Chapter 1

Accounting and the

Business Environment

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Learning Outcomes

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Overview

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History and Development of Accounting

The

double-entry bookkeeping was developed and

introduced by Luca Pacioli during the Renaissance when
businesses grew larger and transactions became complex.

Luca

Pacioli earned a place in history as the Father of

Accounting. He published the first formal book on
accounting entitled Summa de Arithmetica, Geometria,
Proportioni et Proportionalita (Everything about Arithmetic,
Geometric and Proportion) in 1494. The Chinese
introduced the abacus for counting and calculating .
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What Is Accounting?
Accounting - a means used by individuals and
business entities to record their financial
transactions and measure their financial
performance. The person in charge is called an
accountant.
Accounting enables businesses to analyze the
financial performance by determining the profit
or loss made during a certain period. Hence it is
sometimes called the language of business

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WHAT IS
ACCOUNTING?
STUDY OBJECTIVE 1

Accounting is an information
system that :

Identifies
Measures
Records
Communicates the economic
events of an organization to
interested users
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What is Bookkeeping?
Bookkeeping involves only the basic level
of accounting. i.e. the identifying and
recording of economic events and
therefore bookkeeping is only a part of
the accounting process.

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THE ACCOUNTING
PROCESS

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The Accounting Cycle

The cycle represents the flow of
information from the beginning of the
recording process to the preparation of
financial reports. The steps in the cycle
are performed in sequence and are
repeated in each period.

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The Accounting Cycle cont.

Source
documents

Journals

Ledger

Adjusting Entries

Trial Balance

Post-adjusted
Trial Balance

Financial Statements

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Users of Financial Information

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USERS OF FINANCIAL STATEMENTS

Classified into

Internal Users
Comprise various management and supervisory
staff within the organization (e.g. Managers plan,
organize and run a business)

External Users
Comprise of Investors, Creditors (suppliers and
bankers), Taxing authorities (LHDN), Customers,
Labor Unions
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Examples of Questions
Asked by Internal Users
Which product line is the most profitable to
the company?
Should we introduce new product to the
market?
Can we afford to pay cash dividends to
our shareholders this year?
Should we raise the price of the product?
How much is the total cost of production
for each product line?
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Examples of Questions Asked by Internal

Users cont.

Do we have a good career prospect in the

company?
Should we find job in other companies?
Are we getting satisfactory returns from our
investment?
Does Mutiara Berhad perform better than last
year?
Does Suria Company perform better than Bulan
Company?
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Examples of Questions Asked by External

Users

Should we grant the loan to the company?

Should we supply goods on credit to the
firm?
How much is the tax payable by the
company for this year of assessment?
What is the estimated growth rate for the
economy next year?

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Branches of Accounting
BRANCHES OF ACCOUNITNG

FINANCIAL
ACCOUNTING

COST
ACCOUNTING

TAXATION

MANAGEMENT
ACCOUNTING

AUDITING

FORENSIC
ACCOUNTING

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Learning Objective 2
Describe the
organizations and
rules that govern
accounting

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Development of Financial Reporting in Malaysia

The introduction of the Financial Reporting Act 1997 marked a
new era in the development of financial reporting in Malaysia,
with the establishment of the Financial Reporting Foundation
(FRF) and the Malaysian Accounting Standards Board (MASB).
Compliance with MASB approved accounting standards were
made mandatory on companies for financial reporting purposes.
The Companies Act 1965 was also amended to incorporate the
same requirements.

*MASB issues FRS & Private Entity Reporting Standards

(PERS).
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Generally Accepted Accounting

Principles (GAAP)
Issued by the FASB.
Establishes the rules for
recording transactions and
preparing financial
statements.
Published online as part of
the Accounting Standards
Codification.
Requires that information
be useful.

Relevant = The info

allows users to make
a decision.
Faithfully
Representative =
The info is complete,
neutral, and free
from material error.
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Accounting Assumptions
Economic
Entity
Assumption

Monetary
Unit
Assumption

Cost
Principle

Going
Concern
Assumption

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THE BUILDING BLOCKS OF

ACCOUNTING
Assumptions in Accounting

Monetary Unit
1. Only data that can be expressed in terms of money is
included in the accounting records enables
accounting to quantify (measure) economics events
. Economic Entity
1. Includes any organization or unit in society (e.g.
Business Enterprises (Farley, Parkson,
Governmental Unit (Putrajaya), Masjid etc.)
2. Requires that the activities of the entity be kept
separate and distinct from the activities of its owner
and all other economics entities
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Learning Objective 3
Explain different types
of business entities

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Forms of Business
Organisations
A business can take one of the three main
forms of organisation, and in some cases
the accounting procedures depend on
which form the organisation takes. The
three types of business organisations are:
Proprietorship or Sole Trader
Partnership
Company
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Forms of Business Organisations

cont.

The main differences among sole

proprietorship, partnership and company
can be summarized as follows:
Sole Proprietor

Partnership

Company

Ownership

Owned by a single
person.

Owned by two or more

persons or entities.

Owned by unlimited
number of shareholders.

Managed by partners.

Management

Managed by the
owner of business

Managed by the
companys Board of
Directors.

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.

Liability

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likan Tunggal (Enterprise)& Perkongsian

nerships)

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Banking

Oil & Gas Companies

Telecommunications
Companies

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