Financial Accounting

1. Accounting in
Chapter
Business
1
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2. Learning Objectives
 Identify users and uses of  Identify professional
accounting accounting bodies and
standards setting in Malaysia
 Identify opportunities in
accounting and related fields  Define and interpret the
accounting equation and
 Explain he meaning of
each of its components
generally accepted
accounting principles, and  Analyze business
define and apply several key transactions using the
principles of accounting accounting equation
 Identify and prepare basic
financial statements and
explain how they interrelate
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3. Importance of Accounting
is a
Identifies
Accounting
system that
Records
information
Relevant Communicates
that is
Reliable
to help users make
better decisions.
Comparable
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4. Accounting Activities
 Identifying  Recording
Business Business
Activities Activities

Communicating
Business
Activities
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5. Users of Accounting Information
Internal Users
External Users
•Lenders •Consumer Groups •Managers •Sales Staff
•Shareholders •External Auditors •Officers •Budget Officers
•Governments •Customers •Internal Auditors •Controllers
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6. Users of Accounting Information
External Users
Internal Users
Financial accounting provides
external users with financial Managerial accounting provides
statements. information needs for internal
decision makers.
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7. Characteristics of Accounting
Information
USEFUL
FINANCIAL
INFORMATION
RELEVANCE RELIABILITY
1. Predictive value 1. Verifiable
2. Feedback value 2. Faithful representation
3. Timely 3. Neutral
COMPARABILITY CONSISTENCY
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8. Opportunities in Accounting
Financial Managerial Taxation
•Preparation •General accounting •Preparation
•Analysis •Cost accounting •Planning
•Auditing •Budgeting •Regulatory
•Regulatory •Internal auditing •Investigations
•Consulting •Consulting •Consulting
•Planning •Controller •Enforcement
•Criminal •Treasurer •Legal services
•Strategy •Estate planning
investigation
•Lenders •FBI investigators
•Consultants •Market researchers
•Analysts •Systems designers
Accounting- •Traders •Merger services
related •Directors •Business valuation
•Underwriters •Human services
•Planners •Litigation support
•Appraisers •Entrepreneurs
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9. Generally Accepted Accounting
Principles
Financial accounting practice is governed by
concepts and rules known as Generally Accepted
Accounting Principles (GAAP).
Relevant Information Affects the decision of
its users.
Reliable Information Is trusted by users.
Comparable Is helpful in contrasting
Information organizations.
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10. Setting Accounting Principles
Financial Accounting
Standards Board is the private
group that sets both broad and
specific principles.
The Securities Commission is the government
group that establishes reporting requirements
for companies that issue share to the public.
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11. The Operating Guidelines of 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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12. Accounting Assumptions
Now Future
Going-Concern Principle
Economic Entity
Reflects assumption that the
The business is accounted for
business will continue operating
separately from other business
instead of being closed or sold
entities, including its owner
Time Period
Monetary Unit Principle
The economic life of business can be
Express transactions and events in
divided into artificial time period for
monetary, or money, units
the purpose of financial reporting
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13. Accounting Principles
Revenue Recognition
2. Recognize revenue when it is
Historical Cost
earned.
Accounting information is based
3. Proceeds need not be in cash.
on actual cost.
4. Measure revenue by cash
received plus cash value of items
received.
Full Disclosure
Matching
Report enough information for
Expenses are matched against
users to make knowledgeable
revenues, and recorded in the
decisions about the company
same period in which the related
revenues are earned
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14. Accounting Constraints
Conservatism
Income and assets be reported at
their lowest reasonable amounts (i.e.
minimizing the assets and
Materiality
understating the income)
Accountants are required to
accurately account for significant
items and transactions
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15. Professional Accounting Bodies and
Standard Setting in 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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16. Malaysian Institute of Accountant (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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17. Malaysian Institute of Accountant (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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18. Malaysian Institute of Certified Public
Accountant (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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19. Malaysian Accounting Standards Board
(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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20. Financial Reporting Federation (FRF)
 established under the Financial Reporting Act 1997
(Act), comprises 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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21. Business Entity Forms
Proprietorship Partnership Corporation
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22. Characteristics of Businesses
Characteristics Proprietorship Partnership Corporation
Business entity yes yes yes
Legal entity no no yes
Limited liability no* no* yes
Unlimited life no no yes
Business taxed no no yes
One owner allowed yes no yes
* Proprietorships and partnerships that are set up as LLC’s
provide limited liability.
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23. 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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24. Accounting Equation
= +
Assets Liabilities Equity
Liabilities
Assets & Equity
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25. Assets
Cash
Accounts Notes
Receivable Receivable
Resources
owned or
controlled
Vehicles Land
by a
company
Buildings
Store
Supplies
Equipment
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26. Liabilities
Accounts Notes
Payable Payable
Creditors’
claims on
assets
Taxes Wages
Payable Payable
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27. Equity
Owner
Owner
Withdrawals
Investments
Owner’s
claims
on
assets
Revenues Expenses
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28. Expanded Accounting Equation
= +
Assets Liabilities Equity
_ _
Owner Owner
+ Revenues Expenses
Capital Withdrawals
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29. Transaction Analysis Equation
The accounting equation must remain in
balance after each transaction.
= +
Assets Liabilities Equity
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30. Transaction 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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31. Transaction Analysis
J. Scott, the owner, contributed $20,000
cash to start the business.
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32. Transaction Analysis
Purchased supplies paying $1,000
cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
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33. Transaction Analysis
Purchased supplies paying $1,000
cash.
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34. Transaction Analysis
Purchased equipment for $15,000
cash.
The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
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35. Transaction Analysis
Purchased equipment for $15,000
cash.
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36. Transaction 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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37. Transaction Analysis
Purchased Supplies of $200 and
Equipment of $1,000 on account.
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38. Transaction Analysis
Borrowed $4,000 from 1st American
Bank.
The accounts involved are:
(1) Cash (asset)
(2) Notes payable (liability)
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39. Transaction Analysis
Borrowed $4,000 from 1st American
Bank.
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40. Transaction Analysis
The balances so far appear below. Note that the
Balance Sheet Equation is still in balance.
Now let’s look at transactions involving
revenue, expenses and withdrawals. © The McGraw-Hill Companies, Inc., 2005
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41. Transaction Analysis
Rendered consulting services
receiving $3,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
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42. Transaction Analysis
Rendered consulting services
receiving $3,000 cash.
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43. Transaction 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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44. Transaction Analysis
Paid salaries of $800 to employees.
Remember that expenses decrease equity.
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45. Transaction 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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46. Transaction Analysis
J. Scott withdrew $500 from the
business for personal use.
Remember that withdrawals decrease equity.
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47. Financial Statements
Let’s prepare the Financial Statements
reflecting the transactions we have recorded.
1. Income Statement
2. Statement of Owner’s Equity
3. Balance Sheet
4. Statement of Cash Flows
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48. Net income is the
difference
between
Revenues and
Expenses.
The income statement describes a
company’s revenues and expenses
along with the resulting net income or
loss over a period of time due to
earnings activities.
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49. The net income
of $2,200
increases
Scott’s capital
by $2,200.
The Statement of
Owner’s Equity
explains changes in
equity from net
income (or net loss)
and from owner
investments and
withdrawals for a
period of time.
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50. The Balance
Sheet
describes a
company’s
financial
position at a
point in time.
Owner’s Equity in Balance Sheet
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51. From Statement of Owner’s Equity
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52. The Statement of Cash Flows identifies cash inflows and cash outflows over a
period of time.
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53. End of Chapter 1
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