should be applied consistently from one accounting period to another. - Changes are allowed if; A significant change in the nature of the operation and the changes could demonstrate more appropriate presentation of events or transaction. A change is required by MASB Standard.

6.

Materiality and Aggregation - the importance of a material item toward the overall financial information. (the item are material if its non-disclosure could influence the economic decision of users). - materiality depends on: size of the items nature of the items. - material items; presented separately in the financial statement. - immaterial items; aggregated with amount of a similar nature or function and need not be presented separately.

Other Accounting Concepts:

1. Duality Concept (Double Entry) every entry for each transaction should reflect twofold in financial position of the business. 2. Business Entity Concept (Entiti Berasingan) a business is to be treated as an independent entity, separate from its owner. 3. Historical cost Concept (Kos sejarah) assets should be shown in balance sheet at their original cost (at the time they bought) to the business. 4. Matching Concept (Pemadanan)

expenses should be matched against the revenue to which they relate (the same accounting period)

In other word the revenue is recognized when it is earned not when is received and the expenses is recognized when it is incurred not when the payment is made. Some practical consequences of this convention are; Accruals 5. 6. Prepayment Accounting Period produce financial statement at yearly intervals. Monetary Unit

it

all the transactions are recorded in monetary unit of measurement. RM and cent.
7. Prudence/Conservatism Concept.(Konsep Berhati-hati) the need to make estimates and form judgments when preparing financial statement. In other words, a prudent accountant will tend to: understate revenue, profit and assets and overstate expenses, losses and liabilities.

Example of questions on Accounting Standard:

1. Apakah piawai perakaunan? Namakan badan yang bertanggungjawab dalam penggubalan piawaian perakauanan di Malaysia. Bagaimanakah piawai perakaunan digubal di Malaysia? Berikan 2 fungsi Lembaga Piawaian Perakaunan Malaysia (MASB)? General Purpose Financial Reports(Laporan kewangan untuk tujuan am) are designed to satisfy the needs of many different type of users. Does this mean the general purpose report will be of little used to individual users? Di atas sebab-sebab yang tak dapat dielakkan, Amir Enterprise tidak dapat akur kepada salah satu piawaian perakaunan yang telah ditetapkan oleh MASB. Apakah maklumat-maklumat yang perlu Amir Enterprise dedahkan kepada pengguna-2 maklumat perakaunan sepertimana yang dikehendaki oleh MASB dalam keadaan ini? Mestikan persembahan penyata kewangan tekal (consistent)dari satu tempoh ke satu tempoh yang lain?Dalam keadaan bagaimanakah ia dibenarkan tidak tekal? Mengapakah penting andaian ini dipatuhi?

2. 3.

4.

5.

Example of questions on Accounting Concept

1. Berikut adalah beberapa situasi yang berasingan. Anda dikehendaki mengkaji setiap situasi dan nyatakan samada anda bersetuju atau tidak dengan cara ianya direkodkan di dalam akaun, dengan merujuk kepada andaian/prinsip/konsep/konvesyen perakaunan yang relevan. Jelaskan jawapan anda. a. Perbelanjaan pembaikan Perniagaan XYZ termasuk belanja pembaikan rumah pengarah syarikatnya sebanyak RM12000 telah direkodkan ke dalam akaun perniagaan XYZ. b. Salmah telah membeli mesin kira yang berharga RM50 untk kegunaan pejabat yang dijangkana boleh digunakan untuk tempoh 4 tahun. Mesin tersebut telah direkod sebagai satu belanja. c. Perniagaan Selamat mempunyai pekerja yang mahir dan reputasi yang baik dari segi penjagaan kualiti barangan yang dikeluarkannya. Maklumat ini walaubagaimanapun tidak direkodkan.

d. Syarikat Hijau mempunyai 2 ekar tanah berdekatan dengan Litar Formula 1 Sepang, yang dibeli pada tahun 1980 pada harga RM20000 seekar. Disebabkan oleh kepesatan pembangunan nilai tanah ini telah meningkat kepada RM110000 seekar. Harga pasaran baru ini telah direkodkan di dalam penyata kewangan. e. Seorang pelanggan yang berhutang sebanyak RM4500 dengan Perniagaan Enak mungkin akan muflis. Usia hutang tersebut telah lebih daripada 90 hari. Wlaubagaimanapun maklumat ini tidak dimasukkan ke dalm penyata kewangan Perniagaan Enak. f. Perniagaan Perabut Hasan telah menerima tempaha set meja makan dari En. Khairil pada akhir bulan Januari 2001. Set meja makan tersebut dihantar kepada pada bulan Februari dan ia membayarnya pada awal bulan Mac 2001. Urusniaga tersebut hanya direkod dalam bulan Mac, 2001 apabila ianya dibayar.

2.

3.

4.

Penyata Kewangan sebuah perniagaan menunjukkan untung sebanyak RM20,000 untuk tempoh yang terkini. Pemilik perniagaan keliru dengan maklumat ini kerana sejak perniagaannya ditubuhkan , akaun bank perniagaannya hanya bertambah sebanyak RM2,000 sahaja dalam tempoh berikut. Dengan merujuk kepada prinsip/andaian perakaunan yang relevan, jelaskan kenapa perbezaan ini boleh terjadi. What is a different between business entity and accounting entity concept. In your opinion which are catogerised in these both catogeries, sole trader or a company. Explain your answer. Identify the accounting conceptsfor each situation: a. Farhan 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. Farhan only takes into account all the transaction that relate to his business, ignoring transaction made for himself. c. Farhans business made credit sales to Irfan Bhd amounted RM7000 in July 1997. Irfan Bhd only paid RM3000 in September that year; the balance will be paid early next year. Farhan still takes into account the RM4000.