FAG1010 Financial Accounting (University of Malaya) PDF

FAG1010 FINANCIAL ACCOUNTING At the end of the course, students are able to: 1. Identify the needs of accounting for individuals and business. 2. Apply the principles of basic financial accounting in business entities. 3. Prepare statement of profit and loss and statement of financial positio...

FAG1010 FINANCIAL ACCOUNTING At the end of the course, students are able to: 1. Identify the needs of accounting for individuals and business. 2. Apply the principles of basic financial accounting in business entities. 3. Prepare statement of profit and loss and statement of financial position in business. 4. Demonstrate skills in recording and preparing accounting statements in business.  Topic 1 Introduction – The Context and Purposes of Financial Reporting Learning Outcomes After studying this chapter, you should be able to: ❑ Explain the meaning of accounting ❑ Distinguish between bookkeeping and accounting ❑ Identify the users of accounting information ❑ Explain the branches of accounting ❑ Explain the roles of accountants ❑ Discuss the forms of business organisations ❑ Explain different types of business operations  INTRODUCTION ❖ Accounting - important to individuals, businessmen and companies - deals with financial information - helps users to make economic decisions ❖ Firms rely on accounting & financial information - to decide on which investments to make; or - whether to increase the number of employees; or - whether to issue new shares; and - to establish the actual profit or loss they make HISTORY AND DEVELOPMENT OF ACCOUNTING Basic single-entry bookkeeping system was used in the beginning. Luca Pacioli was the first to document the double-entry bookkeeping system of accounting which earned him the title ‘Father of Accounting’. Cost accounting was introduced in the Industrial Revolution. The need for proper reporting of funds led to another specialised area of accounting—auditing. DEFINITIONS OF ACCOUNTING Measuring Involves the translation of economic events or transactions into financial terms, i.e. in Ringgit and sen. However, this measurement function has its limitations because some events, such as a very skilful and experienced employee who is invaluable to a particular company, are not recorded in the company's books of accounts. The fact that the employee is an asset to the company is not taken into consideration because it lacks measurability in financial terms. Recording Recording is the stage in which the business transactions are recorded, in order to provide a permanent history of the financial activities of the organisation. Recording consists of keeping a chronological diary of measured events in an orderly and systematic manner. Here, the accountant classifies and summarises these events in accounting books. Communicating The final stage involves communicating the financial information to various parties through ‘financial statements’. Financial statements are the accounting reports that are prepared to communicate financial information to various interested parties, such as the shareholders and management of a business entity. BOOKKEEPING VS ACCOUNTING - Bookkeeping involves only the basic level of accounting, i.e. the identifying and recording of economic events, and therefore is only a part of the accounting process. - Summary of differences between bookkeeping and accounting: Bookkeeping Accounting Scope Limited scope, involving only the earlier Wider scope, including bookkeeping stages of the accounting process, that is (identifying and recording) plus the identifying and recording of analysing, interpreting, communicating, transactions in financial terms. planning and making decisions. Purpose To provide financial information to enable To produce financial statements to the accountant to proceed with the enable users and interested parties to remaining stages of the accounting make comparisons, plans, forecasts and process. decisions. USERS OF ACCOUNTING INFORMATION Internal users - Internal users are the parties inside a company who manage the company and work for the business. - Managers use accounting information to set goals for their organisations, evaluate and monitor progress, and to take corrective action if necessary. - Employees use financial information to see if the company is profitable and whether they should expect a salary increment. External users - External users are the parties outside the business who have either a present or a potential interest in the business, direct or indirect. - External users with direct interest include: Investors/Owners evaluate the wisdom of buying, holding or selling their financial interests in the company Creditors/Bankers evaluate the risks of granting credit or lending money to businesses - ❑ External users with indirect interest include: – Government agencies The Inland Revenue Board Securities Commissions Malaysia and Bursa Malaysia – Customers: to know if the business will continue to serve & honour warranties given on their products – Economic planners: to analyse & forecast economic activities BRANCHES OF ACCOUNTING ❑ Financial Accounting – The original form of accounting, related to the preparation of financial statements for the use of external users – The main objective is to determine the profit or loss made by a business during the year ❑ Cost Accounting – The main function is to provide information to determine the total cost of the product or service – The objective is to help in cost control ❑ Management Accounting – Prepared by ‘management accountants’ for the management—to enable it to perform its functions – The management uses the financial accounting information to assist in making policies and decisions, and controlling various business activities and departments Responsibilities include: – Designing and evaluating business processes – Preparing budgets and forecasts – Preparing trend and ratio analysis - Auditing - Examination & verification of company’s accounts - Two types of auditors: External: independent audit firms that examine company’s accounts; give an opinion on whether its financial statements conform to accounting standards, and present a true and fair view of its financial performance & position Internal: company’s own accountant to evaluate its performance & operations; make suggestions for continuous improvement ❑ Taxation – Tax accountants use financial statements to compute the company’s taxes payable, and prepare & file tax returns forms and documentation ❑ Forensic Accounting (Investigative Accounting) – A new branch of accounting which applies accounting, auditing and investigative skills to detect financial wrongdoing and fraud  ROLES OF ACCOUNTANTS ❑ Accountants prepare annual reports & financial statements for planning & decision-making and advise on taxation & investment opportunities; – prepare, analyse & review budgets – establish, maintain, coordinate and implement accounting system & control procedures ❑ Under the Accountants Act 1967, no one can practice as an accountant unless he is registered as a member of the Malaysian Institute of Accountants (MIA).  FORMS OF BUSINESS ORGANISATIONS 1. Sole proprietorship 2. Partnership 3. Company  Proprietorship or Sole Partnership Company Trader Ownership Owned by a single person Owned by at least two A BHD company (Public Listed persons, but not Company) has to have a minimum of exceeding 20 partners two shareholders while the maximum number is unlimited; a SDN BHD company (Private Limited Company) can have a minimum of two shareholders and a maximum of 50. Management Managed by the owner of Managed by partners Managed by the company's Board of the business Directors Liability Unlimited liability Unlimited liability Limited liability - The owner is personally - Partners are jointly and - The shareholders' liability is limited liable for all debts of the severally liable for all to their investment in the company business debts of the partnership  TYPES OF BUSINESS OPERATIONS ❑ Service – Provides services rather than sells products or goods; e.g. telecommunication & transportation ❑ Merchandising/Trading – Sells products or goods that are ready for sale; e.g. grocery stores, hardware supply stores ❑ Manufacturing – Converts raw materials, labour and overheads into finished products or goods  Discussion Questions One of your school friends, Wahyu, has arranged a meet up with you about his plan to open up a business. You have discussed many issues with him including the most appropriate form of business. He mentioned to you that one of his close friends, Camelia, had her accountant set up for her a company, and it has been a disaster from the start. Camelia has been constantly getting calls from the tax people to provide them with information. She has to pay her accountant every year to provide information to the Registrar of Companies. The accountant has countless time mentioned to Camelia that it was better for her to set up a company rather than a sole trader but Camelia thinks that she has been given bad advice’. What would be your advice to Wahyu on the pros and cons of setting up a limited company? THANK YOU