ACCOUNTING IN BUSINESSChapter

1

ACCOUNTING ENVIRONMENT

- Lecture 1

Learning Objectives

After studying this chapter, you should be able to:

1. Describe what is accounting.2. State the users of the accounting information.3. Describe the profession of accounting,

accounting professional bodies and code of professional conduct & ethics.

4. State the characteristics of the qualitative accounting information.

5. Describe the assumptions, principles and constraints related to the practice of accounting.

6. Describe the forms and types of business.7. Describe the elements of financial statements.

Definition of Accounting

As an information system that provides report to stakeholders about the economic activities and condition of a business.

So, accounting is the process of: Identifying Measuring Communication economic information to permit informed judgements, and Decisions by users of the information

Identifies

Records

CommunicatesRelevant

Reliable

Comparable

Importance of Accounting

Accountingis a

system that

information

that is

to help users make better decisions.

Identifying Business Activities

Recording Business Activities

Communicating Business Activities

Accounting Activities

Users of Accounting Information

External Users

•Lenders

•Shareholders

•Governments

•Consumer Groups

•External Auditors

•Customers

Internal Users

•Managers

•Officers

•Internal Auditors

•Sales Staff

•Budget Officers

•Controllers

Users of Accounting Information

External Users

Financial accounting provides external users with financial

statements.

Internal Users

Managerial accounting provides information needs for internal

decision makers.

Opportunities in Accounting

Financial•Preparation•Analysis•Auditing•Regulatory•Consulting•Planning•Criminal investigation

Managerial•General accounting •Cost accounting•Budgeting•Internal auditing•Consulting•Controller•Treasurer•Strategy

Taxation•Preparation•Planning•Regulatory•Investigations•Consulting•Enforcement•Legal services•Estate planning

Accounting-related

•Lenders•Consultants•Analysts•Traders•Directors•Underwriters•Planners•Appraisers

•FBI investigators•Market researchers•Systems designers•Merger services•Business valuation•Human services•Litigation support•Entrepreneurs

Branches of Accounting

Differences Between Financial Accounting and Management Accounting

FINANCIAL ACC.- Measure and report

economic events- In accounting period- To determine

results and overall financial position

- Prepare a financial statements

MANAGEMENT ACC.

-Provides management with information about overall planning and control of the business.

- Focus on preparation and interpretation of accounting information for management purposes.

Profession of Accounting Private Accounting

• Frequently called management accountant.• As industrial or cost accountant if they are

employed by manufacturer.• The chief accountant in a business may be called

the controller. Public Accounting

• An accountant may practice as an individual or as a member of a public accounting firm.

• Public accountants who have met a state’s education, experience, and examination requirements may become Certified Public Accountants (CPAs)

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Non-Profit Accounting• Reporting and control for government units,

foundations, hospitals, labor unions, colleges or universities, and charities.

Code of Professional Conduct & Ethics

Set out in two sections: (1) The Fundamental Principles (2) The Professional Statements The Fundamental Principles are:

• Integrity – should be straightforward, honest and sincere.

• Objectivity – must be fair and must not allow prejudice or bias or influence of others to override his objectivity.

• Independence – should both be and appear to be free of any interest which might be regarded as being incompatible with integrity & objectivity.

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• Confidentiality – should respect the confidentiality of information acquired during of his professional work and should not disclose any such information to a third party without specific authority or unless there is a legal or professional right or duty to disclose.

• Professional Competence and Due Care – should carry out his professional work with due care, competence and diligence and has a continuing duty to maintain his professional knowledge and skill up-to-date.

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• Compliance with Technical Standards – should carry out his professional work in accordance with the relevant technical and professional standards and in compliance with the relevant legislation (he must comply with the approved Accounting and Auditing Standards & other pronouncements)

• Professional Behaviour – should observe the ethical guidance of the Association and in circumstances not provided for by the that guidance

Malaysian Accounting Professional Bodies

Financial Reporting Foundation (FRF) • Oversees MASB performance, financial and

funding requirement, and reviews proposed standards by MASB.

Malaysian Accounting Standard Board (MASB)• Adopt international accounting standard or develop

new accounting standard for Malaysian companies Malaysian Institute of Certified Public

Accountant (MICPA)• To advance the theory and practice of accounting,

to provide education, training and examination to accountants.

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Malaysian Institute of Accountants (MIA)• To develop, support and monitor quality and

expertise, consistent with global practice in accounting profession.

Organizations Affecting Financial Reporting and Audits

Generally, there are four related parties involved in the financial reporting process and practice of public accounting in Malaysia:

• Malaysian Accounting Standard Board (MASB)• Malaysian Institute of Accountants (MIA)• Companies Commission of Malaysia (CCM) - responsible to ensure the laws provision are enforced & complied with by corporations, companies and businesses in the corporate sector. - as a regulator to promote proper conduct of corporate officers and exercise good corporate governance.

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• Securities Commission (SC) and Bursa Malaysia (BM) (or previously known as KLSE)

- SC responsible for the regulation and supervision of capital markets and securities industry. - SC has relatively wide investigate and enforcement powers. - BM is a regulatory organization which governs the conduct of stock broking companies and companies listed on the exchange. - listed companies must comply with BM Requirements .

Characteristics of the Qualitative Accounting Information

Primary qualities that make accounting information useful for decision making are:• Relevance – it is capable of making a difference in

a decision and helps users make predictions about ultimate outcome of past, present and future events.

• Reliability – accounting information must posses three key characteristics; (a) verifiable, (b) representational faithfulness and (c) neutrality

The secondary qualities identified are comparability and consistency.

Financial accounting practice is governed by concepts and rules known as generally accepted

accounting principles (GAAP).

Generally Accepted Accounting Principles

Relevant Information Affects the decision of its users.

Reliable Information Is trusted by users.

Comparable Information

Is helpful in contrasting organizations.

The Securities and Exchange Commission is the government group that establishes

reporting requirements for companies that issue stock to the public.

Setting Accounting Principles

Financial Accounting Standards Board is the private group that sets both broad and

specific principles.

Custodians of Accounting Standards in Malaysia

Financial Reporting Act 1997 established the Financial Reporting Foundation with oversight responsibility for the Malaysian Accounting Standards Board.

This structure preserves the integrity and proper functioning of the financial reporting regime in Malaysia.

The Financial Reporting Act 1997 empowers the Malaysian Accounting Standards Board to issue approved accounting standards for use by entities in Malaysia.

Principles of Accounting

There are at least five main accounting principles, which provide guidance in accounting practice:• Historical cost principle (Cost principle)• Objectivity principle• Revenue recognition principle• Matching principle• Full disclosure principle

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Historical Cost PrincipleAccounting information is

based on actual cost.

Objectivity PrincipleAccounting information is supported by independent,

unbiased evidence.

Revenue Recognition Principle1. 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.

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Matching principle – to report expenses incurred in the same period as of the revenue is actually earned as a result of these expenses

Full disclosure principle – requires the business to disclose sufficient information for the users in helping them of making reasonable decision making (business should report relevant, reliable and comparable information about the business activities)

Accounting Assumptions

Four main accounting assumptions are:• Separate business entity• Going concern• Monetary unit• Time period

Separate business entity – the business is viewed as an separate entity from its owners, creditors or stakeholders.

Going concern – the preparation of company’s financial reports should consider assumption that the operation shall continue in foreseeable future without being closed or sold.

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Monetary unit – we should report all the business transactions or events in monetary units such as RM (Ringgit Malaysia)

Time period – business activities can be divided into specific period such as a month, a quarter and a year.

Accounting Constraints

There are two constraints involved in accounting:• Conservatism • Materiality

Conservatism – no gain or profit but to recognize possible loss.

Materiality – requires business to account only for the items that are deemed significant for a given size of operation (if the misreporting of that items give effect to users decision making)

Business Entity Forms

Proprietorship Partnership Corporation

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Sole proprietorship – owned by one individual. Partnership – owned by two or more

individuals. Corporation – organized under state or federal

statutes as separate legal entity. The ownership of corporation is divided into shares of stock. A corporation issues the stock to individuals or other businesses, who then become owners or stockholders of the corporation.

Owners of a corporation are called shareholders (or stockholders).

When a corporation issues only one class of stock, we call it

common stock (or capital stock).

Corporation

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.

Characteristics of Businesses

*

Types of Business Manufacturing Business

• Change basic inputs into products that are sold to individual customers.

• Example: Proton, Sony Merchandising Business

• Purchase inventories from other businesses and resell the inventories to individual customers.

• Example: hyper market, book store Service Business

• Provide service rather products to customers.• Example: hotel, transportation

Financial Statements

Financial Statements consist of four elements, there are:

1. Income Statement

2. Statement of Owner’s Equity

3. Balance Sheet

4. Statement of Cash Flows

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.

Income StatementP1

The net income of $4,400 increases Owner's Equity by

$4,400.

FastForward

Statement of Owner's Equity

For Month Ended December 31, 2009

C, Taylor, Capital December 1, 2009   $ -

Plus: Investment by ower $ 30,000  

Net income 4,400  

    34,400

Less: Withdrawals by owner   200

C. Taylor, Capital, December 31, 2009   $ 34,200

     

The Statement of Owner’s Equity explains changes in equity from net income (or net loss) and from owner ‘s investments and withdrawals for a period of time

The Balance Sheet describes a

company’s financial position at a point in

time.

FastForwardStatement of Owner's Equity

For Month Ended December 31, 2009C, Taylor, Capital December 1, 2009   $ - Plus: Investment by ower $ 30,000   Net income 4,400  

    34,400

Less: Withdrawals by owner   200

C. Taylor, Capital, December 31, 2009   $ 34,200

     

The Statement of Cash Flows identifies cash inflows and cash outflows over a period of time

End of Chapter 1

- Lecture 1