Chapter 1 2 - Acc.in Business

8/10/2019 Chapter 1 2 - Acc.in Business

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Larson, Wild, Chi apetta, Ropidah, Haslinda, Ar yati, Li ana The M cGraw-Hi ll Companies, In c., 2007

AccountingEnvironmentChapter1

(Syllabus:Chap. 1

&2)

100 Shares

$1 par value

Accounting?


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Learning Objectives

Identify users and uses ofaccountingIdentify opportunities inaccounting and related fieldsExplain the meaning ofGenerally Accepted

Accounting Principles, anddefine and apply several key

principles of accounting

Identify Professional Accounting Bodies andstandards setting in MalaysiaDefine and interpret theaccounting equation andeach of its components

Analyze businesstransactions using the

accounting equationIdentify and prepare basicfinancial statements andexplain how they interrelate


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Identifies

Records

CommunicatesRelevant

Reliable

Comparable

Importance of Accounting

Accounting is asystem that

information

that is

to help users makebetter decisions (?).


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IdentifyingBusinessActivities

RecordingBusinessActivities

CommunicatingBusinessActivities

Accounting Activities


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Users of Accounting Information

External Users

Financial accounting providesexternal users with financial

statements (only ?).

Internal Users

Managerial accounting providesinformation needs for internal

decision makers.


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Characteristics of AccountingInformation

USEFULFINANCIAL

INFORMATION

CONSISTENCY COMPARABILITY

RELEVANCE 1. Predictive value2. Feedback value3. Timely

RELIABILITY 1. Verifiable2. Faithful representation3. Neutral



Opportunities in AccountingFinancial

PreparationAnalysisAuditingRegulatory

ConsultingPlanningCriminal

investigation

ManagerialGeneral accountingCost accountingBudgetingInternal auditing

ConsultingControllerTreasurerStrategy

TaxationPreparationPlanningRegulatoryInvestigations

ConsultingEnforcementLegal servicesEstate planning

Accounting-related

LendersConsultantsAnalysts

TradersDirectorsUnderwritersPlannersAppraisers

FBI investigatorsMarket researchersSystems designers

Merger servicesBusiness valuationHuman servicesLitigation supportEntrepreneurs



Financial accounting practice is governed byconcepts and rules known as Generally Accepted

Accounting Principles (GAAP) .

Generally Accepted AccountingPrinciples

RelevantInformation

Affects the decision ofits users.

Reliable Information Is trusted byusers.

ComparableInformation

Is helpful in contrastingorganizations.



The Securities Commission is the governmentgroup that establishes reporting requirementsfor companies that issue share to the public.

Setting Accounting Principles

Financial AccountingStandards Board is the privategroup that sets both broad and

specific principles.



The 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 Assumptions

Economic Entity

The business is accounted forseparately from other businessentities, including its owner

Monetary Unit Principle Express transactions and events in

monetary, or money, units

Now FutureGoing-Concern Principle

Reflects assumption that thebusiness will continue operatinginstead of being closed or sold

Time Period The economic life of business can be

divided into artificial time period forthe purpose of financial reporting



Historical Cost Accounting information is based

on actual cost.

Revenue Recognition1. Recognize revenue when it is

earned.

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

received plus cash value of itemsreceived.

Matching Expenses are matched against

revenues, and recorded in thesame period in which the related

revenues are earned

Accounting Principles

Full Disclosure Report enough information forusers to make knowledgeabledecisions about the company



Accounting Constraints

Conservatism Income and assets be reported attheir lowest reasonable amounts (i.e.

minimizing the assets andunderstating the income) Materiality

Accountants are required toaccurately account for significant

items and transactions



Professional Accounting Bodies andStandard 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)
http://www.mia.org.my/http://www.masb.org.my/http://www.masb.org.my/http://www.mia.org.my/



Malaysian Institute of Accountant (MIA)

established under the Accountants Act 1967regulating 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)

Objectives: To promote and regulate professional and ethical

standards

To enhance competency through continuouseducation and training to meet the challenges of theglobal 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



Malaysian Institute of Certified Public Accountant (MICPA)

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 inthese areas. To preserve at all times the professional independence

of accountants in whatever capacities they may beserving.

To maintain high standards of practice and professionalconduct 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.


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Financial Reporting Federation (FRF)

Established under the Financial Reporting Act 1997(Act)Representation from all relevant parties in the

standard setting process, including preparers, users,regulators and accountancy profession.Oversight the MASB's performance, financial andfunding arrangements, and as an initial source of

views for the MASB on proposed standards andpronouncements.It has no direct responsibility with regard to standardsetting. This responsibility rests solely with the MASB.


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Business Entity Forms

Proprietorship Partnership Corporation


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Characteristics Proprietorship Partnership CorporationBusiness entity yes yes yes

Legal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yes

One owner allowed yes no yes

*

* Proprietorships and partnerships that are set up as LLCsprovide limited liability.

Characteristics of Businesses

*


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Owners of a corporation are called

shareholders (or stockholders ).

When a corporation issues only oneclass of share, we call it common

share (or capital share ).

Corporation


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End of Chapter 1


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AssetsLiabilities& Equity

Accounting Equation

Liabilities EquityAssets = +


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Land

Equipment

Buildings

Cash

Vehicles

StoreSupplies

NotesReceivable

AccountsReceivable

Resourcesowned orcontrolled

by acompany

Assets


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Owners claims

on

assetsRevenues

OwnerInvestments

OwnerWithdrawals

Expenses

Equity


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Expanded Accounting Equation

Revenues ExpensesOwnerCapital

OwnerWithdrawals

_ + _


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The accounting equation must remain inbalance after each transaction.


Transaction Analysis Equation


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Transaction Analysis

Assets = Liabilities + Equity

Cash Supplies Equipment AccountsPayable NotesPayable J. Scott,Capital(1) 20,000$ 20,000$

20,000$ -$ -$ -$ -$ 20,000$

20,000$ = 20,000$

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


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Purchased supplies paying $1,000cash.


Cash Supplies EquipmentAccountsPayable

NotesPayable

J. Scott,Capital

(1) 20,000$ 20,000$(2) (1,000) 1,000$

19,000$ 1,000$ -$ -$ -$ 20,000$

20,000$ = 20,000$


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The accounts involved are:(1) Cash (asset) (2) Equipment (asset)


Purchased equipment for $15,000cash.


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Purchased equipment for $15,000cash.



NotesPayable

J. Scott,Capital

(1) 20,000$ 20,000$(2) (1,000) 1,000$(3) (15,000) 15,000$

4,000$ 1,000$ 15,000$ -$ -$ 20,000$

20,000$ = 20,000$


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The accounts involved are:(1) Supplies (asset)(2) Equipment (asset)(3) Accounts Payable (liability)


Purchased Supplies of $200 andEquipment of $1,000 on account.


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Purchased Supplies of $200 andEquipment of $1,000 on account.



NotesPayable

J. Scott,Capital

(1) 20,000$ 20,000$(2) (1,000) 1,000$(3) (15,000) 15,000$(4) 200 1,000 1,200$

4,000$ 1,200$ 16,000$ 1,200$ -$ 20,000$

21,200$ = 21,200$


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The accounts involved are:(1) Cash (asset) (2) Notes payable (liability)


Borrowed $4,000 from 1st AmericanBank.


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Borrowed $4,000 from 1st AmericanBank.



NotesPayable

J. Scott,Capital

(1) 20,000$ 20,000$(2) (1,000) 1,000$(3) (15,000) 15,000$(4) 200 1,000 1,200$(5) 4,000 4,000$

8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$

25,200$ = 25,200$


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Cash Supplies Equipment

Accounts

Payable

Notes

Payable

J. Scott,

CapitalBal. 8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$

8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$

25,200$ = 25,200$

Transaction AnalysisThe balances so far appear below. Note that theequation is still in balance.

Now lets look at transactions involving

revenue, expenses and withdrawals.


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The accounts involved are:(1) Cash (asset) (2) Revenues (equity)


Rendered consulting servicesreceiving $3,000 cash.


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Assets = Liabilities +

Cash Supplies Equipment AccountsPayable NotesPayable J. Scott,Capital RevenueBal. 8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$(6) 3,000 3,000$

11,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$ 3,000$

28,200$ = 28,200$

Equity


Rendered consulting servicesreceiving $3,000 cash.


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The accounts involved are:(1) Cash (asset)(2) Salaries expense (equity)


Paid salaries of $800 to employees.

Remember that the balance in the salariesexpense account actually increases.

But, equity actually decreases becauseexpenses reduce equity.


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NotesPayable

J. Scott,Capital Revenue Expenses

Bal. 8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$(6) 3,000 3,000$(7) (800) (800)$

10,200$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$ 3,000$ (800)$

27,400$ = 29,000$

Equity

Remember that expenses decrease equity.

Paid salaries of $800 to employees.


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The accounts involved are:(1) Cash (asset)(2) J. Scott, Withdrawals (equity)


J. Scott withdrew $500 from thebusiness for personal use.

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

But, equity actually decreases becausewithdrawals reduce equity.


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Cash Supplies Equipment

Accounts

Payable

Notes

Payable

J. Scott,

Capital

J. Scott,

Withdrawal Revenue ExpensesBal. 8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$(6) 3,000 3,000$(7) (800) (800)$(8) (500) (500)$

9,700$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$ (500)$ 3,000$ (800)$

26,900$ = 29,500$

Equity

Remember that withdrawals decrease equity.

J. Scott withdrew $500 from thebusiness for personal use.


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Financial Statements

Lets prepare the Financial Statementsreflecting the transactions we have recorded.

1. Statement of Profit or Loss andOther Comprehensive Income

2. Statement of Owners Equity

3. Statement of FinancialPosition (or Balance Sheet)

4. Statement of Cash Flows


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Profit is thedifferencebetween

Revenuesand

Expenses.

and other comprehensive income

Revenues: Consulting revenue 3,000$Less:Expenses Salaries expense 800 Profit for the period 2,200$

Scott CompanyStatem ent of Profit or Loss

For Month Ended 31 December 2006

The Statement of Profit and Loss and OtherComprehensive Income or income statement

describes a companys revenues andexpenses along with the resulting profit orloss over a period of time due to earnings

activities.

Scott Companyf f


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The profit of$2,200

increasesScotts capital

by $2,200.

and Other Comprehensive Income

Revenues:

Consulting revenue 3,000$Less Expenses: Salaries expense 800 Profit for the period 2,200$

Statement of Profit & Loss


J. Scott, Capital, 1 Dec. 2006 - $

Add: Investment by owner 20.000 Net income 2.200 Less: Withdrawals 500 J. Scott, Capital, 31 Dec. 2006 21.700 $

Scott CompanyStatement of Owner's Equity


The Statement ofOwners Equity explains changes inequity from profit (orloss) and from owner

investments andwithdrawals for a

period of time.


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Current liabilitiesAccounts payable $1,200Notes payable 4,000Total current liabilities $5,200

Total equity and liabilities $26,900

STATEMENT OF FINANCIAL POSITION31 DECEMBER 2006

SCOTT COMPANY

SCOTT COMPANY


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Cash flows from operating activities:

Cash received from clients 3,000$Purchase of supplies (1,000) Cash paid to employees (800) Net cash provided by operating activities 1,200$

Cash flows from investing activities: Purchase of equipment (15,000)

Net cash used in investing activities (15,000) Cash flows from financing activities: Investment by owner 20,000

Borrowed at bank 4,000 Withdrawal by owner (500) Net cash provided by financing activities 23,500

Net increase in cash 9,700$Cash balance, 1 December 2006 - Cash balance, 31 December 2006 9,700$

STATEMENT OF CASH FLOWSFOR THE MONTH ENDED 31 DECEMBER 2006

SCOTT COMPANY

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

period of time .


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Documents

Chapter 1 2 - Acc.in Business