LU 1: Introduction to Acconting

Prepared by: Sharifah Sabrina Week 1

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Learning Objectives:
After studying this chapter, you should be able to:
Define What is Accounting and Users of Accounting Describe Types and Form of Business Describe the Accounting Cycle/ Process Identify Accounting Principles and Ethical Rules

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Definition of accounting and bookkeeping

Accounting is the process of recording and interpreting financial information pertaining to an organisation. Book-keeping is a process of recording data relating to accounting transactions in the accounting books.

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5 Main branches of Accounting

Financial Management

Financial Accounting Accounting

Management Accounting

Audit

Taxation

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Users of Accounting Information

Many different people need accounting information on which to base decision.

Investors, employees, managers, suppliers, financiers, customers, bankers, government sectors, etc.
Managers planning, control & running of the business. Directors and owners how effective the managers are and to make judgments about risks and return in future. Employees stability & prospects of their jobs Identify Internal users and external users.
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Questions Asked by Internal Users

Is cash sufficient to pay bills? What is the cost of manufacturing

each unit of product? Can we afford to give employee pay raises this year? What product line is most profitable?
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Prentice Hall, Inc. 2000

Questions Asked by External Users

Is the company earning satisfactory

income? How does the company compare in size and profitability with competitors? Will the company be able to pay its debts when they become due?

Prentice Hall, Inc. 2000

Purpose of a Business

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Objective of Business
Everyone involved in business needs a good The objective of of accounting, including where understandingmost businesses is to earn a profit. Profit is the difference between the amounts received the numbers come from, whatprovided and the from customers for goods or services the numbers amounts paid for involved in business needs a mea Everyonethe inputs used to provide those goods or services. good understanding of accounting, including, what the numbers mean, what accounting reports can be used for. n, what involved in business needs a good understanding of accounting, including where the numbers come from, what the numbers mean, what accounting reports can be used for.
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Exh. 1.5

Activities in Organizations
Operating activities Aimed at selling products and

services Result in sales and expenses

Investing

Financing

Operating
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Types of Business
Service Businesses provide service rather than product to customers. Example? Merchandising business sell products they purchase from other businesses to customers Examples? Manufacturing Business change basic inputs into products that are sold to customers Examples?

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Form of business
Sole proprietorship is a one-man business, owned and managed by one person. Partnership is a business formed by two people but having not more than 20 partners. Professional partnership can have a maximum of 50 members. A company is an enterprise formed by two or more persons with a maximum of 50 people for a private limited company and no maximum limit for a public limited company.

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The Accounting Cycle

Transactions or events

Documents

Journalize Transaction

Prepare financial statements.

Prepare a trial balance.

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Post entries to the accounts in the general ledger.

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The Accounting Cycle

1.An event is a happening of consequence. 2.A transaction is an external event. 3.Documents Receipt, Invoice, Cheques, Purchase order 4.The journal is the book of original entry. .Posting is the process of transferring information from the journal to the ledger. 5. A ledger is a book of accounts a.The general ledger contains all of the accounts b.A subsidiary ledger provides detail about one specific general ledger account.

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The Accounting Cycle

6.The trial balance is a list of all open accounts in the ledger and their balances. a.If the trial balance is prepared immediately after the adjusting entries have been made, it is called an adjusted trial balance. b.If the trial balance is prepared immediately after the closing entries have been posted, it is called a post-closing trial balance.

7.Adjusting entries are made at the end of an accounting period to bring all accounts up to date on an accrual basis.
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The Accounting Cycle

8 .Financial statements reflect the collection, tabulation, and final summarization of the accounting data. There are 4 financial statements a.The balance sheet which shows the financial condition of the enterprise at the end of a period b.The income statement which measure the results of operations for the period c.The statement of cash flows which reports the cash provided and used by operating, investing, and financing activities during the period AND d.The statement of retained earnings, which reconciles the balance of the retained earnings account from the beginning to the end of the period.

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The Accounting Cycle

9. Closing is the formal process by which all nominal accounts are reduced to zero and the net income or net loss is determined and transferred to owner's equity.

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Accounting standards

At one time, there used to be quite wide differences in the ways that accountant calculated profits. In the late 1960s, a number of cases led to widespread outcry against this lack of uniformity in accounting practice. In response, the accounting bodies formed the Accounting Standards Committee. Accounting Standards are drafted to ensure that there is no conflict between the law and accounting standards. Starting 1/1/2006 public listed companies in Malaysia were required to adopt all the Financial Reporting Standards issued by Malaysian Accounting Standard Board.
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Accounting principles and conventions

Revenue recognition: Revenue must be recorded when the four criteria has been satisfied : 1) Persuasive sales arrangement exists 2) Delivery has/will eventually occur or services already rendered 3) The sellers price to the buyer is fixed or determinable; and 4) Collectability is reasonably assured

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Accounting principles and conventions

Accounting entity: each business is a separate entity from its owner. Going concern: the business entity will continue to operate indefinitely. Money measurement: money is used as the basic measuring unit for financial reporting. Historical cost: all transactions of a business entity are recorded at the original cost to the enterprise.

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Accounting principles and conventions Accounting period: the life of a business is divided into specified periods of time for the purpose of preparing financial reports. Objectivity: there must always be objective verifiable evidence for reporting any accounting information. Consistency: the same accounting method should be applied in each accounting period when preparing financial reports.

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Accounting principles and conventions Prudence: Accounting concept that requires recording (recognizing) the expenses and liabilities as soon as possible, but the revenues only when they are realized or assured. It implies that only that method of determining asset value or net income which yields the lesser amount should be used. Accrual concept: revenue is recognised when it is earned and expenses when they are incurred. Matching principle: revenue earned during an accounting period has to be matched with the expenses associated with earning that revenue.
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Grading
Grades are what you make of them. Not what they make of you, unless YOU made it that way!

REFERENCE (Main)
Wan Ibrahim, W., Bijoy, K., Kasim, K. (2008). Fundamentals of Business Accounting, Oxford University Press You should buy at RM39.90.