FHBM1214 Week1 Conceptual Framework Student

In Your Textbook...
Roshayani Arshad, et al. (2007), Financial Accounting An Introduction, 3rd Edition, Malaysia, McGraw Hill. Chapter 1: Introduction to Accounting Chapter 2: Basic Framework of Accounting
Topic 1
Conceptual Framework
UTAR/FHBM1214/Topic1
What is Accounting?
Accounting can be defined as the process of ______________________________________ information to permit informed judgments and ___________ by users of the information. Vs. Book-keeping involves only the recording of data. Accountants might used the information obtained from book-keeping for accounting purpose.
What is Accounting?
Flows of Accounting process
The accounting process includes all the functions of bookkeeping.

UTAR/FHBM1214/Topic1 4
LO 1 Explain what accounting is.
What does Accounting record?

Transactions: Refer to any economic event or activity that affects the financial condition of a business and must be entered into the accounting records. Two types of transactions:
1. _______ transaction for which immediate payment is made. 2. ________ transaction for which payment is postponed to a future date.
Purpose of Accounting
To ________________________ about business organisations to various interested parties __________________. Accounting information is used by:
1. External users, e.g. investors, government, creditors, taxing authorities, general public 2. Internal users, e.g. managers, business owners, shareholders
Looking at the examples above, how do you think we can differentiate external users from internal users? 6 UTAR/FHBM1214/Topic1
Who Use Accounting Data?

Us ? ers
Internal Users
1.Government & taxing authorities
1.Owner
2. Manager
2.Investors
Business Stakeholders
A business stakeholder is a person or entity having an interest in the economic performance of the business.
3.Shareholder
3.Labor Unions 4.Employees 4.Creditors / Bankers

External Users 8
Owner
To decide whether expand, continue or close down the business. Question asked by Owner: Should I close down the business if my Company incurred losses for the past 3 years?
Manager
To make decision on the operations of a firm Question asked by Manager: Is it possible to change the operation from labour intensive to machinery intensive?
Shareholder
To buy, remain or sell out the shares.
Employees
To determine ability to pay salaries and other employment benefits, job security and career prospects
. .
Question asked by shareholder: How much dividend I could get this year?
Question asked by employees: How much bonus I could get by the end of the year?
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External Users
Government & Taxing authorities

To administer and enforce laws on companies. Question asked by Government:
4.Creditors/ Bankers
1.Government & taxing authorities
2.Investors
3.Labor Unions
Do the business follows the business act? Question asked by Taxing authorities: How much tax to charge a business?
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Investor
To evaluate how much profit they can expect to obtain from their investment.
Labour unions
Bargains with the employer on behalf of union members (employees) and negotiates labor contracts with employers. Question asked by labour unions: Is the Company paying wages below market value to the labours?
15 UTAR/FHBM1214/Topic1 16
Question asked by Investor: Is the company earning a satisfactory income?

Creditors / Bankers
To determine borrowers ability to meet scheduled payments by evaluating borrowers financial position and prediction of future operations. Question asked by Creditors / Bankers: Will the Company able to make loan repayment when mature?
The Process of Providing Information

Identify stakeholders. Internal: Owners, managers, employees STAKEHOLDERS External: Customers, creditors, government
2
Assess stakeholders informational needs.
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Record economic data about business activities and events. Design the accounting information system to meet stakeholders needs.

STAKEHOLDERS Internal: Owners, managers, employees Prepare accounting reports for stakeholders. External: Customers, creditors, government
Accounting Information System
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Accounting Information System
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Who Uses Accounting Data?

Common Questions Asked
1. Can we afford to give our employees a pay raise?
User
WHOM do we report for?
2. Did the company earn a satisfactory income? 3. Do we need to borrow in the near future? 4. Is cash sufficient to pay dividends to the stockholders? 5. What price that we should set for our products so that the Company's net income can be maximised? 6. Will the company be able to pay its short-term debts?
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Nature of a Business
A business is an organisation in which basic resources (inputs) are assembled and processed to provide goods or services (outputs) to customers. Objective of most businesses to _______ _________ (difference between revenue and cost/expenses). Some businesses operate with an objective other than to maximise profits.
Types of Businesses
Manufacturing Business
Product
Proton Intel Boeing Nike Coca-Cola Sony
Cars, automotive parts Computer chips Jet aircraft Athletic shoes and apparel Beverages Stereos and television
Types of Businesses
Merchandising Business
Product
Types of Businesses
Service Business
Product Product
Jusco Toys R Us Tower Records Guardian Amazon.com
General merchandise Toys Music & video records Beauty & health products Internet books, music, video retailer
Disney Malaysia Airline Hilton Hotels A Cut Above Maxis
Entertainment Transportation Hospitality and lodging Hairdressing services Telecommunication
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There are three forms of business organizations Proprietorship Partnership Corporation
A proprietorship is owned by one individual.
Advantages
Ease in organizing Low cost of organizing Disadvantages Limited source of financial resources Unlimited liability
Joes
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A partnership is owned by two or more individuals.
Advantages More financial resources. Additional management skills. Disadvantage Unlimited liability.
A corporation is organized under Company Law as a separate legal entity.
Advantage The ability to obtain large amounts of resources by issuing shares. Disadvantage Double taxation.
Joe and Martys
J & M, Bhd.
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Forms of Business Ownership

Proprietorship
Generally owned by one person. Often small service-type businesses Owner receives any profits, suffers any losses, and is personally liable for all debts.
Partnership
Owned by two or more persons. Often retail and service-type businesses Generally unlimited personal liability Partnership agreement
Corporation
Ownership divided into shares of stock Separate legal entity organized under state corporation law Limited liability
HOW to record?
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Generally Accepted Accounting Principles

Financial statements have to be prepared in accordance to Generally Accepted Accounting Principles (GAAPs). GAAPs are the standards and principles (i.e. rules, practices and procedures) used in the preparation of financial statements. International Accounting Standards Board (IASB) issues the International Financial Reporting Standards (IFRS). In Malaysia, Companies are require to comply with Financial Reporting Standard (FRS). However private companies are permitted to apply either FRS or Private Entity Reporting Standard (PERS).
Basic Accounting Concepts

The accountant uses a number of accounting concepts and conventions as guides to accounting practice. These concepts have been derived over the years from customs and general accounting practices.
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1. Accounting/Business Entity For accounting purposes, the business is regarded as an accounting entity or business entity which is different from its owners, creditors, employers, customers and other persons. All of the dealings or transactions of the business are recorded from the point of view of the business, as a separate entity.

2. Going Concern The business enterprise is assumed to have an indefinite life. The accountant will ignore the current liquidation values of the resources in the business because he assumes that these resources will not be sold but will be utilized by the business in its normal operations.

3. Money Measurement Money is used as the basic measuring unit for financial reporting. If the event cannot be measured in monetary terms, it is not considered as part of the accounting data. E.g. motivational level of the staff, inefficient management, poor working conditions.

4. Historical Cost All transactions of a business entity are recorded at the original cost to the enterprise. Current market value is irrelevant. This practice is based on the assumption that the business is a going concern and is not likely to be liquidated.

5. Accounting Period The life of a business is divided into units of equal length for the purpose of preparing financial reports. The period may be a month, a half-year, a full year, or any other length of time depending on the volume and nature of the business. Purpose: to enable comparisons and analysis of the businesss financial position over a period of time.

6. Objectivity There must always be objective verifiable evidence for reporting any accounting information. The evidence that a business transaction has taken place and the details pertaining to that transaction are contained in source documents, e.g. receipts, invoices, cheques, and vouchers.

7. Consistency The same accounting method should be applied in each accounting period when preparing financial reports. Purposes:
1. to ensure that the accounting reports of a business are comparable from period to period. 2. to prevent misleading profits arising from differing accounting methods from being reported.

8. Conservatism/Prudence Due to uncertainty of future events, cautious accounting practices are observed so that income statement & assets are not overstated and expenses & liabilities are not understated. The accountant will try not to anticipate income but to provide for all possible losses.

9. Accrual Concept
Revenue reported when earned
(goods sold or services performed)

10. Matching Principle Revenue earned during an accounting period has to be matched with the expenses associated with earning that revenue.
Sales made during 1/1/06 31/12/06
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Expense reported when incurred

(used)
Cash receipts/payments are irrelevant

Matched
Bills incurred during 44 1/1/06 31/12/06

11. Materiality The principle that trivial matters are to be disregarded in accounting, and all important matters are to be disclosed.
E.g. A box of paper clips was bought and it will be used up over a period of time. The cost should be incurred when someone uses a paper clip. It is possible to record this as an expense every time but, obviously the price of a paper clip is so small that is not worth recording it in this manner.

12. Full disclosure principle The full disclosure principle requires that financial statements include disclosure of information on conditions that may have imminent and significant effects on the company's financial status.
For example, information on contingent liabilities, pending lawsuits and incomplete transactions should be disclosed. The policies the company uses to record and report business transactions should also be described.
Since the box of paper clips is not a material item, the box will be charged as an expense in a period it was bought.
Accounting reports, called financial statements, provide summarized information to the owner.
Financial Statements
Income statement A summary of the revenue and expenses for a specific period of time. Balance sheet (a.k.a. Statement of financial position) A list of the assets, liabilities, and owners equity as of a specific date. Statement of cash flows A summary of the cash receipts and disbursements for a specific period of time.
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Cycle of Accounting Record Process

Source Documents Journal
Summary
Ledger
Transactions take place

Balance Sheet
Income Statement
Trial Balance
49 UTAR/FHBM1214/Topic1 50
What is Accounting?
Types of business
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Form of Business
1. 2. 3. 4. 5. 6.
Accounting Concepts
7. 8. 9. 10. 11. 12.
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Lecture Exercise
1. Valuing closing stock at cost is an application of which concept? a. Prudence b. Consistency c. Historical cost d. Money measurement 2. Which of the following statements is not true? The going concern concept can be ignored if ______. a. business closure is in the near future b. the business is likely to fail in the forthcoming accounting period c. parts of the business are likely to face closure d. similar firms also have chosen to ignore the concept
3. Including private costs incurred in running a car as business costs would violate the concept of: a. b. c. d. Historical cost Going concern Consistency Business entity
4. Combining the activities of Mei Ling and Mills Sdn would violate the a. b. c. d. Cost principle. Business entity Monetary unit assumption. Consistency principle.
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5. A business organized as a separate legal entity under state law having ownership divided into shares of stock is a a. proprietorship. b. partnership. c. corporation d. sole proprietorship.
The End
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In Your Textbook...

The accounting process includes all the functions of bookkeeping.

LO 1 Explain what accounting is.

What does Accounting record?

Who Use Accounting Data?

3.Labor Unions 4.Employees 4.Creditors / Bankers

Government & Taxing authorities

1.Government & taxing authorities

Question asked by Investor: Is the company earning a satisfactory income?

The Process of Providing Information

Assess stakeholders informational needs.

The Process of Providing Information

The Process of Providing Information

Accounting Information System

Accounting Information System

Who Uses Accounting Data?

WHOM do we report for?

Proton Intel Boeing Nike Coca-Cola Sony

Jusco Toys R Us Tower Records Guardian Amazon.com

Disney Malaysia Airline Hilton Hotels A Cut Above Maxis

Entertainment Transportation Hospitality and lodging Hairdressing services Telecommunication

There are three forms of business organizations Proprietorship Partnership Corporation

A proprietorship is owned by one individual.

A partnership is owned by two or more individuals.

A corporation is organized under Company Law as a separate legal entity.

Joe and Martys

Forms of Business Ownership

Generally Accepted Accounting Principles

Basic Accounting Concepts

Basic Accounting Concepts

Basic Accounting Concepts

Basic Accounting Concepts

Basic Accounting Concepts

Basic Accounting Concepts

Basic Accounting Concepts

Basic Accounting Concepts

Basic Accounting Concepts

Basic Accounting Concepts

Basic Accounting Concepts

Expense reported when incurred

Cash receipts/payments are irrelevant

Basic Accounting Concepts

Basic Accounting Concepts

Cycle of Accounting Record Process

Transactions take place

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