Lesson 1

Introduction to Accounting
Learning Outcomes
Understand the meaning, functions and subfields of
accounting
Explain Bookkeeping, Financial and Management Accounting
Explain accounting cycle
Explain the forms of business units
Understand accounting principles - concepts &
conventions
 Accounting
The process of identifying, measuring and
communicating economic information to permit
informed judgments and decisions by users of the
information.

Economic information is generally financial and is

stated in monetary terms
Example:
Room sales for the period were RM1,500,000
Net income was RM150,000
 Users of Accounting Information

External Users Internal Users

Lenders Consumer Groups Managers Sales Staff

Shareholders External Auditors Officers/Directors Budget Officers
Governments Customers Internal Auditors Controllers
 Purpose of Accounting
To provide accurate, useful and timely financial information, which
can be used to measure the financial position and operating
performance of a hospitality business.

Provide manager timely and accurate financial information to

make intelligent decisions for their business to be successful.

Investor need financial statements to analyze the quality of a

potential investment or current stock holding.

Creditors need financial statement to identify any risk involved in

doing business with customer on an open line of credit.
Bookkeeping VS Accounting

Bookkeeping Accounting
Initial phase of accounting Includes summarizing the
Recording and accounting information
classifying transactions and interpreting financial
by bookkeeper statement.
After accounting records
are judged satisfactory,
the financial statements
are prepared
Accountant supervises the
work of the bookkeeper.
 Financial
accounting

Accounting Cost
system accounting

Branches of
Accounting
Managerial
Auditing
accounting

Tax
accounting
Branches of Explanation
accounting
Financial Accounting for revenues, expenses, assets and
Accounting liabilities.
Basic accounting processes of recording,
classifying and summarizing transactions.
Collection and recording of financial data
through production of key financial statements
Eg: Profit and loss accounts, balance sheets,
cash flow statement
Distributed to stockholders, lenders, financial
analysts (external users) for future planning
Managerial Provide information to various management
Accounting level (internal user) for the purpose for
enhancing control.
Provide in depth information as a basis for
management decisions.
 Financial Accounting
VS Managerial Accounting

External Users Internal Users

Financial accounting provides Managerial accounting provides

external users with financial information needs for internal
statements. decision makers.
 Branches of Explanation
accounting
Cost Dealing with recording, classification, allocation
Accounting and reporting of current and prospective costs.
Include cost behavior, break-even point, profit
planning, budgeting
Assisting management in cost and revenue
control.
Tax accounting Preparation and filling the tax forms with
government agencies.
Tax planning to minimize tax payment
Auditing Reviewing and evaluating documents, records
and control system.
Accounting Review the information system of the
systems hospitality organization which include not only
accounting system but other elements such as
reservations.
Forms of Business Organization
Sole proprietorship
Partnership
Corporations
 Sole Proprietorship
It is a business owned by a single individual who manage the
business
For the legal point of view, the owner is not separable from
the business and is legally responsible for all debts of
business. For accounting purposes, the owner is a separate
business entity
The owner is not paid a salary by business, but can simply
withdraws cash from it.
The business does not pay income taxes,
but the income or loss from the business
is reported on owners personal income
tax return
Sole Proprietorship
Advantages
One owner in total
management control.
It is easy to form.
Little start up cost is
needed
There is little regulations
needed.
All profit to owner.
The business does not
pay any income taxes
Disadvantages
Unlimited liability of the
owner for the debts of the
business
Difficulty the owner may
have in rising large
amounts of cash / capital
for business
The expertise depends
mainly on owners skills
(hard to obtain quality
employees)
 Partnership
It is a business owned by two or more people joined together
in a non-corporate manner for the purposes of operating
business.
The partnership can be created by either oral or written
agreement.
Written agreement includes the duties and initial investment,
and the sharing of profits and loses among the partner.
Partnership

Advantages Disadvantages
Greater financial strength Partners are taxed on their
from more than one owner shares of the profit
provide greater regardless of whether
resources for business cash is distributed to them.
Do not pay any income Conflicts in decision
taxes The partner is making process among
taxed based on income or partners
loss from business that is Unlimited liability of the
distributed to the partner owner for the debts of the
based on shares. business
 Limited Partnership
It offers the protection of limited liability to its limited
partners.
At least one limited partner may not actively
participate in managing the business
At least one general partner responsible for the debs
of the partnership unlimited liability
The limited partnership must be in writing
 Corporate
It is a legal entity, which has the following characteristics:
An exclusive name
Continued existence independent of its stockholders
Paid in capital represented by transferable shares of capital
stock
Limited liability for its owners
Overall control vested in its directors.
Corporate
Advantages
Shareholders liability is
normally limited to their
investment.
Owners are taxed only on
distributed profits
Equity capital can be raised
by selling capital stock to
public
Lower tax rates
Corporations life continues
irrespective of the owners
lives.
Disadvantages
Double taxation corporate
profits are taxed twice they
are taxed on the corporation
income and profit paid out as
dividend which are taxable
income to the individual
stockholder's
Stock is sold new but
unknown stockholders the
original owners may lose
control of their business if
some stockholders are able to
buy sufficient amount of stock.
Accounting principle
(Concept)
In order to make accounting language convey the
same meaning to all people & to make it more
meaningful
These generally accepted accounting principles
provide a uniform basis for preparing financial
statements.
No enterprise can prepare its financial statements
without considering these concepts
1. Cost Principle
When a transaction is recorded, it is the transaction
price (cost) that establishes the accounting value for
the product of service purchased.
Example:
If a restaurateur buys a dishwasher, the agreed-upon
price between the restaurant and the supplier
determines the amount to be recorded
Assets are shown in final accounts at their original
cost price
Basis for setting depreciation and future values of
assets
 2. Business Entity Assumption
Accounting and financial statements are based on the
concepts that:

1. Each business is a business entity that maintains its

own set of accounts
2. These accounts are separated from other financial
interests of the owners
 3. Continuity of Business Unit
(Going-Concern)
Reflects assumption that the business will continue
operating instead of being closed or sold
In preparing the accounting records and reports, it is
assumed that the business will continue indefinitely and
that liquidation is not a prospect.
This is important, especially in the valuation of the assets
of a business.
Example:
Plant and machinery used daily to produce goods of the business
has different value that if it was going to be sold off on completion of
the accounts
4. Unit of Measurement
The common unit of measurement in Malaysia is
RM
This allows the users of accounting data to make
meaningful comparisons between the current and
past business transaction.
5. Objective Evidence
All business transactions must be supported by
objective evidence proving that the transactions did
in fact occurred.
Example:
An invoice or other form of independent evidence is
necessary to prove the reason for expenditure
6. Full Disclosure Principle

The financial statements must provide information

on all the facts pertinent to the interpretation of the
financial statements
It is accomplished either by reporting the
information in the body of financial statement or in
the footnotes to the financial statement.
6. Consistency
Once an accounting method has been
adopted, it should be followed from period to
period unless a change is warranted and
disclosed.
It allows a user of financial information to
make reasonable comparison between
period
 7. Matching Principle
(Accrual principle)
Expenses incurred by a company must be matched
against revenue generated as a result of those
expenses.

All the the cost

revenue of
a particular of that
period period

for determining the

net profits of that
period
 7. Matching Principle
(Accrual principle)
It is used when transaction is recorded on an accrual
basis rather than a cash basis
Example: Utility bills, telephone bills, rental,
insurance
Cash accounting records expenses only as cash
payments are made and records revenue when the
cash is received.
Accrual accounting adjust the accounting records by
recording expenses that are incurred during an
accounting period but that are not actually paid until
the following period.
8. Conservation
It calls for recognizing expenses as soon as
possible but delaying the recognition for
revenue until they are ensured.
Example: Accounting treatment of lawsuits
If a hotel is a plaintiff in a lawsuit and its legal counsel
indicates the case will be won and estimate the amount
of settlement, the amount is not recorded as revenue
until a judgement is rendered
If the hotel is a defendant in a lawsuit and its legal
counsel indicates the hotel will lost the lawsuit and most
likely will pay a stated amount, the expense should be
recognized immediately.
9. Materiality
Events or information must be accounted for
if they make a difference to the user of
financial information
It is often applied to fixed assets
For example:
Wastebasket has a useful life of ten years
but since it costs less than the $100 (for
example) limit for recording it as fixed
assets, it is expensed .
Re-cap
Understand the meaning, functions and subfields of
accounting
Differentiate Bookkeeping and accounting
Explain accounting cycle
Explains branches of accounting
Explain the advantages and disadvantages of sole
proprietorship, partnership and corporate
Understand accounting principles - concepts &
conventions
Accounting concept
The End