Chapter 1

Fundamentals of Accounting
BBA1113/BBA1114| Financial Accounting Fundamentals
Prepared by Maniam

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BBA1113/BBA1114|Financial Accounting Fundamentals

Lesson Outline

Brief history
Nature, definition of accounting and what is bookkeeping?
Objective of accounting
Branches of accounting
Users and characteristics of accounting Information
Types of business

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What is Accounting..?

Everyone is his life will use some form of accounting.

Basically one will think about how much resources one has and how it will
be spent for the days that come by.
This basic thinking (mental idea) of how much one has and how it is being
spent is actually called accounting.
As human beings, we tend to forget this simple mental calculation as we
store them in our mind and it varies from day to day. Therefore, comes
book keeping method that allows one to keep records of this mental
calculation.
The starting point of accounting was discovered to be book keeping.

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What is Accounting..?

From book keeping, the field of study was progressed into accounting.

The formal definitions of accounting are many. The following one would be
one:

Process of identifying, measuring, and communicating economic

information to permit informed judgments and decisions by users of the
information

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Why we need accounting..?

To record business transaction

To know the success of the business
To know how much a business owns and how much it owes others
How wealthy the business is

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History..

Known to exist since 3500 B.C (Sumerians @ Mesopotamia)

Started when the need to maintain accurate records of the quantities and
relative values of agricultural products first arose
There is evidence that accounting is being practiced in ancient times in
Egypt, China, India, Greece, England and Rome
No standard accounting system
1494 Pacioli wrote about bookkeeping

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Objectives of accounting

Primary objective to provide information for decision making

What kind of information is important for the businesses..????

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Bookkeeping vs accounting..

Bookkeeping - recording of transactions and events, and this is just one

part of accounting.

Accounting also involves identifying and communicating information on

transaction and events and it includes the crucial processes of analysis and
interpretation.

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Financial Accounting

Financial accounting vs. financial reporting.

Financial accounting is regarded as the accounting process that ends with
the preparation of final accounts.
Financial reporting is the process of communicating financial accounting to
users of such information

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Accounting process

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Management Accounting

A separate collection and recording system was set up to provide

managers with more information and more frequently.

Such information was needed mainly for stock valuation purposes and to
work out the cost of individual products and processes.

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Auditing..

It is an examination and assessment of the activities, controls, records and

systems that underpin accounting information.

Auditors are often trained accountants who specialize in ascertaining

whether the accounts are credible, i.e. whether they can be believed.

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Taxation

Those accountants who are involved in tax work are responsible for
computing the amount of tax payable by both business entities and
individuals.

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USERS OF
ACCOUNTING
INFORMATION

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External Users..

These users are not directly involved in running the organization but
these interested parties have their own needs to be met.

External users have limited access to an organization's information.

Each external user has special information needs depending on the types
of decisions to be made.

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External Users (Cont)..

Lenders (creditors) loan money or other resources to an organization.

Banks, savings and loans, co-ops, and mortgage and finance companies
often are lenders.

Lenders look for information to help them assess whether an organization

is likely to repay its loans with interest.

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External Users (Cont)..

Shareholders (investors) are the owners of a corporation. They use

accounting reports in deciding whether to buy, hold, or sell stock.

Government through Inland Revenue Board requires organizations to file

accounting reports in computing taxes. Other needs would be collecting
statistical data for country development purposes.

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External Users (Cont)..

Suppliers use accounting information to judge the soundness of a

customer before making sales on credit.

Customers use financial reports to assess the staying power of potential

suppliers

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Internal Users..

Those directly involved in managing and operating an organization.

They use the information to help improve the efficiency and effectiveness
of an organization.

Internal reports are designed with the special needs of internal users in
mind.

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Internal Users (cont)..

Managers who oversee the operating activities of business and needs are
various such as purchases management, quality products, minimizing
costs and maximizing profits and others.

Employees and labor unions use accounting information to judge the

fairness of wages, assess future job prospects, and bargain for better
wages.

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CHARACTERISTICS
OF ACCOUNTING
INFORMATION
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Relevance..

The
1.
2.
3.

information has either:

Predictive value - helps users forecast future events.
Feedback value - confirms or corrects prior expectations.
Timeliness - information must be available to decision makers before
it loses its capacity to influence their decisions.

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Reliability..

Accounting information should be:

1. Verifiable - free of error and bias.
2. Faithful representation - the quality that makes accounting
information dependable in representing the events that it purports
to represent.
3. Neutrality - accurate.

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Comparability..

Accounting information should be comparable from:

1. business to business, and
2. period to period.

It results when different companies use the same accounting principles

and allows users to analyze 2 or more companies to gauge performance

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Consistency..

Same accounting principles and methods should be used from year to

year.
For example, a straight-line method used for depreciating the company's
assets is consistently applied from year to year.
A business may change its accounting methods provided that it discloses
the change, the reasons for the change, and the effect of the change on
income.

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Understandability..

Accounting information should be understandable to users who are

generally assumed to have a reasonable knowledge of business and
economic activities.

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TYPES OF BUSINESS

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Sole Proprietorship

It is owned by one individual.

Registered business with the Registration of Business Act, 1956.
The person owns and manages the firm and can employ employees.
No agreement is necessary.
A sole proprietor may also withdraw capital.

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Sole Proprietorship

The sole proprietors liability for the firms debts to its creditors is
unlimited.
The business liabilities are the sole proprietors liabilities and he/she
undertakes the risks of the business.
Similarly, the business assets are the sole proprietors assets.

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Partnership..

2 or more owners or partners combining together to set up and run a

business.
Maximum partners are 20 but no ceiling for professional firms.
Partners contribute capital based on the share of the partnership.
In general, all the partners are mutually liable for the business liabilities
and share the profit.

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Partnership..

Since all partners have unlimited liability, even innocent partners can be
held responsible when another partner commits inappropriate or illegal
actions.
In good practice, all partners sign an agreement to minimize disputes
later.
This type of business is governed by the Partnership Act.

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Limited Companies..

It is a body corporate (normally established by an act of parliament)

incorporated by law and having a separate legal entity; meaning that:
it can sue or be sued,
can own property (purchase property),
can enter into contracts and
can carry on business.

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Limited Companies..

Limited companies are governed by Companies Act 1965.

Limited company can be classified into Public Limited Company (Berhad)

and Private Limited Company (Sendirian Berhad).

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..

End of Lecture

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