Chapter 1 : Introduction to

Accounting

NATURE OF FINANCIAL ACCOUNTING

1. Definition of accounting2. Roles of an accountant3. Users of accounting information4. Importance of financial accounting5. Conceptual framework of financial reporting

Definition of accountingAccounting is a process of recording, classifying, summarising and interprating the economic events of an organization (business or non-business) to interested users of the information.

RECORDING CLASSIFYING

SUMMARISINGINTERPRATING

RECORDING

CLASSIFYING

SUMMARISING

INTERPRATING

It is concerned with the recording of financial transactions in an orderly manner, soon after their occurrence in the proper books of accounts.

It is concerned with the systematic analysis of the recorded data so as to accumulate the transactions of similar type at one place. This function is performed by maintaining the ledger in which different accounts are opened to which related transactions are posted.

It is concerned with the preparation and presentation of the classified data in a manner useful to the users. This function involves the preparation of financial statements

interpreting the statements in a manner useful to action ( giving meaning of the financial report)

Roles of an accountant

The primary task of accountants, which extends to all the others, is to prepare and examine financial records. They make sure that records are accurate and that taxes are paid properly and on time. Accountants and auditors perform overviews of the financial operations of a business in order to help it run efficiently. They also provide the same services to individuals, helping them create plans of action for improved financial well-being.

On the job, accountants:• Examine statements to ensure accuracy• Ensure that statements and records comply with laws and regulations• Compute taxes owed, prepare tax returns, ensure prompt payment• Inspect account books and accounting systems to keep up to date• Organize and maintain financial records• Improve businesses efficiency where money is concerned• Make best-practices recommendations to management• Suggest ways to reduce costs, enhance revenues and improve profits• Provide auditing services for businesses and individuals

The four main types of accountants are:• Public accountants: Their clients include corporations, governments and individuals.

They fulfill a broad range of accounting, auditing, tax and consulting duties.

• Management accountants: Also called cost, managerial, corporate or private accountants. They record and analyze the financial information of the clients they work for, and provide it for internal use by managers, not the public.

• Government accountants: Maintain and examine records of government agencies, audit private businesses and individuals whose activities are subject to government regulations or taxations.

• Internal auditors: They check for risk management of an organization or businesses' funds. They then identify ways to improve the process for finding and eliminating waste and fraud.

Users of Accounting Information

Before we identify the users of accounting information, we should understand the types of the business which are :

• Proprietorship or Sole Trader• Partnership• Company

Sole Proprietor Partnership Company

OwnershipOwned by a single person.

Owned by two or more persons or entities.

Owned by unlimited number of shareholders.

ManagementManaged by the owner of business

Managed by partners.

Managed by the company’s Board of Directors.

Liability

Unlimited liability – Owner is personally liable for all debts of business.

Unlimited liability – Partners are jointly and severely liable for all debts of partnership.

Limited liability – Shareholders’ liability is limited to their investment in the company.

TYPES OF THE BUSINESS

Users of Accounting Information• External Users• Investors• Creditors• Members of Non-governmental

Organisations• Government• Consumers• Research Scholars.

Internal Users• Owners• Management• Employees• Internal auditors

OBJECTIVES OF ACCOUNTING

a) To keep systematic recordsb) To protect business propertiesc) To ascertain the operational profit or lossd) To ascertain the financial position of the businesse) To facilitate rational decision makingf) Information System

Accounting ???

The main purpose of accounting is ;- to ascertain profit or loss during a specified period, - to show financial condition of the business on a particular date ;and - to have control over the firm's property.

BRANCHES OF ACCOUNITNG

FINANCIAL ACCOUNTING COST ACCOUNTING MANAGEMENT

ACCOUNTING AUDITING

FORENSIC ACCOUNTINGTAXATION

Revision

• Book-keeping: It is the art of recording in the books of accounts the monetary aspect of commercial or financial transactions.• Accounting: It is the means of collecting, summarising and reporting

in monetary terms, information about the business.

1. The accounting process does not include:a. interpretingb. reportingc. purchasingd. observinge. classifying

Revision

2. External users of financial accounting information include:a. lenders b. prospective owners c. customersd. labor unionse. all of the above

3. Which of the following is the internal user of accounting information:a. Suppliersb. Management c. Employee Unionsd. Banks

• Jamal Pintar (JP) is the owner of his own business. On December 31, JP’s assets, liabilities, revenues and expenses were:

Insurance Expenses RM3,000 Accounts Payable RM4,000Miscellaneous Expenses RM900 Accounts Receivable RM5,000Rent Expenses RM2,500 Cash RM14,000Salaries Expense RM19,000 Equipment RM11,000Supplies Expense RM1,200 Notes Payable RM4,600Services Performed RM45,000 Supplies on hand RM700

3. On December 31, total assets are equal to:a. RM25,700 b. RM19,700 c. RM22,100

d. RM30,700e. none of the above

• Jamal Pintar (JP) is the owner of his own business. On December 31, JP’s assets, liabilities, revenues and expenses were:

Insurance Expenses RM3,000 Accounts Payable RM4,000Miscellaneous Expenses RM900 Accounts Receivable RM5,000Rent Expenses RM2,500 Cash RM14,000Salaries Expense RM19,000 Equipment RM11,000Supplies Expense RM1,200 Notes Payable RM4,600Services Performed RM45,000 Supplies on hand RM700

4. On December 31, net income is equal to:a. RM18,400b. RM45,000 c. RM25,000d. RM17,400e. none of the above

Conceptual framework

The Conceptual Framework describes the objective of, and the concepts for, general purpose financial reporting. It is a practical tool that: a) assists the IASB to develop Standards that are based on consistent

concepts;b) assists preparers to develop consistent accounting policies when no

Standard applies to a particular transaction or event, or when a Standard allows a choice of accounting policy; and

c) assists others to understand and interpret the Standards.

Conceptual framework

• The objective of the Conceptual Framework is to improve financial reporting by providing a more complete, clear and updated set of concepts• A conceptual framework must consider the theoretical and

conceptual issues surrounding financial reporting and for m a coherent and consistent foundation that will underpin the development of accounting standards

Conceptual framework

• a conceptual framework can be seen as a statement of generally accepted accounting principles (GAAP) that form a frame of reference for the evaluation of existing practices and the development of new ones• As the purpose of financial reporting is to provide useful information

as a basis for economic decision making, a conceptual framework will form a theoretical basis for determining how transactions should be measured (historical value or current value) and reported – ie how they are presented or communicated to users.

The content of the Framework can be summarised as follows:

• Identifying the objective of financial statements• The reporting entity (to be issued)• Identifying the parties that use financial statements• The qualitative characteristics that make financial statements useful• The remaining text of the old Framework dealing with elements of financial

statements: assets, liabilities equity income and expenses and when they should be recognised and a discussion of measurement issues (for example, historic cost, current cost) and the related concept of capital maintenance.

Accounting Concepts

Accounting concepts is rules of accounting that should be followed in preparation of all accounts and financial statements.

Basic accounting conceptsThe four fundamental concepts are

Accruals concept: revenue and expenses are recorded when they occur and not when the cash is received or paid out;

Consistency concept: once an accounting method has been chosen, that method should be used unless there is a sound reason to do otherwise;

Going concern: the business entity for which accounts are being prepared is in good condition and will continue to be in business in the foreseeable future;

Prudence concept (also conservation concept): revenue and profits are included in the balance sheet only when they are realized (or there is reasonable 'certainty' of realizing them) but liabilities are included when there is reasonable 'possibility' of incurring them

Other concepts include;The historical cost concept stipulates that all assets must be recorded at the “original cost” and not the assets’ current market value. Historical cost refers to the price or the actual cost we paid for in the first place. Asset value recorded in the account books should be the actual cost paid, and not the asset's current market value;

Matching (or "Accruals") - Income should be properly "matched" with the expenses of a given accounting period. Transactions affecting both revenues and expenses should be recognized in the same accounting period;

Materiality - An item is said to be “material” if it is sufficiently important to affect our judgment of the true position of the firm. In other words, any misstatement which affects the decision of a reasonable user of the statements is deemed to be material. Minor events may be ignored, but the major ones should be fully disclosed;

Basic accounting concepts

Business entity concepts / separate entity concepts: accounting records reflect the financial activities of a specific business or organization, not of its owners or employees;

Objectivity: financial statements should be based only on verifiable evidence, including an audit trail;

Money measurement: the accounting process records only activities that can be expressed in monetary terms (with some exceptions);

Accounting equation: total assets equal total liabilities plus owners' equity;

Accounting period: financial records pertaining only to a specific period are to be considered in preparing accounts for that period;

Full disclosure: financial statements and their notes should contain all relevant data;

Lower of cost or market value: inventory is valued either at cost or the market value (whichever is lower);

Realization: any change in the market value of an asset or liability is not recognized as a profit or loss until the asset is sold or the liability is paid off;

Unit of measurement: financial data should be recorded with a common unit of measure (ringgit, pound sterling, yen, etc.).