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Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2005
Accounting in Business
Chapter
11
Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2005
Learning ObjectivesLearning Objectives
Identify users and uses of accounting
Identify opportunities in accounting and related fields
Explain he meaning of generally accepted accounting principles, and define and apply several key principles of accounting
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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IdentifiesIdentifies
RecordsRecords
CommunicatesCommunicatesRelevantRelevant
ReliableReliable
ComparableComparable
Importance of AccountingImportance of Accounting
AccountingAccountingis a
system that
information
that is
to help users make better decisions.
to help users make better decisions.
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Identifying Business Activities
Recording Business Activities
Communicating Business Activities
Accounting ActivitiesAccounting Activities
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Users of Accounting InformationUsers of Accounting Information
External Users
•Lenders
•Shareholders
•Governments
•Consumer Groups
•External Auditors
•Customers
Internal Users
•Managers
•Officers
•Internal Auditors
•Sales Staff
•Budget Officers
•Controllers
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Users of Accounting InformationUsers of Accounting Information
External Users
Financial accounting provides external users with financial
statements.
Internal Users
Managerial accounting provides information needs for internal
decision makers.
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Characteristics of Accounting Information
Characteristics of Accounting Information
USEFUL FINANCIAL
INFORMATION
CONSISTENCYCOMPARABILITY
RELEVANCE1. Predictive value2. Feedback value3. Timely
RELIABILITY1. Verifiable2. Faithful representation3. Neutral
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Opportunities in AccountingOpportunities in Accounting
FinancialFinancial
•Preparation•Analysis•Auditing•Regulatory•Consulting•Planning•Criminal investigation
•Preparation•Analysis•Auditing•Regulatory•Consulting•Planning•Criminal investigation
ManagerialManagerial
•General accounting •Cost accounting•Budgeting•Internal auditing•Consulting•Controller•Treasurer•Strategy
•General accounting •Cost accounting•Budgeting•Internal auditing•Consulting•Controller•Treasurer•Strategy
TaxationTaxation
•Preparation•Planning•Regulatory•Investigations•Consulting•Enforcement•Legal services•Estate planning
•Preparation•Planning•Regulatory•Investigations•Consulting•Enforcement•Legal services•Estate planning
Accounting-related
Accounting-related
•Lenders•Consultants•Analysts•Traders•Directors•Underwriters•Planners•Appraisers
•Lenders•Consultants•Analysts•Traders•Directors•Underwriters•Planners•Appraisers
•FBI investigators•Market researchers•Systems designers•Merger services•Business valuation•Human services•Litigation support•Entrepreneurs
•FBI investigators•Market researchers•Systems designers•Merger services•Business valuation•Human services•Litigation support•Entrepreneurs
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Financial accounting practice is governed by concepts and rules known as Generally Accepted
Accounting Principles (GAAP).
Financial accounting practice is governed by concepts and rules known as Generally Accepted
Accounting Principles (GAAP).
Generally Accepted Accounting Principles
Generally Accepted Accounting Principles
Relevant Information
Relevant Information
Affects the decision of its users.
Affects the decision of its users.
Reliable InformationReliable Information Is trusted by users.
Is trusted by users.
Comparable Information
Comparable Information
Is helpful in contrasting organizations.
Is helpful in contrasting organizations.
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The Securities Commission is the government group that establishes reporting requirements for companies that issue share to the public.
The Securities Commission is the government group that establishes reporting requirements for companies that issue share to the public.
Setting Accounting PrinciplesSetting Accounting Principles
Financial Accounting Standards Board is the private group that sets both broad and
specific principles.
Financial Accounting Standards Board is the private group that sets both broad and
specific principles.
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The Operating Guidelines of AccountingThe 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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Accounting AssumptionsAccounting Assumptions
Economic EntityThe business is accounted for separately from other business
entities, including its owner
Monetary Unit PrincipleExpress transactions and events in
monetary, or money, units
Now Future
Going-Concern PrincipleReflects assumption that the
business will continue operating instead of being closed or sold
Time PeriodThe economic life of business can be divided into artificial time period for the purpose of financial reporting
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Historical Cost Accounting information is based
on actual cost.
Revenue Recognition 1. Recognize revenue when it is
earned.2. Proceeds need not be in cash.3. Measure revenue by cash
received plus cash value of items received.
MatchingExpenses are matched against
revenues, and recorded in the same period in which the related
revenues are earned
Accounting PrinciplesAccounting Principles
Full DisclosureReport enough information for users to make knowledgeable decisions about the company
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Accounting ConstraintsAccounting Constraints
ConservatismIncome and assets be reported at
their lowest reasonable amounts (i.e. minimizing the assets and understating the income) Materiality
Accountants are required to accurately account for significant
items and transactions
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Professional Accounting Bodies and Standard Setting in Malaysia
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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Malaysian Institute of Accountant (MIA)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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Malaysian Institute of Accountant (MIA)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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Malaysian Institute of Certified Public Accountant (MICPA)
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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Malaysian Accounting Standards Board (MASB)
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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Financial Reporting Federation (FRF)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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Business Entity FormsBusiness Entity Forms
ProprietorshipProprietorship PartnershipPartnership CorporationCorporation
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Characteristics Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes
Characteristics Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes
*
* Proprietorships and partnerships that are set up as LLC’s provide limited liability.
* Proprietorships and partnerships that are set up as LLC’s provide limited liability.
Characteristics of BusinessesCharacteristics of Businesses
*
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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).
CorporationCorporation
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AssetsLiabilities & Equity
Accounting EquationAccounting Equation
LiabilitiesLiabilities EquityEquityAssetsAssets = +
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LandLand
EquipmentEquipment
BuildingsBuildings
CashCash
VehiclesVehicles
Store Supplies
Store Supplies
Notes Receivable
Notes Receivable
Accounts Receivable
Accounts Receivable
Resources owned or controlled
by a company
Resources owned or controlled
by a company
AssetsAssets
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Taxes Payable
Taxes Payable
Wages Payable
Wages Payable
Notes Payable
Notes Payable
Accounts Payable
Accounts Payable
Creditors’ claims on
assets
Creditors’ claims on
assets
LiabilitiesLiabilities
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Owner’sclaims
on assets
Owner’sclaims
on assets
RevenuesRevenues
Owner Investments
Owner Investments
Owner Withdrawals
Owner Withdrawals
ExpensesExpenses
EquityEquity
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LiabilitiesLiabilities EquityEquityAssetsAssets = +
Expanded Accounting EquationExpanded Accounting Equation
RevenuesRevenues ExpensesExpensesOwner CapitalOwner Capital
Owner Withdrawals
Owner Withdrawals
_ + _
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The accounting equation must remain in balance after each transaction.
LiabilitiesLiabilities EquityEquityAssetsAssets = +
Transaction Analysis EquationTransaction Analysis Equation
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The accounts involved are:
(1) Cash (asset)
(2) J. Scott, Capital (equity)
J. Scott, the owner, contributed $20,000 cash to start the business.
Transaction AnalysisTransaction Analysis
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Transaction AnalysisTransaction Analysis
J. Scott, the owner, contributed $20,000 cash to start the business.
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The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
Transaction AnalysisTransaction Analysis
Purchased supplies paying $1,000 cash.
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Transaction AnalysisTransaction Analysis
Purchased supplies paying $1,000 cash.
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The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
Transaction AnalysisTransaction Analysis
Purchased equipment for $15,000 cash.
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Transaction AnalysisTransaction Analysis
Purchased equipment for $15,000 cash.
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The accounts involved are:
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)
Transaction AnalysisTransaction AnalysisPurchased Supplies of $200 and Equipment of $1,000 on account.
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Transaction AnalysisTransaction AnalysisPurchased Supplies of $200 and Equipment of $1,000 on account.
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The accounts involved are:
(1) Cash (asset)
(2) Notes payable (liability)
Transaction AnalysisTransaction Analysis
Borrowed $4,000 from 1st American Bank.
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Transaction AnalysisTransaction Analysis
Borrowed $4,000 from 1st American Bank.
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Transaction AnalysisTransaction AnalysisThe 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.
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The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
Transaction AnalysisTransaction AnalysisRendered consulting services
receiving $3,000 cash.
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Transaction AnalysisTransaction AnalysisRendered consulting services
receiving $3,000 cash.
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The accounts involved are:
(1) Cash (asset)
(2) Salaries expense (equity)
Transaction AnalysisTransaction Analysis
Paid salaries of $800 to employees.
Remember that the balance in the salaries expense account actually increases.
But, equity actually decreases because expenses reduce equity.
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Transaction AnalysisTransaction Analysis
Remember that expenses decrease equity.
Paid salaries of $800 to employees.
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The accounts involved are:
(1) Cash (asset)
(2) J. Scott, Withdrawals (equity)
Transaction AnalysisTransaction AnalysisJ. Scott withdrew $500 from the
business for personal use.
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 AnalysisTransaction Analysis
Remember that withdrawals decrease equity.
J. Scott withdrew $500 from the business for personal use.
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Financial StatementsFinancial StatementsLet’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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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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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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The Balance Sheet
describes a company’s
financial position at a point in time.
The Balance Sheet
describes a company’s
financial position at a point in time.
Owner’s Equity in Balance Sheet
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From Statement of Owner’s Equity
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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 1End of Chapter 1