Mujahid Ali Chapter 1 Accounting In Business

Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2005

Accounting in Business

Chapter

11


Learning ObjectivesLearning Objectives

Identify users and uses of accounting

Identify opportunities in accounting and related fields

Explain he meaning of generally accepted accounting principles, and define and apply several key principles of accounting

Identify professional accounting bodies and standards setting in Malaysia

Define and interpret the accounting equation and each of its components

Analyze business transactions using the accounting equation

Identify and prepare basic financial statements and explain how they interrelate


IdentifiesIdentifies

RecordsRecords

CommunicatesCommunicatesRelevantRelevant

ReliableReliable

ComparableComparable

Importance of AccountingImportance of Accounting

AccountingAccountingis a

system that

information

that is

to help users make better decisions.

to help users make better decisions.


Identifying Business Activities

Recording Business Activities

Communicating Business Activities

Accounting ActivitiesAccounting Activities


Users of Accounting InformationUsers of Accounting Information

External Users

•Lenders

•Shareholders

•Governments

•Consumer Groups

•External Auditors

•Customers

Internal Users

•Managers

•Officers

•Internal Auditors

•Sales Staff

•Budget Officers

•Controllers


Users of Accounting InformationUsers of Accounting Information

External Users

Financial accounting provides external users with financial

statements.

Internal Users

Managerial accounting provides information needs for internal

decision makers.


Characteristics of Accounting Information

Characteristics of Accounting Information

USEFUL FINANCIAL

INFORMATION

CONSISTENCYCOMPARABILITY

RELEVANCE1. Predictive value2. Feedback value3. Timely

RELIABILITY1. Verifiable2. Faithful representation3. Neutral


Opportunities in AccountingOpportunities in Accounting

FinancialFinancial

•Preparation•Analysis•Auditing•Regulatory•Consulting•Planning•Criminal investigation

•Preparation•Analysis•Auditing•Regulatory•Consulting•Planning•Criminal investigation

ManagerialManagerial

•General accounting •Cost accounting•Budgeting•Internal auditing•Consulting•Controller•Treasurer•Strategy

•General accounting •Cost accounting•Budgeting•Internal auditing•Consulting•Controller•Treasurer•Strategy

TaxationTaxation

•Preparation•Planning•Regulatory•Investigations•Consulting•Enforcement•Legal services•Estate planning

•Preparation•Planning•Regulatory•Investigations•Consulting•Enforcement•Legal services•Estate planning

Accounting-related

Accounting-related

•Lenders•Consultants•Analysts•Traders•Directors•Underwriters•Planners•Appraisers

•Lenders•Consultants•Analysts•Traders•Directors•Underwriters•Planners•Appraisers

•FBI investigators•Market researchers•Systems designers•Merger services•Business valuation•Human services•Litigation support•Entrepreneurs

•FBI investigators•Market researchers•Systems designers•Merger services•Business valuation•Human services•Litigation support•Entrepreneurs


Financial accounting practice is governed by concepts and rules known as Generally Accepted

Accounting Principles (GAAP).

Financial accounting practice is governed by concepts and rules known as Generally Accepted

Accounting Principles (GAAP).

Generally Accepted Accounting Principles

Generally Accepted Accounting Principles

Relevant Information

Relevant Information

Affects the decision of its users.

Affects the decision of its users.

Reliable InformationReliable Information Is trusted by users.

Is trusted by users.

Comparable Information

Comparable Information

Is helpful in contrasting organizations.

Is helpful in contrasting organizations.


The Securities Commission is the government group that establishes reporting requirements for companies that issue share to the public.

The Securities Commission is the government group that establishes reporting requirements for companies that issue share to the public.

Setting Accounting PrinciplesSetting Accounting Principles

Financial Accounting Standards Board is the private group that sets both broad and

specific principles.

Financial Accounting Standards Board is the private group that sets both broad and

specific principles.


The Operating Guidelines of AccountingThe Operating Guidelines of Accounting

ASSUMPTIONS PRINCIPLES CONSTRAINTS

Economic entity Historical costs Conservatism

Monetary unit Revenue recognition Materiality

Going concern Matching

Time period Full disclosure


Accounting AssumptionsAccounting Assumptions

Economic EntityThe business is accounted for separately from other business

entities, including its owner

Monetary Unit PrincipleExpress transactions and events in

monetary, or money, units

Now Future

Going-Concern PrincipleReflects assumption that the

business will continue operating instead of being closed or sold

Time PeriodThe economic life of business can be divided into artificial time period for the purpose of financial reporting


Historical Cost Accounting information is based

on actual cost.

Revenue Recognition 1. Recognize revenue when it is

earned.2. Proceeds need not be in cash.3. Measure revenue by cash

received plus cash value of items received.

MatchingExpenses are matched against

revenues, and recorded in the same period in which the related

revenues are earned

Accounting PrinciplesAccounting Principles

Full DisclosureReport enough information for users to make knowledgeable decisions about the company


Accounting ConstraintsAccounting Constraints

ConservatismIncome and assets be reported at

their lowest reasonable amounts (i.e. minimizing the assets and understating the income) Materiality

Accountants are required to accurately account for significant

items and transactions


Professional Accounting Bodies and Standard Setting in Malaysia

Professional Accounting Bodies and Standard Setting in Malaysia

Malaysian Institute of Accountant (MIA) http://www.mia.org.my

Malaysian Institute of Certified Public Accountant (MICPA)

Malaysian Accounting Standards Board (MASB) http://www.masb.org.my

Financial Reporting Foundation (FRF)


Malaysian Institute of Accountant (MIA)Malaysian Institute of Accountant (MIA)

established under the Accountants Act 1967 regulating the accounting profession. play a significant role in the development and

advancement of accounting profession globally. Its membership in such bodies include the:

• Asean Federation of Accountants (AFA) • Confederation of Asian and Pacific Accountants

(CAPA) • International Federation of Accountants (IFAC) • Intergovernmental Working Group of Experts on

International Standards of Accounting and Reporting (ISAR)


Malaysian Institute of Accountant (MIA)Malaysian Institute of Accountant (MIA)

Objectives:

• To promote and regulate professional and ethical standards

• To enhance competency through continuous education and training to meet the challenges of the global economy

• To enhance the status of members

• To lead research and development for the enhancement of the profession

• To inculcate a high sense of social responsibility




Objectives: • To advance the theory and practice of accountancy in

all its aspects. • To recruit, educate, train and assess by means of

examination or otherwise a body of members skilled in these areas.

• To preserve at all times the professional independence of accountants in whatever capacities they may be serving.

• To maintain high standards of practice and professional conduct by all its members.

• To do all such things as may advance the profession of accountancy in relation to public practice, industry, commerce, education and the public service.


Malaysian Accounting Standards Board (MASB)

Malaysian Accounting Standards Board (MASB)

established under the Financial Reporting Act 1997 (the Act) as an independent authority to develop and issue accounting and financial reporting standards in Malaysia.

Working with FRF to make up the new framework for financial reporting in Malaysia, with representation from all relevant parties in the standard-setting process, including preparers, users, regulators and the accountancy profession.


Financial Reporting Federation (FRF)Financial Reporting Federation (FRF)

established under the Financial Reporting Act 1997 (Act), comprises representation from all relevant parties in the standard setting process, including preparers, users, regulators and accountancy profession.

oversight the MASB's performance, financial and funding arrangements, and as an initial source of views for the MASB on proposed standards and pronouncements. It has no direct responsibility with regard to standard setting. This responsibility rests solely with the MASB.


Business Entity FormsBusiness Entity Forms

ProprietorshipProprietorship PartnershipPartnership CorporationCorporation


Characteristics Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes

Characteristics Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes

*

* Proprietorships and partnerships that are set up as LLC’s provide limited liability.

* Proprietorships and partnerships that are set up as LLC’s provide limited liability.

Characteristics of BusinessesCharacteristics of Businesses

*


Owners of a corporation are called shareholders (or stockholders).

When a corporation issues only one class of share, we call it

common share (or capital share).

CorporationCorporation


AssetsLiabilities & Equity

Accounting EquationAccounting Equation

LiabilitiesLiabilities EquityEquityAssetsAssets = +


LandLand

EquipmentEquipment

BuildingsBuildings

CashCash

VehiclesVehicles

Store Supplies

Store Supplies

Notes Receivable

Notes Receivable

Accounts Receivable

Accounts Receivable

Resources owned or controlled

by a company

Resources owned or controlled

by a company

AssetsAssets


Taxes Payable

Taxes Payable

Wages Payable

Wages Payable

Notes Payable

Notes Payable

Accounts Payable

Accounts Payable

Creditors’ claims on

assets

Creditors’ claims on

assets

LiabilitiesLiabilities


Owner’sclaims

on assets

Owner’sclaims

on assets

RevenuesRevenues

Owner Investments

Owner Investments

Owner Withdrawals

Owner Withdrawals

ExpensesExpenses

EquityEquity



Expanded Accounting EquationExpanded Accounting Equation

RevenuesRevenues ExpensesExpensesOwner CapitalOwner Capital

Owner Withdrawals

Owner Withdrawals

_ + _


The accounting equation must remain in balance after each transaction.


Transaction Analysis EquationTransaction Analysis Equation


The accounts involved are:

(1) Cash (asset)

(2) J. Scott, Capital (equity)

J. Scott, the owner, contributed $20,000 cash to start the business.

Transaction AnalysisTransaction Analysis



J. Scott, the owner, contributed $20,000 cash to start the business.



(1) Cash (asset)

(2) Supplies (asset)


Purchased supplies paying $1,000 cash.



Purchased supplies paying $1,000 cash.



(1) Cash (asset)

(2) Equipment (asset)


Purchased equipment for $15,000 cash.



Purchased equipment for $15,000 cash.



(1) Supplies (asset)

(2) Equipment (asset)

(3) Accounts Payable (liability)

Transaction AnalysisTransaction AnalysisPurchased Supplies of $200 and Equipment of $1,000 on account.


Transaction AnalysisTransaction AnalysisPurchased Supplies of $200 and Equipment of $1,000 on account.



(1) Cash (asset)

(2) Notes payable (liability)


Borrowed $4,000 from 1st American Bank.



Borrowed $4,000 from 1st American Bank.


Transaction AnalysisTransaction AnalysisThe balances so far appear below. Note that the

Balance Sheet Equation is still in balance.

Now let’s look at transactions involving revenue, expenses and withdrawals.



(1) Cash (asset)

(2) Revenues (equity)

Transaction AnalysisTransaction AnalysisRendered consulting services

receiving $3,000 cash.


Transaction AnalysisTransaction AnalysisRendered consulting services

receiving $3,000 cash.



(1) Cash (asset)

(2) Salaries expense (equity)


Paid salaries of $800 to employees.

Remember that the balance in the salaries expense account actually increases.

But, equity actually decreases because expenses reduce equity.



Remember that expenses decrease equity.

Paid salaries of $800 to employees.



(1) Cash (asset)

(2) J. Scott, Withdrawals (equity)

Transaction AnalysisTransaction AnalysisJ. Scott withdrew $500 from the

business for personal use.

Remember that the balance in the J. Scott, Withdrawals account actually increases.

But, equity actually decreases because withdrawals reduce equity.



Remember that withdrawals decrease equity.

J. Scott withdrew $500 from the business for personal use.


Financial StatementsFinancial StatementsLet’s prepare the Financial Statements

reflecting the transactions we have recorded.

1. Income Statement

2. Statement of Owner’s Equity

3. Balance Sheet

4. Statement of Cash Flows


Net income is the difference between

Revenues and Expenses.

The income statement describes a company’s revenues and expenses

along with the resulting net income or loss over a period of time due to

earnings activities.


The net income of $2,200 increases

Scott’s capital by $2,200.

The Statement of Owner’s Equity

explains changes in equity from net

income (or net loss) and from owner investments and withdrawals for a

period of time.


The Balance Sheet

describes a company’s

financial position at a point in time.

The Balance Sheet

describes a company’s

financial position at a point in time.

Owner’s Equity in Balance Sheet


From Statement of Owner’s Equity


The Statement of Cash Flows identifies cash inflows and cash outflows over a

period of time.


End of Chapter 1End of Chapter 1