Chapter

1
(Syllabus:
Chap. 1
&2)

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Accounting
Environment
100 Shares

Accounting?
$1 par value

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Learning
Learning Objectives
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

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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
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Importance
Importance of
of Accounting
Accounting
Accounting
Accounting

is a

Identifies
Identifies

system that

Records
Records
Relevant
Relevant

information
that is

Communicates
Communicates

Reliable
Reliable
Comparable
Comparable
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to
tohelp
helpusers
usersmake
make
better
betterdecisions
decisions(?).
(?).
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Accounting
Accounting Activities
Activities
Identifying
Business
Activities

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Recording
Business
Activities

Communicating
Business
Activities

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Users
Users of
of Accounting
Accounting Information
Information
Internal Users

External Users

Lenders

Consumer Groups Managers

Sales Staff

Shareholders External Auditors

Officers

Governments Customers

Internal Auditors Controllers

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Budget Officers

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Users
Users of
of Accounting
Accounting Information
Information
External Users

Financial accounting provides

external users with financial
statements (only ?).

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Internal Users

Managerial accounting provides

information needs for internal
decision makers.
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Characteristics
Characteristics of
of Accounting
Accounting
Information
Information
USEFUL
FINANCIAL
INFORMATION

RELEVANCE
1. Predictive value
2. Feedback value
3. Timely

COMPARABILITY

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RELIABILITY
1. Verifiable
2. Faithful representation
3. Neutral

CONSISTENCY

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Opportunities
Opportunities in
in Accounting
Accounting
Financial
Financial
Preparation
Preparation
Analysis
Analysis
Auditing
Auditing
Regulatory
Regulatory
Consulting
Consulting
Planning
Planning
Criminal
Criminal
investigation
investigation

AccountingAccountingrelated
related

Managerial
Managerial

Taxation
Taxation

General
Generalaccounting
accounting
Cost
Costaccounting
accounting
Budgeting
Budgeting
Internal
Internalauditing
auditing
Consulting
Consulting
Controller
Controller
Treasurer
Treasurer
Strategy
Strategy

Preparation
Preparation
Planning
Planning
Regulatory
Regulatory
Investigations
Investigations
Consulting
Consulting
Enforcement
Enforcement
Legal
Legalservices
services
Estate
Estateplanning
planning

Lenders
Lenders
Consultants
Consultants
Analysts
Analysts
Traders
Traders
Directors
Directors
Underwriters
Underwriters
Planners
Planners
Appraisers
Appraisers

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FBI
FBIinvestigators
investigators
Market
Marketresearchers
researchers
Systems
Systemsdesigners
designers
Merger
Mergerservices
services
Business
Businessvaluation
valuation
Human
services
Human services
Litigation
Litigationsupport
support
Entrepreneurs
Entrepreneurs
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Generally
Generally Accepted
Accepted Accounting
Accounting
Principles
Principles
Financial
Financialaccounting
accounting practice
practiceis
isgoverned
governedby
by
concepts
conceptsand
andrules
rules known
known as
as Generally
GenerallyAccepted
Accepted
Accounting
AccountingPrinciples
Principles(GAAP).
(GAAP).
Relevant
Relevant
Information
Information
Reliable
Reliable Information
Information

Comparable
Comparable
Information
Information
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Affects
Affectsthe
thedecision
decisionof
of
its
itsusers.
users.
Is
Istrusted
trustedby
by
users.
users.
Is
Ishelpful
helpfulin
incontrasting
contrasting
organizations.
organizations.
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Setting
Setting Accounting
Accounting Principles
Principles
Financial
FinancialAccounting
Accounting
Standards
StandardsBoard
Board is
isthe
the private
private
group
groupthat
that sets
setsboth
bothbroad
broad and
and
specific
specific principles.
principles.

The
TheSecurities
Securities Commission
Commission is
isthe
the government
government
group
groupthat
thatestablishes
establishesreporting
reporting requirements
requirements
for
forcompanies
companies that
thatissue
issueshare
shareto
tothe
thepublic.
public.

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The
The Operating
Operating Guidelines
Guidelines of
of Accounting
Accounting
ASSUMPTIONS

PRINCIPLES

CONSTRAINTS

Economic entity

Historical costs

Conservatism

Monetary unit

Revenue recognition

Materiality

Going concern

Matching

Time period

Full disclosure

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Accounting
Accounting Assumptions
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

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Accounting
Accounting Principles
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
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Full Disclosure
Report enough information for
users to make knowledgeable
decisions about the company
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Accounting
Accounting Constraints
Constraints

Conservatism
Income and assets be reported at
their lowest reasonable amounts (i.e.
minimizing the assets and
understating the income)

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Materiality
Accountants are required to
accurately account for significant
items and transactions

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Professional
Professional Accounting
Accounting Bodies
Bodies and
and
Standard
Standard Setting
Setting in
in Malaysia
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)

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Malaysian
Malaysian Institute
Institute of
of Accountant
Accountant (MIA)
(MIA)
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)
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Malaysian
Malaysian Institute
Institute of
of Accountant
Accountant (MIA)
(MIA)
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
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Malaysian
Malaysian Institute
Institute of
of Certified
Certified Public
Public
Accountant
Accountant (MICPA)
(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.

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Malaysian
Malaysian Accounting
Accounting Standards
Standards Board
Board
(MASB)
(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.

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Financial
Financial Reporting
Reporting Federation
Federation (FRF)
(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.
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Business
Business Entity
Entity Forms
Forms
Proprietorship
Proprietorship

Partnership
Partnership

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Corporation
Corporation

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Characteristics
Characteristics of
of Businesses
Businesses
Characteristics
Characteristics Proprietorship
Proprietorship Partnership
Partnership Corporation
Corporation
Business
yes
yes
yes
Businessentity
entity
yes
yes
yes
Legal
no
no
yes
Legal entity
entity
no
no
yes
Limited
no
no
yes
Limited liability
liability
no*
no*
yes
Unlimited
no
no
yes
Unlimited life
life
no
no
yes
Business
no
no
yes
Businesstaxed
taxed
no
no
yes
One
yes
no
yes
One owner
owner allowed
allowed
yes
no
yes

**Proprietorships
Proprietorshipsand
andpartnerships
partnershipsthat
thatare
areset
set up
upas
asLLCs
LLCs
provide
providelimited
limitedliability.
liability.
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Corporation
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).
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End of Chapter 1

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Accounting
Accounting Equation
Equation
Assets
Assets

Liabilities
Liabilities

Assets

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Equity
Equity

Liabilities
& Equity

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Assets
Assets
Cash
Cash
Accounts
Accounts
Receivable
Receivable

Vehicles
Vehicles

Resources
Resources
owned
owned or
or
controlled
controlled
by
by aa
company
company

Store
Store
Supplies
Supplies
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Notes
Notes
Receivable
Receivable

Land
Land

Buildings
Buildings
Equipment
Equipment
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Liabilities
Liabilities
Accounts
Accounts
Payable
Payable

Notes
Notes
Payable
Payable

Creditors
Creditors
claims
claims on
on
assets
assets
Taxes
Taxes
Payable
Payable
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Wages
Wages
Payable
Payable
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Equity
Equity
Owner
Owner
Withdrawals
Withdrawals

Owner
Owner
Investments
Investments

Owners
Owners
claims
claims
on
on
assets
assets
Revenues
Revenues
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Expenses
Expenses
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Expanded
Expanded Accounting
Accounting Equation
Equation

Assets
Assets

Owner
Owner
Capital
Capital

Liabilities
Liabilities

Owner
Owner
Withdrawals
Withdrawals

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+
Revenues
Revenues

Equity
Equity

Expenses
Expenses

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Transaction
Transaction Analysis
Analysis Equation
Equation
The accounting equation must remain in
balance after each transaction.

Assets
Assets

Liabilities
Liabilities

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Equity
Equity

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Transaction
Transaction Analysis
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)

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Transaction
Transaction Analysis
Analysis
J. Scott, the owner, contributed $20,000
cash to start the business.

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Transaction
Transaction Analysis
Analysis
Purchased supplies paying $1,000
cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)

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Transaction
Transaction Analysis
Analysis
Purchased supplies paying $1,000
cash.

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Transaction
Transaction Analysis
Analysis
Purchased equipment for $15,000
cash.
The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)

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Transaction
Transaction Analysis
Analysis
Purchased equipment for $15,000
cash.

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Transaction
Transaction Analysis
Analysis
Purchased Supplies of $200 and
Equipment of $1,000 on account.
The accounts involved are:
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)

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Transaction
Transaction Analysis
Analysis
Purchased Supplies of $200 and
Equipment of $1,000 on account.

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Transaction
Transaction Analysis
Analysis
Borrowed $4,000 from 1st American
Bank.
The accounts involved are:
(1) Cash (asset)
(2) Notes payable (liability)

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Transaction
Transaction Analysis
Analysis
Borrowed $4,000 from 1st American
Bank.

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Transaction
Transaction Analysis
Analysis
The balances so far appear below. Note that the
equation is still in balance.

Now lets look at transactions involving

revenue, expenses and withdrawals. The McGraw-Hill Companies, Inc., 2007

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Transaction
Transaction Analysis
Analysis
Rendered consulting services
receiving $3,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)

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Transaction
Transaction Analysis
Analysis
Rendered consulting services
receiving $3,000 cash.

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Transaction
Transaction Analysis
Analysis
Paid salaries of $800 to employees.
The accounts involved are:
(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.
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Transaction
Transaction Analysis
Analysis
Paid salaries of $800 to employees.

Remember that expenses decrease equity.

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Transaction
Transaction Analysis
Analysis
J. Scott withdrew $500 from the
business for personal use.
The accounts involved are:
(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.
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Transaction
Transaction Analysis
Analysis
J. Scott withdrew $500 from the
business for personal use.

Remember that withdrawals decrease equity.

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Financial
Financial Statements
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

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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.
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The profit of
$2,200
increases
Scotts capital
by $2,200.
The Statement of
Owners Equity
explains changes in
equity from profit (or
loss) and from owner
investments and
withdrawals for a
period of time.

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The
TheStatement
Statementof
of
Financial
FinancialPosition
Position or
or
Balance
BalanceSheet
Sheet
describes
describesaa
companys
companysfinancial
financial
position
positionat
ataapoint
point in
in
time.
time.
Owners Equity in Statement of Financial
Position or Balance Sheet
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From Statement of Owners Equity

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

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The Statement of Cash Flows identifies cash inflows and cash outflows over a
period of time.
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End of Chapter 2

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