Introduction to Accounting

Definition of Accounting Role of Accounting Brief History & Development of Accounting Introduction to Financial Statements Accounting Profession & Professional Bodies Assumptions, Principles and Qualitative Characteristics of Accounting Information Accounting Standards and Accounting Policy

Definition of Accounting

the purpose of accounting is to

provide information which is potentially useful for making economic decisions and which if provided will enhance social welfare.

(AAA, 1975)

Definition of Accounting
Accounting: a process of identifying, recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the result thereof (AICPA, 1961)

Accounting vs Bookkeeping
Bookkeeping: only involves activities of collecting and recording financial data Mechanical and repetitive process A small aspect of accounting

Definition of Accounting

the purpose of accounting is to

provide information which is potentially useful for making economic decisions and which if provided will enhance social welfare.

(AAA, 1975)

Role of Accounting

Means of communication
As language of business Information conveyed to various parties within organisation as well as external parties Form of communication depends on information do be conveyed and types of users

provide information for decision making

Role of Accounting

Means of establishing accountability

Accountability: held responsible to a higher authority for actions carried out Employees accountable to management, management accountable to owners, organisation accountable to government and society Accounting provides information to enable assessment of performance to be made, as a result accountability can be established

Role of Accounting

Planning and control tool

Planning includes determining objectives to be achieve and ways of achieving the objectives Control involves comparison of actual performance and expected performance

Aid to users of accounting information/interested parties

Who Uses Accounting Information?

Internal users (Management Accounting):
Management

Examples of reports:
Budgets Cost analyses Performance reports

Who Uses Accounting Information?

External users (Financial Accounting):
Investors Lenders Employees Customers Competitors Government Press Suppliers

Examples of reports:

Balance sheet Income statement Statement of cash flows Other regulatory reports

User group Shareholders

Reason for interest in financial information To assess the performance of the management in their role as stewards of the company To use the information to make decisions on whether or not to sell the investment in the shares of the company or perhaps to buy more shares in the company To make decisions on whether to invest or not to invest in the shares of the company

Potential shareholders

Investment analysts To assess the performance of the company in order to be able to advise their clients on investment strategy

Lenders and potential lenders

Employees and trade unions

To assess the ability of the business to make repayments to meet the regular interest payments
To assess the viability of the business and the extent to which it is likely to be able to (a) continue to offer employment (b)

suppliers

Where suppliers offer credit terms, they need to be able to assess the likelihood of being paid promptly
In the case of an environmental activist group, for example: to assess the extent to which the company has set aside fund for environmental clean up operations

Special interest group (NGO)

Government: Inland revenue board Government: other agencies Financial journalists

To assist in the assessment and collection of taxes

To assist in the collection of national statistical information

To obtain information about a company activities and profitability which will be of interest of the journalists readers

Customers

To assess the likelihood of the business continuing in existence and to continue to supply the goods or services required by the customers

The general public

Anyone not covered by any of the categories above who has interest in the activities of the company

Brief History and Development of Accounting

Existence of Accounting during civilisation of Egyptians, Greeks and Romans In earliest form performed stewardship function (protection of owners interest by collection of business facts and figures) Pacioli published the first printed work on mathematics (include a section on double entry bookkeeping)

Brief History and Development of Accounting

First known use of double entry bookkeeping in Genoa Commune Accounts of 1340 Industrial Revolution and change in business form Emergence of cost/management accounting

Brief History and Development of Accounting

Development of accounting continually affected by changes in technology, law, economic condition, influence of pressure groups

Introduction to Financial Statements

Financial statement is a structured financial representation of the financial position of an enterprise and the transaction undertaken by an enterprise

Financial Statements
The objective of financial statements is to provide information about the financial position, performance and change in financial position of an enterprise that is useful to a wide range of users in making economic decisions.
International Accounting Standards Committee (2000)

Objectives and Purposes of Financial Statements

Provide information about the financial position, performance and cash flow of an enterprise Show the results of managements stewardship of the resources entrusted to it Assists users in predicting the enterprises future cash flow and the timing and certainty of the generation of cash and cash equivalents.

Components of Financial Statements

Balance Sheet Income Statement A statement showing:

All changes in equity, or Changes in equity other than those arising from capital transactions with owners and distribution with owners

Cash Flow Statement, and Accounting policies and explanatory notes

Primary Financial Statements

The Balance Sheet (Statement of Financial Position)

Income Statement (Statement of Earnings) Statement of Cash Flows

Balance Sheet

Statement of financial position Reports the resources of a firm (assets) and what is owed (liabilities and owners equity) at a particular date Reports a firms assets, liabilities and owners equity at a particular date

Components of a Balance Sheet

Assets
Cash, inventory, accounts receivable, buildings

Liabilities
Accounts payable, taxes payable, bank loan

Owners Equity
Paid-in capital, retained earnings

Limitations of the Balance Sheet

Book value vs. market value.

Which is better?

Only records assets/liabilities that can be quantified.

Reputation
TESCOs name Great CEO

The Income Statement

Reports the performance of the firm for a particular period Reports the amount of net income earned by a firm during a period Net income = Revenue - Expenses

The Income Statement

Revenues
Increase in a companys resources from the sale of goods or services.

Expenses
Costs incurred in the normal course of business to generate revenues.

Net Income or (Net Loss)

Revenues - Expenses

Limitations of Financial Statements

Limited to information which can be expressed in quantitative terms. Largely confined to an analysis of past events. Accounting is not an exact science. Most information expressed in monetary units

Notes to Financial Statements

1.

Summary of significant accounting policies.

Additional information about the summary totals found in the financial statements.

2.

3.
4.

Disclosure of important information that is not recognized in the financial statements.

Supplementary information required by the Malaysian Accounting Standards Board (MASB) or the Securities Commission (SC).

The Financial Reporting Environment

Securities Commission Financial Reporting Foundation Malaysian Accounting Standards Board Malaysian Institute of Accountants Bursa Malaysia Professional Accounting Bodies
MICPA

The Accounting Environment

MASB

Bursa Malaysia

MIA

Accounting World
Security Commission (SC) Inland Revenue Board of Malaysia

MICPA

Accounting Assumptions and Principles

Separate Entity Going concern Accounting Period Matching Principle Consistency Conservatism/Prudence Realisation Principle

Separate Entity Assumption

The assumption that the activities of the entity are to be separated from those of the individual owners

Going concern

The assumption that the an accounting entity will have a continuing existence for the foreseeable future Allows the use of historical cost in the preparation of financial statement

Periodicity Principle

The life of the business is divided into arbitrary time periods Accounting period is generally one year for reporting to external parties but can be varied for internal reporting

Monetary Measurement

Record only those activities of economic entities that can be measured in monetary terms Transactions that cannot be quantified in financial terms are not recorded in the main accounting records

Cost principle

Assumes that all transactions are recorded in terms of their cost at the time the transaction occurred. Provides objective verifiable evidence of a transaction rather than a subjective opinion liable to distortion

Consistency Principle

Required the reporting entity to use the accounting methods over consecutive time periods (i.e no changes from year to year) All item must be treated similarly from year to year. Does not mean that accounting method cannot be changed (refer to MASB 1)

Matching Principle
Under the matching concept, revenues for a period are matched with the expenses incurred in generating the revenue. Expenses of the business entity is recognised when the revenue related to the said expense is recognised

Conservatism/Prudence

Ensuring that profit is not shown as being too high or that assets are shown too high a value and that the financial statements are neutral i.e. that neither gain nor losses are understated or overstated

Qualitative characteristics of Financial Information

Comparability
Information can be compared with :
Information produced in the previous year Information produced by other businesses

Understandability
Users should be able to understand and can make good decision from such information

Qualitative characteristics of Financial Information

Relevance
Information is relevant if it influence a decision Information has predictive value (helps users to make decisions about the future) Has confirmatory value (helps users to evaluate their past decisions)

Qualitative characteristics of Financial Information

Reliability
Information can be depended on Complete information and free from significant error and bias

Accounting Standards

Accounting standard can be defined as a guide-line for practice in accounting, It is procedures and rules that should be followed by an accountant in collecting, preparing and reporting transactions occurred in business activities to public knowledge.

Accounting Standards

To ensure that the information reported in financial statements is complete, reliable, understandable and can be comparable by the user. also used for standardization in preparing financial statement so that it can be comparable with other statement produced by other organization.

Accounting Policies

Accounting policies are the specific principles, bases, conventions, rules and practices adopted by the enterprise in preparing and presenting financial statements.