DEFINITION OF ACCOUNTING: The process of identifying, measuring, and communicating economic information of an organizations to its users who need the information for decision making. BOOK KEEPING: Is the process of recording data relating to accounting transactions in the accounting books. Includes recording of transactions in a journal, posting in the ledgers and balancing of accounts (all the records before the preparation of trial balance) OBJECTIVES OF ACCOUNTING: To keep systematic records To ascertain the result of the operations To ascertain the financial position of a business To portray the liquidity position To protect business properties To facilitate rational decision-making To satisfy the requirements of law INTERNAL EXTERNAL Managers Potential investors Owner (s) Creditors Tax inspectors Bank Prospective buyers NATURE FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING USERS Info for external parties Info to internal parties PURPOSE Reports on past performance Provides info for planning, (fin st) to helps making controlling, evaluating and investment decision / credit continuous improvement to rating aid decision making process SEGMENT REPORTING Pertains to the entire org. Pertains to smaller business units/department in addition to entire org. REPORTING Well-defined (annually, semi As needed (daily, weekly, FREQUENCY annually or quarterly) monthly) LEGAL REQUIREMENT Subject to public and Optional and not subjected regulators scrutiny (comply to rules and regulations with GAAP, Securities Commission, Companies Acts) TYPES CHARACTERISTICS ADVANTAGES DISADVANTAGES SOLE ? ? ? PROPRIETORSHIP PARTNERSHIP ? ? ? CORPORATION ? ? ? PRINCIPLES / EXPLANATIONS CONCEPTS HISTORICAL COST The transaction recorded in the books at cost at the time of purchase. BUSINESS ENTITY Each business org/entity exists as an economic unit and has an existence separate from its owner(s) MONEY MEASUREMENT Economic entity is initially recorded and reported in a common monetary unit of measure RM in Malaysia. GOING CONCERN Transactions are recorded assuming that the business will exist for a long period of time (at least 12 months) DUAL ASPECTS Every transaction has a two-fold aspect: assets and claims against them (asset = capital + liabilities) TIME INTERVAL This requires that entity to prepare financial st at regular interval during the year (actg period) ACCRUAL The revenue is recognised on its realization and not on its actual receipts. While costs are recognised when they are PRINCIPLES / CONCEPTS EXPLANATIONS REVENUE RECOGNITION In accrual basis, revenue is recognised by the seller when it is earned irrespective of whether cash from the transaction has been received or not REALISATION This refers to the application of accruals concept towards the recognition of revenue. Revenue must be recognised: (a) When the rewards and benefits associated with the items sold or services provided is transferred (b) When the consideration for the transfer is measurable and is realised 2 exception: (i) hire purchase (ii) contracts account MATCHING All costs which are associated to a particular period should be compared with the revenue associated to the same period to obtain the net income of the business FULL DISCLOSURE All material information must be disclosed in the fin st. UNDERSTANDABILITY : Require the fin info to be understandable by users
RELEVANCE: Affected by the materiality of the info. influence
the economic decision of its users MATERIALITY: info is materials if its omission or misstatement effect the decision of the users
RELIABILITY : is reliable if a user can depend upon it to be
materially accurate and if it faithfully represents the info that it purports to present FAITHFUL REPRESENTATION: require fin info to be true and fair view and free from misstatement SUBSTANCE OVER FORM: require transaction and events to be accounted for so that it represent the true economic substance rather than the legal form PRUDENCE: exercise degree of caution in the estimates (assets and income are not overstated, and liability and expenses are not overstated) COMPLETENESS : reliability achieved only if complete fin info provided
COMPARABILITY: require the fin info to be comparable
across periods and companies CONSISTENCY: once adopted, accounting method should be applied consistently in the future. ???
"The Language of Business: How Accounting Tells Your Story" "A Comprehensive Guide to Understanding, Interpreting, and Leveraging Financial Statements for Personal and Professional Success"