FAR110 Financial Accounting 1 Topic 1 - Copy PDF

FAR110 FINANCIAL ACCOUNTING 1 TOPIC 1: INTRODUCTION TO ACCOUNTING  TOPIC OUTLINE 1. Definition of accounting 2. Three basic activities 3. Objective of financial reporting 4. Uses and Users of Financial Information 5. Qualitative characteristics of accounting information 6...

FAR110 FINANCIAL ACCOUNTING 1 TOPIC 1: INTRODUCTION TO ACCOUNTING  TOPIC OUTLINE 1. Definition of accounting 2. Three basic activities 3. Objective of financial reporting 4. Uses and Users of Financial Information 5. Qualitative characteristics of accounting information 6. The building blocks of accounting 7. Types business entities DEFINITION OF ACCOUNTING The process of classifying, recording and summarizing of transactions and business events in monetary terms, and interpreting the results to interested parties (users of financial statements) to assist them in decision making. Classifying + Recording + Summarizing + Interpreting = Accounting THREE BASIC ACTIVITIES Identification of economic event Business transactions/ economic transactions are identified properly Recording (including classifying and summarizing) Accounting data are classified according to certain categories The accounting data for a particular period is reported and summarized in total amount Communication of accounting report The information collected and recorded will be communicated to interested users through financial statements The users will interpret and analyse the information for their use OBJECTIVES OF FINANCIAL REPORTING To provide financial information (through financial statements) to the primary users (owners, existing investors, potential investors, lenders/creditors) for decision making To provide information about entity’s financial performance & financial position To provide information to evaluate the stewardship of the entity’s management USERS AND USES OF ACCOUNTING INFORMATION Users of Accounting information Internal users External users Those who are from within Those who from outside the business organization the organization and have and who use the no involvement in the information to run the business operation and business and use the decisions information to make Individuals or business decision organizations who require the information to assist them in making decision for current/future interest USERS AND USES OF ACCOUNTING INFORMATION Internal Users Uses Management (Examples: Managers, Involve in managing the business such as to Account Officers, Board of Directors, plan, organize, control and evaluate the Chief Executive Officers and other business operations and performance decision makers) Financial managers To decide on the investment decision and evaluating the business ability to pay dividends and debts Owners and partners To evaluate the performance of the business for future planning. Marketing managers To determine on the policies and prices of products to be marketed. Employees/Human resource managers To assess the ability of the business to provide good remuneration, retirement benefits, employment opportunities and job security. USERS AND USES OF ACCOUNTING INFORMATION External Users Uses Lenders (such as To evaluate the ability of the business to repay the debts suppliers/creditors and bankers) or loans Investors To make decisions to buy, hold or sell ownership or shares of the business Government bodies and To know if the company is operating within prescribed tax authorities rules and reporting in accordance with regulatory requirements. Example: Inland Revenue Board Malaysia uses the information to determine the appropriateness of tax paid by business Malaysian Trades Union Congress uses the information to negotiate and improve workers’ economic interest and welfare QUALITATIVE CHARACTERISTIC OF ACCOUNTING INFORMATION Characteristics Details Relevance The information can influence the users decision making The information should be able to evaluate the past, present and future events that can be used to predict future performance Faithful Information provided reflects the phenomena that it suppose to representation represent Information must be free from errors or misstatement, unbiased and complete. Comparability Information provided can be used as comparison with the prior year’s performance or financial position or with other businesses. Verifiability Although the information is provided by different sources, the information is reliable and provide similar information Timeliness Information is reported timely and updated Understandability The information provides have to be understandable to users. Accounting concepts ECONOMIC ENTITY CONCEPT A business is considered separate entity The business entity is therefore considered to be distinct from its owners for the purpose of accounting @ a unit by itself. Items recorded in buss books are transaction affecting the business only. E.g: one of the owner transfer his personal assets to the business for business use. As a result that assets are now consider to be the property of the business (business view point) & investment (owner’s view point). Accounting concepts MONEY MEASUREMENT/ MONETARY CONCEPT Every recorded event or transaction is measured in terms of monetary value (example RM, Yen, Rupiah, Dollar), with the assumption that the currency is stable over time If cannot be expressed in terms of money is not recorded in the accounting books Assumption: Money – common denominator Monetary units – appropriate basis for acctg measurement & analysis. Monetary units – most effective means of expressing to interested parties changes in capital & exchanges of goods & services Accounting concepts GOING CONCERN CONCEPT Business is assumed to have an indefinite life (presumed to be healthy and likely to continue in business for the foreseeable future) unless there is going to be liquidated in the near future. It is made on the basis of long-term considerations Accounting concepts ACCRUAL-BASED ACCOUNTING/ACCRUAL CONCEPT CONCEPT income and expense must be recognized in the accounting periods to which they relate rather than on cash basis. Income must be recorded in the accounting period in which it is earned. Therefore, accrued income must be recognized in the accounting period. Expenses, on the other hand, must be recorded in the accounting period in which they are incurred. Therefore, accrued expense must be recognized in the accounting period in which it occurs rather than in the following period in which it will be paid. Reflects the actual measures of profitability Accounting concepts NEUTRALITY Information must be free from bias to be reliable. Neutrality will lost if the financial statements are prepared to influence users to make judgments or decision in order to achieve predetermined outcome. Information must reflect the picture of entity Accounting concepts MATERIALITY The degree of an omission or misstatement of the accounting information that may mislead the users of the information In accounting, an amount is considered material if it has significant effect upon Statement of Profit or Loss (SOPL) or Statement of Financial Position (SOFP). Material is exercising informed judgment & did not apply specific rules E.g: 1) cost of new building is a material amount & must be depreciated 2) cost of an eraser or paper clips is not material Accounting concepts PERIODICITY Information must be provided in periodicity intervals Economic activities of a buss can be divided into: Monthly, quarterly or yearly Reporting purposes – yearly basis Management purposes – Quarterly or monthly Accounting concepts CONSISTENCY Transactions and valuation methods are treated the same way from year to year. Therefore, more meaningful comparisons of financial performance from year to year can be made Where accounting policies are changed, companies are required to disclose this fact and explain the impact of any change This concept helps to achieve comparability. Accounting concepts COMPARABILITY CONCEPT Transactions and valuation methods are treated the same way from year to year. Therefore, more meaningful comparisons of financial performance from year to year can be made Where accounting policies are changed, companies are required to disclose this fact and explain the impact of any change This concept helps to achieve comparability. TYPES AND VARIOUS FORM OF BUSINESS Characteristics of sole proprietorship, partnership and company 1) ENTITY NAME APPEARANCE COMPANY LIMITED LIABILITY GENERAL SOLE PARTNERSHIP PARTNERSHIP PROPRIETORSHIP ENTITY name Company NAME APPEARANCE Company name Choice of trade Choice of trade ended with “Sdn ended with the word name subjected to name subjected to Bhd” or “Bhd” “PLT” Registrar of Registrar of Business (ROB) Business (ROB) (Perkongsian Liabiliti approval approval Terhad) 2) CAPITAL CONTRIBUTION COMPANY LIMITED LIABILITY GENERAL SOLE PARTNERSHIP PARTNERSHIP PROPRIETORSHIP Share capital Partners contribution Partners contribution Own contribution  3) OWNER(S) OF THE BUSINESS COMPANY LIMITED LIABILITY GENERAL SOLE PARTNERSHIP PARTNERSHIP PROPRIETORSHIP ENTITY NAME APPEARANCE Shareholders Partners (partners Partners Sole Proprietor have shares in the capital and profits of LLP) 4) LEGAL STATUS COMPANY LIMITED LIABILITY GENERAL SOLE PARTNERSHIP PARTNERSHIP PROPRIETORSHIP Separate legal entity Separate legal entity Not a separate legal Not a separate legal entity entity  5) PARTY THAT IS LIABLE FOR DEBTS OF THE BUSINESS COMPANY LIMITED LIABILITY GENERAL SOLE PARTNERSHIP PARTNERSHIP PROPRIETORSHIP Company LLP Partners Sole Proprietor 6) RESPONSIBILITY FOR MANAGEMENT OF BUSINESS COMPANY LIMITED LIABILITY GENERAL SOLE PARTNERSHIP PARTNERSHIP PROPRIETORSHIP Board of Directors Partners Partners Sole Proprietor  7) PERSONAL LIABILITY COMPANY LIMITED LIABILITY GENERAL SOLE PARTNERSHIP PARTNERSHIP PROPRIETORSHIP 6) RESPONSIBILITY FOR MANAGEMENT OF BUSINESS No personal No personal Unlimited liability Unlimited liability liability of liability of (jointly and which can extend individual director partners, except severely liable to personal or shareholders. for own wrongful with the assets of the sole act or omission or partnership) proprietor Liabilities borne without authority which can extend by the directors or to personal shareholders are Liabilities borne assets of the to the extent of by the partners partners unpaid shares are jointly and only severally with LLP to the extent of unpaid shares  8) NO OF SHAREHOLDERS/ PARTNERS COMPANY LIMITED LIABILITY GENERAL SOLE PARTNERSHIP PARTNERSHIP PROPRIETORSHIP Unlimited Minimum 2 and no 2 to 50 partners Sole Proprietor only maximum (except for partnership for professional practice) 9) COMPANY SECRETARY/ COMPLIANCE OFFICER COMPANY LIMITED LIABILITY GENERAL SOLE PARTNERSHIP PARTNERSHIP PROPRIETORSHIP Qualified Company Qualified Company N/A N/A Secretary Secretary or partner of the LLP  10) ANNUAL COMPLIANCE COMPANY LIMITED LIABILITY GENERAL SOLE PARTNERSHIP PARTNERSHIP PROPRIETORSHIP 6) RESPONSIBILITY FOR MANAGEMENT OF BUSINESS Must file annual Must lodge an return and annual financial declaration and statements every solvency calendar year statement with Commission of Company Malaysia (SSM)  11) ANNUAL SUBMISSION TO CCM/ SSM COMPANY LIMITED LIABILITY GENERAL SOLE PARTNERSHIP PARTNERSHIP PROPRIETORSHIP Annual return with Annual declaration audited/ unaudited financial statement 12) ANNUAL FEE TO CCM/SSM COMPANY LIMITED LIABILITY GENERAL SOLE PARTNERSHIP PARTNERSHIP PROPRIETORSHIP RM200 RM200 Trade name – RM60 Trade name – RM60 Personal name – Personal name – RM30 RM30 13) INCOME TAX STATUS/ RATE COMPANY LIMITED LIABILITY GENERAL SOLE PARTNERSHIP PARTNERSHIP PROPRIETORSHIP Tax on company Tax on LLP Tax on partners Tax on partners/ sole proprietor On the first On the first 0% to 26% RM500,000 – 20% RM500,000 – 20% 0% to 26% After – 25% After – 25% 14) RULES & REGULATIONS COMPANY LIMITED LIABILITY GENERAL SOLE PARTNERSHIP PARTNERSHIP PROPRIETORSHIP Company Act 1965 Limited Liability Registration of Registration of Partnership Act 2012 Business Act 1956 Business Act 1956 (LLP) (RBA) (RBA) Limited Liability Partnership Regulations 2012  ADVANTAGES AND DISADVANTAGES COMPANY LIMITED LIABILITY GENERAL SOLE PARTNERSHIP PARTNERSHIP PROPRIETORSHIP More paperwork Less paperwork, Less paperwork, Less paperwork, Expensive registration is easy, registration is easy, registration is easy, Complexity in fast and fewer fast and fewer fast and fewer administration documents are documents are documents are (statutory audit, needed needed needed AGM, board Limited liability Unlimited liability Unlimited liability resolution) Simplest Simplest Simplest Higher compliance administration (not administration (not administration (not cost compulsory for compulsory for compulsory for Suitable for statutory audit) statutory audit) statutory audit) business Not required to Not required to Not required to affordable to disclose financial disclose financial disclose financial maintain business statements to statements to statements to with higher public public public operation cost Lack of continuity Public has access Difficult to raise to financial affairs capital to the company  Accounting VS bookkeeping Bookkeeping Accounting is the bigger picture. Refers to the mechanical aspect of accounting, such as recording, classifying Relate with the system and summarizing transaction that keeps track of the data, Is a part of accounting including people, and records is the tedious part of the financial affairs the transaction by taking the of a business. It involves the systematic and accurate information from bookkeeping recording of the: involve analyse the results 1. Amounts Give a reports and 2. Dates information needed for 3. sources of each revenue and management to make expense transaction. decisions Bookkeeping is concerned with the systems that enable the financial information to be extracted in the transactions. ROLE OF ACCOUNTING PROFESSION IN BUSINESS Knowledge of accounting is very important for all fields. Whatever field a businessman is in, he will have to make decisions & a wise decision will be to rely on accounting data. Even for profession that is not related to accounting like doctors, lawyers etc knowledge of accounting is very important in making business decisions such as decision to open a new branch, to increase product price or shut down an operation. Accounting is helpful in the evaluation of performance & indicates the financing implications of choosing one plan or project versus other WHY ACCOUNTING STANDARDS EXIST? To have a uniform financial statements as it serve various types of users. To reduce the possibilities of very large variations in financial reporting. For comparability purposes. To show ‘true and fair view’ of an organisation.