Chapter 1 - Accounting PDF

Table of contents 1 INTRODUCTION TO ACCOUNTING INTRODUCTION This topic covers de nition of accounting, users of accounting information, differe...

Table of contents 1 INTRODUCTION TO ACCOUNTING INTRODUCTION This topic covers de nition of accounting, users of accounting information, differences between bookkeeping and accounting, branches of accounting, types of business ownerships, types of business activities, types of nancial statements, professional accounting bodies in Malaysia, professional ethics in accounting and potential career in accounting. fi fi  1 Table of contents 1 LEARNING OBJECTIVES Students should be able to: 1.1 Explain the term of accounting. 1.2 Explain about the users of accounting information. 1.3 Explain the differences between bookkeeping and accounting. 1.4 Identify branches of accounting. 1.5 Identify the characteristics of three types of business ownerships. 1.6 Describe types of business activities. 1.7 Identify the elements of Financial Statement. Explain types of nancial statements. 1.8 Explain the functions of three professional accounting bodies in Malaysia. 1.9 Describe the principle of ethics in accounting profession. 1.10 Identify potential career in accounting. fi  1 Table of contents 1.1 DEFINITION OF ACCOUNTING Process of identifying, recording, classifying, summarising, communicating and interpreting the results of business or economic transactions to users in order for them to make better decisions. 1.2 USERS OF ACCOUNTING INFORMATION Internal Users Manager/Management Making routine decisions and needs information in planning, organising, and controlling operations. Board of Director / As owner, they are interested in the pro ts earned from their owner investment, the nancial stability and the growth of their business. Internal Auditor To verify that management system and the nancial system of a company complying with accounting standards and to provide recommendations to the management based on analysis and assessments of accounting information. External Users Existing/current investor Deciding whether to buy more shares or dispose the shares. Potential investors Assessing the company’s pro tability and the amount of dividends paid out to shareholders. Creditors Supplier Assessing the ability of a business to pay Accounts Payable. Bankers Assessing the ability of a business to repay loan. Government agencies Determining the amount of tax to be collected. Inland Revenue Board of Malaysia (Lembaga Hasil Dalam Negeri) Customers Interested in whether continue to support its product lines. Labour unions Want to know whether the owners have the ability to pay increased wages and bene ts. Malaysian Trades Union Congress 1-1 fi fi fi fi fi  1 Table of contents 1.3 DIFFERENCES BETWEEN BOOKKEEPING AND ACCOUNTING Bookkeeping Accounting De nition Bookkeeping is a part of Accounting is an information system. accounting. Process of recording, classifying, Process of recording, in summarising, reporting, analysing and chronological order, the daily interpreting the nancial condition and transactions of a business entity. performance of a business. Scope The process involved is Accounting is more extensive and preliminary work in the accounting. thorough work beyond bookkeeping. Person in Accounting Clerk Accountant charge 1.4 BRANCHES OF ACCOUNTING Branches of accounting Explanation Financial Accounting Financial accounting is the eld of accounting that provides economic and nancial information for external and internal users. Management Accounting Managerial accounting provides economic and nancial information for internal users. Cost Accounting The process of operating cost information which will help manager in identifying, measuring and controlling expenditure. Auditing The activity of examining the accounts to ensure that they are accurate and fair as follow under Companies’ Act 1965. Public Sector Accounting The process of accounting for public assets and money. Preparing accounting information is mandatory. Taxation Tax accountants are responsible for calculating individual or business tax for the purpose of tax assessments. Forensic Accounting The latest branch of accounting for investigative purposes when misdeeds and illegal acts relating to accounting, either directly or indirectly, occur. Branches of accounting such as nancial accounting, management accounting, cost accounting, auditing, public sector accounting, taxation and forensic accounting. 1-2 fi fi fi fi fi fi  1 Table of contents 1.5 TYPES OF BUSINESS OWNERSHIP Differences Sole Partnership Company Proprietorship 1. Number of owner 1 2 – 20 2 – unlimited 2. Capital source Proprietor Partners Shareholders 3. Life of Limited Limited Inde nite organization 4. Liabilities Unlimited Unlimited Limited 5. Law Businesses Act 1956 Partnership Act 1961 Companies Act and Regulation 1965 6. Distribution of Wholly owned by Among partners Allocated pro ts/losses proprietor according to shares of capital/ equity ratio 1.6 TYPES OF BUSINESS ACTIVITIES Services Manufacturing Merchandising Provide services rather Change basic inputs into Purchase inventories from than products to products that are sold to other businesses (such as customers. individual customers. manufacturers) and resell Example: Maybank, Example: Gardenia, Nestle the inventories to individual Maraliner, Keretapi Tanah customers. Melayu. Example: Giant, Mydin, Econsave. 1.7 TYPES OF FINANCIAL STATEMENTS Refer to MFRS 101 Statement of Comprehensive Income and Statement of Pro t or Loss (including tax) Reports the nancial performance of an entity over a speci c accounting period. Contains information on revenues and expenses including the net pro t or loss of the business entity. There are several formats in reporting the revenue and expenses depending on the nature of business runs by the entity. 1-3 fi fi fi fi fi fi  1 Table of contents Statement of Changes in Equity Reports how the owner’s equity has changed over the reporting period. It reports how opening capital has increased through net income, and how it decreased through net losses and drawings. Statement of Financial Position Also known as the balance sheet. It contains of three main components: 1. Assets 2. Liabilities 3. Owner’s equity Statement of Cash Flows Also known as cash ows statement, presents the movement in cash ows over the period. It shows the in- ow and out- ows of cash of an organisation according to three main activities which are operating, investing and nancing. 1.8 PROFESSIONAL ACCOUNTING BODIES IN MALAYSIA Malaysian Accounting Standards Board (MASB) Established under the Financial Reporting Act 1997 The main functions and authority : 1. Issue new accounting standards [Financial Reporting Standards (FRS) 2. Review, revise or adopt existing accounting standards. 3. Issue statements of principles for nancial reporting. 4. Sponsor or undertake development of possible accounting standards. 5. Develop a conceptual framework for the purpose of evaluating proposed accounting standards. Malaysian Institute of Accountants (MIA) Established under the Accountants Act (1967) The main functions of MIA are to: 1. Determine the quali cations for members. 2. Provide training and continuing professional education to existing and potential practitioners. 3. Control the accounting practice in Malaysia. 1-4 fl fl fi fi fl fi fl  1 Table of contents Malaysian Institute of Certi ed Public Accountants (MICPA) The Malaysian Institute of Certi ed Public Accountants (MICPA) was formed as a professional body in 1958. The main functions of MICPA are to : 1. Advance the theory and practice of accountancy in all aspects. 2. Recruit, educate, train and assess a body of members skilled in these areas. 3. Maintain high standards of practice and professional conduct by all its members. 4. Develop the accounting profession. 1.9 PROFESSIONAL ETHIC IN ACCOUNTING Fundamental Principle of Professional ethics: 1. Integrity - Accountants must not have any con ict of interest, which can in uence their actions and honest. 2. Objectivity - Not allowing a con ict of interest or prejudice to in uence an auditor’s judgement 3. Professional competence and due care - The requirement to attain and maintain knowledge and skill at a level required to perform service. Also the need to act diligently and make decisions with thought and care. 4. Con dentiality - Not disclosing sensitive nancial information or trade secrets for personal gain or for the gain of others. 5. Professional Behaviour - Complying with the rules and maintaining the professionalism of the audit rm. 1.10 POTENTIAL CAREER IN ACCOUNTING Public Accounting - career in auditing, taxation, and management consulting serving the general public Private / Corporate Accounting - careers in industry working in cost accounting, budgeting, accounting information systems and taxation Governmental Accounting - careers with the IRS (Internal Revenue Service), public colleges and universities and in state and local governments. Forensic Accounting - uses accounting, auditing and investigative skills to conduct investigations into theft and fraud 1-5 fi fi fi fi fl fi fl fl fl