Chapter 1 2 - Acc - in Business

Chapter
Accounting
Environment
1
(Syllabus:
Chap. 1
&2)
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana
100 Shares
Accounting?
$1 par value
The McGraw-Hill Companies, Inc., 2007
Learning Objectives
Identify users and uses of
accounting
Identify opportunities in
accounting and related fields
Explain the meaning of
Generally Accepted
Accounting Principles, and
define and apply several key
principles of accounting
Identify Professional
Accounting Bodies and
standards setting in Malaysia
Define and interpret the
accounting equation and
each of its components
Analyze business
transactions using the
accounting equation
Identify and prepare basic
financial statements and
explain how they interrelate
Importance of Accounting
is a
Accounting
Identifies
system that
Records
information
Relevant
that is
Communicates
Reliable
Comparable
to help users make

better decisions (?).
Accounting Activities
Identifying
Business
Activities
Recording
Business
Activities
Communicating
Business
Activities
Users of Accounting Information

Internal Users
External Users
Lenders
Consumer Groups Managers
Sales Staff
Shareholders External Auditors
Officers
Governments Customers
Internal Auditors Controllers
Budget Officers
Users of Accounting Information

External Users
Financial accounting provides

external users with financial
statements (only ?).
Internal Users
Managerial accounting provides

information needs for internal
decision makers.
Characteristics of Accounting
Information
USEFUL
FINANCIAL
INFORMATION
RELEVANCE
1. Predictive value
2. Feedback value
3. Timely
COMPARABILITY
RELIABILITY
1. Verifiable
2. Faithful representation
3. Neutral
CONSISTENCY
Opportunities in Accounting
Financial
Preparation
Analysis
Auditing
Regulatory
Consulting
Planning
Criminal
investigation
Accountingrelated
Managerial
Taxation
General accounting
Cost accounting
Budgeting
Internal auditing
Consulting
Controller
Treasurer
Strategy
Preparation
Planning
Regulatory
Investigations
Consulting
Enforcement
Legal services
Estate planning
Lenders
Consultants
Analysts
Traders
Directors
Underwriters
Planners
Appraisers
FBI investigators
Market researchers
Systems designers
Merger services
Business valuation
Human services
Litigation support
Entrepreneurs
Generally Accepted Accounting

Principles
Financial accounting practice is governed by
concepts and rules known as Generally Accepted
Accounting Principles (GAAP).
Relevant
Information
Affects the decision of

its users.
Reliable Information
Is trusted by
users.
Comparable
Information
Is helpful in contrasting
organizations.
Setting Accounting Principles

Financial Accounting
Standards Board is the private
group that sets both broad and
specific principles.
The Securities Commission is the government

group that establishes reporting requirements
for companies that issue share to the public.
The Operating Guidelines of Accounting

ASSUMPTIONS
PRINCIPLES
CONSTRAINTS
Economic entity
Historical costs
Conservatism
Monetary unit
Revenue recognition
Materiality
Going concern
Matching
Time period
Full disclosure
Accounting Assumptions
Now
Future
Economic Entity
The business is accounted for
separately from other business
entities, including its owner
Going-Concern Principle
Reflects assumption that the
business will continue operating
instead of being closed or sold
Monetary Unit Principle

Express transactions and events in
monetary, or money, units
Time Period
The economic life of business can be
divided into artificial time period for
the purpose of financial reporting
Accounting Principles
Revenue Recognition
1. Recognize revenue when it is
Historical Cost
earned.
Accounting information is based
2. Proceeds need not be in cash.
on actual cost.
3. Measure revenue by cash
received plus cash value of items
received.
Matching
Expenses are matched against
revenues, and recorded in the
same period in which the related
revenues are earned
Full Disclosure
Report enough information for
users to make knowledgeable
decisions about the company
Accounting Constraints
Conservatism
Income and assets be reported at
their lowest reasonable amounts (i.e.
minimizing the assets and
understating the income)
Materiality
Accountants are required to
accurately account for significant
items and transactions
Professional Accounting Bodies and

Standard Setting in Malaysia
Malaysian Institute of Accountant (MIA)
http://www.mia.org.my
Malaysian Institute of Certified Public Accountant
(MICPA)
Malaysian Accounting Standards Board (MASB)
http://www.masb.org.my
Financial Reporting Foundation (FRF)

established under the Accountants Act 1967
regulating the accounting profession.
play a significant role in the development and
advancement of accounting profession globally.
Its membership in such bodies include the:
Asean Federation of Accountants (AFA)
Confederation of Asian and Pacific Accountants
(CAPA)
International Federation of Accountants (IFAC)
Intergovernmental Working Group of Experts on
International Standards of Accounting and Reporting
(ISAR)

Objectives:
To promote and regulate professional and ethical
standards
To enhance competency through continuous
education and training to meet the challenges of the
global economy
To enhance the status of members
To lead research and development for the
enhancement of the profession
To inculcate a high sense of social responsibility
Malaysian Institute of Certified Public

Accountant (MICPA)
Objectives:
To advance the theory and practice of accountancy in

all its aspects.
To recruit, educate, train and assess by means of
examination or otherwise a body of members skilled in
these areas.
To preserve at all times the professional independence
of accountants in whatever capacities they may be
serving.
To maintain high standards of practice and professional
conduct by all its members.
To do all such things as may advance the profession of
accountancy in relation to public practice, industry,
commerce, education and the public service.
Malaysian Accounting Standards Board

(MASB)
Established under the Financial Reporting Act 1997
(the Act) as an independent authority to develop and
issue accounting and financial reporting standards in
Malaysia.
Working with FRF to make up the new framework for
financial reporting in Malaysia, with representation
from all relevant parties in the standard-setting
process, including preparers, users, regulators and
the accountancy profession.
Financial Reporting Federation (FRF)

Established under the Financial Reporting Act 1997
(Act)
Representation from all relevant parties in the
standard setting process, including preparers, users,
regulators and accountancy profession.
Oversight the MASB's performance, financial and
funding arrangements, and as an initial source of
views for the MASB on proposed standards and
pronouncements.
It has no direct responsibility with regard to standard
setting. This responsibility rests solely with the MASB.
Business Entity Forms
Proprietorship
Partnership
Corporation
Characteristics of Businesses
Characteristics
Proprietorship Partnership Corporation
Business entity
yes
yes
yes
Legal entity
no
no
yes
Limited liability
no*
no*
yes
Unlimited life
no
no
yes
Business taxed
no
no
yes
One owner allowed
yes
no
yes
* Proprietorships and partnerships that are set up as LLCs

provide limited liability.
Corporation
Owners of a corporation are called

shareholders (or stockholders).
When a corporation issues only one

class of share, we call it common
share (or capital share).
End of Chapter 1
Accounting Equation
Assets
Liabilities
Assets
Equity
Liabilities
& Equity
Assets
Cash
Accounts
Receivable
Vehicles
Resources
owned or
controlled
by a
company
Store
Supplies
Notes
Receivable
Land
Buildings
Equipment
Liabilities
Accounts
Payable
Notes
Payable
Creditors
claims on
assets
Taxes
Payable
Wages
Payable
Equity
Owner
Withdrawals
Owner
Investments
Owners
claims
on
assets
Revenues
Expenses
Expanded Accounting Equation
Assets
Owner
Capital
Liabilities
Owner
Withdrawals
+
Revenues
Equity
Expenses
Transaction Analysis Equation

The accounting equation must remain in
balance after each transaction.
Assets
Liabilities
Equity
Transaction Analysis
J. Scott, the owner, contributed $20,000
cash to start the business.
The accounts involved are:
(1) Cash (asset)
(2) J. Scott, Capital (equity)
J. Scott, the owner, contributed $20,000
cash to start the business.
Assets
Cash
Supplies Equipment
(1) $ 20,000
$ 20,000 $
$ 20,000
Liabilities
Accounts
Notes
Payable Payable
$
=
20,000
Equity
J. Scott,
Capital
$ 20,000
$ 20,000
Purchased supplies paying $1,000
cash.
(1) Cash (asset)
(2) Supplies (asset)
Purchased supplies paying $1,000
cash.
Assets
Cash
Supplies Equipment
(1) $ 20,000
(2)
(1,000) $ 1,000
$ 19,000 $ 1,000 $
$ 20,000
Liabilities
Accounts
Notes
Payable Payable
$
=
20,000
Equity
J. Scott,
Capital
$ 20,000
$ 20,000
Purchased equipment for $15,000
cash.
(1) Cash (asset)
(2) Equipment (asset)
Purchased equipment for $15,000
cash.
Assets
Cash
Supplies Equipment
(1) $ 20,000
(2)
(1,000) $ 1,000
(3)
(15,000)
$ 15,000
4,000 $ 1,000 $
15,000
$ 20,000
Liabilities
Accounts
Notes
Payable Payable
$
=
20,000
Equity
J. Scott,
Capital
$ 20,000
$ 20,000
Purchased Supplies of $200 and
Equipment of $1,000 on account.
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)
Purchased Supplies of $200 and
Equipment of $1,000 on account.
Assets
Cash
Supplies Equipment
(1) $ 20,000
(2)
(1,000) $ 1,000
(3)
(15,000)
$ 15,000
(4)
200
1,000
$
4,000 $ 1,200 $
Equity
J. Scott,
Capital
$ 20,000
$ 1,200
16,000
$ 21,200
Liabilities
Accounts
Notes
Payable Payable
$ 1,200 $
=
$ 20,000
21,200
Borrowed $4,000 from 1st American
Bank.
(1) Cash (asset)
(2) Notes payable (liability)
Borrowed $4,000 from 1st American
Bank.
Assets
Cash
Supplies Equipment
(1) $ 20,000
(2)
(1,000) $ 1,000
(3)
(15,000)
$ 15,000
(4)
200
1,000
(5)
4,000
$ 8,000 $ 1,200 $ 16,000
$ 25,200
Liabilities
Accounts
Notes
Payable Payable
Equity
J. Scott,
Capital
$ 20,000
$ 1,200
$
$ 1,200 $
4,000
4,000
25,200
$ 20,000
The balances so far appear below. Note that the
equation is still in balance.
Assets
Cash Supplies Equipment

Bal. $ 8,000 $ 1,200 $ 16,000
$ 8,000 $ 1,200 $
$ 25,200
16,000
=
Liabilities
Equity
Accounts Notes
Payable Payable
$ 1,200 $ 4,000
J. Scott,
Capital
$ 20,000
$ 20,000
1,200 $
4,000
$ 25,200
Now lets look at transactions involving

revenue, expenses and withdrawals. The McGraw-Hill Companies, Inc., 2007
Rendered consulting services
receiving $3,000 cash.
(1) Cash (asset)
(2) Revenues (equity)
Rendered consulting services
receiving $3,000 cash.
Assets
Cash
Supplies Equipment
Bal. $ 8,000 $ 1,200 $ 16,000
(6)
3,000
$ 11,000 $
1,200 $
16,000
$ 28,200
Liabilities
Equity
Accounts Notes
Payable Payable
$ 1,200 $ 4,000
J. Scott,
Capital Revenue
$ 20,000
$ 3,000
$ 1,200 $
$ 20,000 $ 3,000
4,000
$ 28,200
Paid salaries of $800 to employees.
(1) Cash (asset)
(2) Salaries expense (equity)
Remember that the balance in the salaries
expense account actually increases.
But, equity actually decreases because
expenses reduce equity.
Paid salaries of $800 to employees.
Assets
Cash
Supplies Equipment
Bal. $ 8,000 $ 1,200 $ 16,000
(6)
3,000
(7)
(800)
$ 10,200 $ 1,200 $ 16,000
$ 27,400
Liabilities
Equity
Accounts Notes
Payable Payable
$ 1,200 $ 4,000
J. Scott,
Capital Revenue Expenses
$ 20,000
$ 3,000
$
(800)
$ 1,200 $ 4,000
$ 20,000 $ 3,000 $
(800)
$ 29,000
Remember that expenses decrease equity.

J. Scott withdrew $500 from the
business for personal use.
(1) Cash (asset)
(2) J. Scott, Withdrawals (equity)
Remember that the balance in the J. Scott,
Withdrawals account actually increases.
But, equity actually decreases because
withdrawals reduce equity.
J. Scott withdrew $500 from the
business for personal use.
Assets
Accounts Notes
Payable Payable
$ 1,200 $ 4,000
Cash
Supplies Equipment
Bal. $ 8,000 $ 1,200 $ 16,000
(6)
3,000
(7)
(800)
(8)
(500)
$ 9,700 $ 1,200 $ 16,000
$ 26,900
Liabilities
$ 1,200 $ 4,000
=
Equity
J. Scott,
J. Scott,
Capital Withdrawal Revenue Expenses
$ 20,000
$ 3,000
$
(800)
$
(500)
$ 20,000 $
(500) $ 3,000 $
(800)
$ 29,500
Remember that withdrawals decrease equity.

Financial Statements
Lets prepare the Financial Statements
reflecting the transactions we have recorded.
1. Statement of Profit or Loss and
Other Comprehensive Income
2. Statement of Owners Equity
3. Statement of Financial
Position (or Balance Sheet)
4. Statement of Cash Flows
Scott Company
State m e nt of Profit or Los s
and other comprehensive income

For Month Ended 31 December 2006
Revenues:
Consulting revenue
$
3,000
Less:Expenses
Salaries expense
800
Profit for the period
$
2,200
Profit is the
difference
between
Revenues
and
Expenses.
The Statement of Profit and Loss and Other

Comprehensive Income or income statement
describes a companys revenues and
expenses along with the resulting profit or
loss over a period of time due to earnings
activities.
Scott Company
Statement of Profit & Loss
and Other Comprehensive Income
Revenues:
Consulting revenue
$
3,000
Less Expenses:
Salaries expense
800
$
2,200
The profit of
$2,200
increases
Scotts capital
by $2,200.
Scott Company
The Statement of
Statement of Owner's Equity
Owners Equity
explains changes in
equity from profit (or
$
loss) and from owner J. Scott, Capital, 1 Dec. 2006
Add: Investment by owner
20.000
investments and
Net income
2.200
withdrawals for a
Less: Withdrawals
500
period of time.
J. Scott, Capital, 31 Dec. 2006
21.700
Scott Company
Statement of Owner's Equity
J. Scott, Capital, 1 Dec. 2006
Add: Investment by owner
Less: Withdrawals
J. Scott, Capital, 31 Dec.2006
20.000
2.200
500
21.700
The Statement of
Financial Position or
Balance Sheet
describes a
companys financial
position at a point in
time.
Owners Equity in Statement of Financial
Position or Balance Sheet
SCOTT COMPANY
Statement of Financial Position

31 DECEMBER 2006
ASSETS
Non-current assets
Equipment
Total non-current assets
$16,000
$16,000
Current Assets
Cash
Supplies
Total current assets
Total assets
$ 9,700
1,200
10,900
$ 26,900
EQUITY AND LIABILITIES

Equity
J.Scott, Capital
$ 21,700
From Statement of Owners Equity

SCOTT COMPANY
STATEMENT OF FINANCIAL POSITION
31 DECEMBER 2006
Current liabilities
Accounts payable
Notes payable
Total current liabilities
$1,200
4,000
$5,200
Total equity and liabilities
$26,900
SCOTT COMPANY
STATEMENT OF CASH FLOWS
FOR THE MONTH ENDED 31 DECEMBER 2006
Cash flows from operating activities:
Cash received from clients
$ 3,000
Purchase of supplies
(1,000)
Cash paid to employees
(800)
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of equipment
(15,000)
Net cash used in investing activities
Cash flows from financing activities:
Investment by owner
20,000
Borrowed at bank
4,000
Withdrawal by owner
(500)
Net cash provided by financing activities
Net increase in cash
Cash balance, 1 December 2006
Cash balance, 31 December 2006
1,200
(15,000)
$
$
23,500
9,700
9,700
The Statement of Cash Flows identifies cash inflows and cash outflows over a
period of time.
End of Chapter 2

Chapter 1 2 - Acc - in Business

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Chapter

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

to help users make

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Users of Accounting Information

Consumer Groups Managers

Shareholders External Auditors

Internal Auditors Controllers

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Users of Accounting Information

Financial accounting provides

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

Managerial accounting provides

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

Generally Accepted Accounting

Affects the decision of

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Setting Accounting Principles

The Securities Commission is the government

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

The Operating Guidelines of Accounting

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Monetary Unit Principle

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Professional Accounting Bodies and

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Malaysian Institute of Accountant (MIA)

The McGraw-Hill Companies, Inc., 2007

Malaysian Institute of Accountant (MIA)

The McGraw-Hill Companies, Inc., 2007

Malaysian Institute of Certified Public

To advance the theory and practice of accountancy in

The McGraw-Hill Companies, Inc., 2007

Malaysian Accounting Standards Board

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Financial Reporting Federation (FRF)

The McGraw-Hill Companies, Inc., 2007

Business Entity Forms

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

* Proprietorships and partnerships that are set up as LLCs

The McGraw-Hill Companies, Inc., 2007

Owners of a corporation are called

When a corporation issues only one

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007