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CHAPTER

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 After completing this chapter, you should be able to
understand:

Define accounting and book-keeping

Describe accounting in qualitative characteristics, principles,
assumptions, and constraint according to accounting
framework and standards
Describe the roles of an accountant
Describe the functions of financial accounting
Describe the usage and the importance of accounting
information
Describe the types of business or entities
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4
 1-2

Objective 1

Define accounting and book-keeping

 Accounting Defined
is a
Accounting Identifies
system that

Records

information
Relevant Communicates
that is

Reliable
to help USERS
make better
Comparable decisions.
 Accounting Activities

Identifying Recording Communicating
Business Business Business
Transactions Activities Activities

Accounting - Language of Business

 Accounting Activities
Accounting is not an end in itself

Identifying Recording Communicating
Business Business Business
Activities Activities Activities

Keeping a Preparing
chronological log accounting
Selecting of transactions reports. Also
transactions and and events includes
events that are measured in analyzing &
relevant to Rupees and interpreting them
organization Classified & (to help Users in
Summarized in making better
useful format decisions)
 Accounting is the process of identifying, recording,
summarizing and reporting economic information
to decision makers in the form of financial
statements.

Book-keeping is a process of recording data

relating to accounting transactions in the
accounting books.

EBF 1013
SSSA 9
 Accounting versus bookkeeping
Bookkeeping is the mechanical and repetitive
process of recording financial transactions and
keeping financial records.
Bookkeeping is a small part of accounting which is
recording of transactions.

Accounting is a comprehensive system for

collecting, analyzing and communicating financial
information
Accounting goals are the analysis, interpretation,
and use of information.
 1-2

Objective 2

Describe accounting in qualitative

characteristics, principles,
assumptions, and constraint
according to accounting framework
and standards
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 Objectives of Financial Reporting

Qualitative Elements of
Characteristics of Financial Statements
Accounting Information

Operating Guidelines

Assumptions Principles
 Relevant Reliability

Useful financial
information

Comparability Consistency

An Introduction to Accounting 9/22/2010 13

CHARACTERISTICS OF USEFUL
INFORMATION
Generally Accepted Accounting Principles

Financial Accounting practice is governed by concepts and rules

known as Generally Accepted Accounting
Principles (GAAP).

Relevant Affects the decision of

Information its users.

Reliable Information Is trusted by

users.

Comparable Is helpful in contrasting

Information organizations.
 Objectives of Financial Reporting

Qualitative Elements of
Characteristics of Financial Statements
Accounting Information

Operating Guidelines

Assumptions Principles
 Operating guidelines are classified as
assumptions, principles, and constraints.
Assumptions provide a foundation for the accounting
process.
Principles indicate how transactions and other economic
events should be recorded.
Constraints on the accounting process allow for a relaxation
of the principles under certain circumstances.
Assumptions Principles Constraints
Monetary unit
Revenue recognition Materiality
Economic entity Matching Conservatism
Separate entity Full disclosure
Cost
Time period
Objectivity
Going concern
Dual aspect concept
 ASSUMPTIONS
USED IN ACCOUNTING
Only those transactions will be recorded which
can be measured in money terms.

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 ECONOMIC ENTITY
ASSUMPTION
Activities of the entity kept separate
and distinct from the activities of the owner
and all other economic entities.
Example: BMW activities
can be distinguished from
those of other car
manufacturers such as Mercedes.
 SEPARATE ENTITY
ASSUMPTION

For accounting purposes, entity of Owner is separate from entity of

Business
TIME PERIOD ASSUMPTION

Economic life of a business divided

into
artificial time periods.

2005 2006 2007

QTR 1 JAN FEB MAR
QTR 2 APR MAY JUN
QTR 3 JUL AUG SEPT
QTR 4 OCT NOV DEC
Reflects assumption that the business will
continue in operation long enough to carry out
its existing objectivesinstead of being closed or
sold.
Implications: depreciation and amortization
are used, plant assets recorded at cost instead
of liquidation value, items are labeled as fixed
or long-term.
 PRINCIPLES
REVENUE RECOGNITION
STUDY OBJECTIVE 5

Revenue recognition principle

dictates that revenue should be
recognized in the accounting
period in which it is earned.
When a sale is involved, revenue is
recognized at the point of sale.
 MATCHING
(EXPENSE RECOGNITION)

Expense recognition is traditionally

tied to revenue recognition.
referred to as the matching
principle
dictates that expenses be matched
with revenues in the period in which
efforts are made to generate
revenues.
 MATCHING (EXPENSE RECOGNITION)
PRINCIPLE

Unexpired costs become expenses in two ways:

1) Cost of goods
merchandise inventory becomes expensed when
the inventory is sold
2) Operating expenses
other unexpired costs through use or
consumption or through the passage of time
 FULL DISCLOSURE
PRINCIPLE
Requires that circumstances and events that
make a difference to financial statement users
be disclosed.
Compliance with the full disclosure principle
1) data in the financial statements
2) notes that accompanying the statements
Summary of significant accounting policies
usually the first note to the financial
statements
 COST PRINCIPLE

The cost principle dictates that assets be

recorded on actual cost.
Cost is used because it is both relevant and
reliable.
1) Cost is relevant because it represents a) the
price paid, b) the assets sacrificed, or c) the
commitment made at the date of
acquisition.
2) Cost is reliable because it is a) objectively
measurable, b) factual, and c) verifiable.
 Dual aspect Concept
Principles

Every transaction has at least two effects and both of these

affects should be recorded.
It is applied to Accounting Equation
Two constraints
Materiality
relates to an items impact on a firms overall
financial condition and operations.
Conservatism
dictates that when in doubt, choose the method that
will be the least likely to overstate assets and income
 1-2

Objective 3

Describe the roles of an accountant

Roles of Accountants

Financial accountants
prepare financial information
for external decision-making in
accordance with GAAP
Managerial accountants
prepare financial information
for internal decision-making
Roles of Accountants

Auditors - evaluate controls

and attest to the fairness of the
financial statements.
Accounting managers -
control all accounting activities
of a firm.
Tax specialists - develop
information that reflects tax
obligations of the firm.
Consultants - devise
specifications for the AIS.
 1-2

Objective 4

Describe the functions of

financial accounting

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Functions of Financial Accounting
1. Recording of information
2. Classification of data .
3. Making summaries
4. Dealing with financial transactions .
5. Interpreting financial information .
6. Communicating results
7. Making information more reliable .
 1-2

Objective 5

Describe the usage and the importance

of accounting information
 Information needs of management : management
needs information for planning, organizing &
controlling the activities of business. The supply of
information at appropriate time help management
in achieving the business objectives
Information needs of shareholders & Investors :
various laws have been passed under which
financial statements should be prepared in such a
way that required information is supplied to the
shareholders & creditors
Information needs of employees: accounting
information is required for deciding workers
share in profits, setting wages disputes, etc.
 Information needs of creditors : Creditors are
mainly interested in creditworthiness of the
business. They need information about liquidity
position of the company. So they will study
information concerning solvency, liquidity, &
profitability of the business.
Information Needs of Government : Govt. needs
information about sales, profits, liquidity,
dividend policy etc.The information helps the
govt. in deciding the social & economic
policies.
Accounting as an information
system

Accounting Decision
making

Data
Recording Processing of Communication
Business
of data data (as financial
activities &
(measuring (preparation and Statements & other
transactions
business storage of data Statements &
transactions reports)
Users of Accounting Information

Internal Users External Users

Those directly Those not directly
involved in involved in managing
managing and and operating an
operating an organization
organization
Users of Accounting Information
Accounting information helps users both internal and external to
make better decisions

Internal Users External Users

Directors Owner/Shareholders
Managers Creditors/ Lenders
Officers/employees Customers
Budget Officers Investors
Internal Auditors External Auditors
Brokers/Financial Analyst
Financial Advisors
 Accounting

Users with indirect financial

Users with direct interest: (customers, taxation
financial interest: authorities, financial analysts
(Present and and advisors, brokers, labor
Management: potential unions, consumer group general
(directors, officers of shareholders, public, press etc.)
the company, creditors, employees, Decisions:
managers, dept. heads suppliers) Assessing tax, protecting
and supervisors) Decisions: investors and public interest
Decisions: Share investment advising on investment
Assessing profitability, decision, credit decisions, setting economic
financial performance decisions, assessing policies, measuring social and
in terms of plans & company status and environmental protection
goals, marking plans prospects, approving programmed, negotiation labor
and policies supply decisions agreements.
 Iscash sufficient to pay bills?
What is the cost of manufacturing
each unit of product?
Can we afford to give employee
pay raises this year?
What product line is most
profitable?

Prentice Hall, Inc. 2000 45

 Is the company earning
satisfactory income?
How does the company compare
in size and profitability with
competitors?
Will the company be able to pay
its debts when they become due?

Prentice Hall, Inc. 2000 46

 Objective 5
Describe the types of business
and forms of business
organization

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 Service Businesses provide service rather than
product to customers. Example?
Merchandising business sell products they
purchase from other businesses to
customers
Examples?
Manufacturing Business change basic inputs
into products that are sold to customers
Examples?

EBF 1013
SSSA 48
Service Business Service
Les Copaque Entertainment
Malaysia Airlines System (MAS) Transportation
Maybank Corporation Financial services
Seri Malaysia Hospitality and lodging
PWC Auditing

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Merchandising Business Product
Giant General merchandise
Amazon.com Internet books, music, video
Toy R Us Toys
Pensonic Consumer electronics
Cheetah Apparel

50
Manufacturing Business Product
General Motors Corporation Cars, trucks, vans
Nokia Cell phones
Acer Personal computers
Adidas Athletic shoes and apparel
F & N Company Beverages
Samsung Stereos and televisions

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1. Services
- could be in the form of proprietorship,
partnership or corporation
2. Manufacturing
- usually in the form of corporation
3. Merchandising
- buying of goods to be sold back
53
Sole-Proprietorship

Sole proprietorship is a one-man business, owned and

managed by one person,

more than 70% of business organizations in

Malaysia are organized by proprietorships,

easy and low cost of organizing,

financial resources are limited to the owners

resources, and

commonly used by small businesses such as

hardware stores, laundries, restaurants, and grocery
shop.
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Sole-Proprietorship

Advantages
1. Ease of formation.
2. Low cost of formation.
3. No requirement for auditing by a public accountant.
4. Lower tax on profit.

Disadvantages
1. Unlimited liability of owner.
2. Difficult to obtain external finance.
3. Lack of support by external parties.
4. Transfer of ownership is difficult.

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Partnership

Partnership is a business formed by two people but

having not more than 20 partners. Professional partnership
can have a maximum of 50 members.

about 10% of business organizations in Malaysia

are organized by partnerships,

combine the skills and resources of more than one

person, and

like proprietorships, small local businesses such

as automotive repair shops, music stores, beauty
salons, and clothing stores may be organized as
partnerships.
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Partnership
Advantages
1. Ease of formation.
2. Low cost of formation.
3. Combined experience and managerial skills of partners.
4. Less government regulations (e.g.: to engage public accountant).
5. Lower tax burden (only income tax).
6. Shared control

Disadvantages
1. Limited life
2. Unlimited liability
3. Transfer of ownership is difficult
4. Difference in opinion among partners (e,g,: the extent of liability of partners)
5. Difficult to transfer ownership.
6. Difficult to raise funds for expansion and investment.
7. Changes in partnership agreement leads to partnership to be resolved.

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Limited Liability Company

combines attributes of a partnership and a

corporation in that it is organized as a corporation.

a company is an enterprise formed by two or more

persons with a maximum of 50 people for a private
limited company and no maximum limit for a public
limited company.

can elect to be taxed as a partnership

a popular alternative to a partnership

has tax and liability advantages to the owners.

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Limited Liability Company

Advantages
1. Limited liability for shareholders.
2. Ease of transferring ownership.
3. Continuous existence.
4. No mutual agency.
5. Professional management.
6. Ease of capital assembly.
7. Private limited companies may become public companies.

Disadvantages
1. High cost of formation.
2. Higher overhead on accounting and secretarial disclosure.
3. Tighter government regulation and more extensive public
disclosure.
4. Separation of ownership and control makes it difficult for
shareholders to take action on bad management group.

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 Grades are what you make of them. Not what
they make of you, unless YOU made it that
way!
End of Chapter 1