Accounting Fundamentals and Standards

Introduction and Financial Regulatory (Evolution of Double-Entry Bookkeeping)

• Accounting history is thousands of years old, tracing back to ancient civilizations using clay tokens to represent goods.
• Double-entry bookkeeping emerged in the ancient world due to factors such as the invention of writing, numeral systems, and the rise of trade and capital.
• A.C. Littleton (1956) identified seven factors leading to double-entry bookkeeping: the art of writing, arithmetic, private property, money, commerce, capital, and credit.
• Double-entry bookkeeping is primarily about balancing debits and credits in accounts, maintaining the fundamental accounting equation (Assets = Liabilities + Equity).
• Luca Pacioli (1445-1510) is credited with significantly contributing to double-entry bookkeeping.
• His book "Summa de Arithmetica Geometrica, Proportioni et Proportionalita" published in Venice.
• His work was based on practices in Venice, Florence, and Milan (13th century) and described the double-entry system's debit and credit methods.
• Pacioli emphasized that every entry should have a corresponding, equal entry, and the need for periodic financial statements for managing resources.
• Accounting records exist from ancient times (3600 years ago), including records of payments, receipts, and tax collections.
• Accounting during the post-Islamic era evolved to "Five Books"

Development of Accounting Principles (In the USA)

• Management Contribution Phase (1900-1933): Focus on pragmatic solutions for minimizing taxes, smoothing earnings, and establishing product costs.
• Institution Contribution Phase (1933-1959): Rise of the Securities and Exchange Commission (SEC), fostering a need for standardized accounting principles. The Committee on Accounting Procedures (CAP) issued pronouncements.
• Professional Contribution Phase (1959-1973): The Accounting Principles Board (APB) and the Financial Accounting Standards Board (FASB) were created to develop and standardize accounting principles.
• Politicization Phase (1973-Present): Accounting standards are subject to political influence as these rules affect economic behaviors and interest group politics.

Accounting and its Role in Capitalism

• Capitalism emerged in the late 18th century, partially due to the neglect of middle-class officials and favoritism towards merchants and trade guilds.

• Double-entry bookkeeping facilitated economic expansion: shifting focus from substance to profit; empowering entrepreneurs through integrated systems; assuring accuracy and order with its duality (double entry) technique; separating business and personal assets to establish the enterprise's autonomous existence.

• Accounting in relation to capitalism is seen as an economic and political system in which trade and industry are controlled by private owners for profit.

Relevance of Accounting History

• Accounting history provides insights into the origins of double-entry bookkeeping, the evolution of modern accounting, the formation of accounting problems over time, historical contexts, and past methodologies to assist present practices.
• Historical developments can offer context for decisions in accounting policy, practice, and pedagogy.

Limitations of Accounting History

• Historical inquiry is conditional and not definitive; information may be incomplete or reveal only probable factors rather than certain causes, subject to judgmental processes constrained by time.

Development of Accounting in Malaysia

• Companies' financial regulations existed prior to 1957, under the Companies Ordinance (etc).
• Malaysian Institute of Certified Public Accountants (MICPA) and Malaysian Institute of Accountant (MIA) were formed.
• Companies Act 1965 was established.
• Financial Reporting Foundation (FRF) and Malaysian Accounting Standard Board (MASB).
• Convergence to International Financial Reporting Standards (IFRS) in 2012.

Accounting Theory

• Accounting theory's main functions and objectives: explanation and evaluation of accounting principles, problem-solving, forecasting future impacts of events, investigating and explaining events, prediction and justification of the profession, and evaluation of current practice and guidance for future practice.
• Different approaches to accounting theory: inductive, deductive, ethical, sociological, economic, eclectic, and more..
• Accounting theories evolved through periods including: a pre-theory period (refined existing practice); a general scientific period (explaining existing practice); a normative period (ideal practice); and a positive era (explaining and predicting accounting practices).

Formulation and Verification of Accounting Theory

• Theory must have semantic (relating to real world), syntactic (logical structures), and pragmatic (affecting people's behavior) elements.
• Pragmatic aspects of accounting theory, focusing on observable accountant behavior in specific situations or user's responses to the accounting output and their use of information.
• Traditional historical cost accounting (HCA) as interpreted within syntactic theory, with limitations.
• Normative accounting theory - prescribing how accountants should behave
• Positive accounting theory (PAT) - descriptive (explaining and predicting).

Regulatory Approach of Accounting Theory

• Regulation is seen as prescribed rules by an authoritative direction.
• Different theories of regulation exist, including public interest theory, capture theory, economic interest group theory, and the bushfire theory.
• Free-market perspective - where regulation isn't necessary given market forces and other mechanisms to motivate firms to provide useful information.
• Information asymmetry, market failures, power disparity and uneven distribution of power within markets highlight the importance of regulation.
• Accounting regulation, a political process that is affected by the interplay of lobbying by interest groups and various stakeholders.

Malaysia Reporting Regime

• Regulatory bodies like the Financial Reporting Foundation (FRF), Malaysian Accounting Standards Board (MASB), Companies Commission of Malaysia (SSM), Securities Commission Malaysia (SC), Bank Negara Malaysia (BNM), and Bursa Malaysia each play a specific role.
• The interaction of these bodies and their enforcement mechanisms ensure compliance to accounting standards.
• Disclosure requirements, corporate governance mechanisms, and their enforcement ensure investor confidence and market efficiency.

Conceptual Framework Discussion

• Conceptual Framework sets out fundamental principles to guide standard setting in financial reporting and promotes internationally comparable and high-quality financial information.
• A practical tool that assists in developing standards, accounting policies, and user understanding.
• Key components include objectives, qualitative characteristics of information, cost constraint, reporting entity, elements of financial statements, recognition measurement and disclosure. Different measurement bases, such as historical cost and current value measurement bases (fair value, value in use), are discussed.
• Historical cost accounting, current cost accounting (CCA) and Exit Price Accounting (EPA) methods and criticisms of each method are considered, with emphasis on practicality and decision-making support.

Explore essential concepts and techniques in accounting with this quiz. Test your knowledge on the primary functions of accounting, notable techniques used in financial concealment, and the importance of established standards influenced by stakeholders. Ideal for accounting students and professionals alike.