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.
