ABFA 1013 INTRODUCTION TO ACCOUNTING DIPLOMA IN BUSINESS STUDIES (ACCOUNTING) YEAR 1 – SEMESTER 1 (2011/2012) COURSEWORK 1

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TABLE OF CONTENT No. 1 2 3 4 5 Title Plagiarism Statement Declaration Form Safe Assign Plagiarism Report Summary Introduction Content: 5.1 Accounting Equation 5.2 Profit Determination 5.3 Accounting Cycle 5.4 Users of Accounting Information 5.5 Type of Business in Malaysia 5.6 Format of Financial Statements 6
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Page 3 4 5 5

5-6 6 7 8 8 9-10 10
11-12 13

Conclusion
Appendix Reference

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3. Summary What is accounting? Nowadays, the word ACCOUNTING can be referred to as “the language of business” (Andrew, Wong, 2010).Accounting is a process where the accountants identify, analyze, summarize and then communicate the business information to the users. For instance, the business institutions use the accounting information to measure their business performances and find out their financial position in order to making further decisions. On the other hand, this information also helps the customers to know how to use their money wiser. 4. Introduction From the accounting equation, ones can straight away find out all the assets that he/she owns, how much they can receive from others and how much they owe to somebody else. The profitability of the business activities is shown conspicuously by the profit determination. For example, the companies can know how much they earn or loss after running their business for a specific period of time by preparing an income statement which is based on the profit determination. When preparing the accounting information, the accountants are always following the accounting cycle that we covered in this report. By referring to the financial statements, the proprietors can know about the current financial status of their business and this will help them to decide what they should do in the future. 5. Content 5.1 Accounting Equation: The basic Accounting Equation formula is stated as below:
Owner's Equity

Assets

Liabilities

By the way, it can be stated as below: Non-current Assets + Current Assets = Current Liabilities + Non-current Liabilities + Capital + Additional Capital Injection + Profit – Loss – Drawings Assets are the resources that owned by a business or company in undertaking business activities. There are two types of assets: non-current assets and current assets. Non-current assets are the resources that ready to be used for more than one year. The examples of non-current assets are motor vehicles, machinery, land, buildings and office equipment. Current assets are the resources that can be used within one year and

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converted into cash easily. For example, cash in hand, cash in bank, inventories and trade receivables. (Loh Boon Foo et al., 2006) Liabilities are the amount owed by a business to outsiders or suppliers (external parties). There are two types of liabilities: current liabilities and non-current liabilities. Current liabilities are debts that have to be settled by business within an accounting year. For example, trade payables, bank overdraft, accrued expenses and prepaid revenue. Non-current liabilities are the owing amount that a business has more time (>1 year) to settle. The examples of non-current liabilities are bank loans, mortgages and debentures. Owner’s equity is defined as the investment made by the owner in a business (capital). Owner and the business are considered as two separate entities. Therefore, capital is a liability to the business. When the business derives profit, the owner’s equity will increase. Besides, the owner’s equity can be increased by additional capital injection. When the business makes loss, the owner’s equity will decrease. In other way, the owner’s equity will decrease when the owner makes withdrawal (drawings). (Betsy Li et. al, 2007)

5.2 Profit Determination PROFIT=REVENUE-EXPENSES Profit is made when the revenues obtained from business activities are more than the expenses (Frank Wood, 2008). For example, $40,000 is the revenue that Win Hong gained through his business. After deducting the revenue by his expenses which amount to $20,000, there is still has $20,000 left and this is the profit he derived from his business. Revenue can be represented by the value of amount that an individual or a company gained by running a business over a period of time. The examples of revenues are sales, discount received, interest received, and etc. Expenses are defined as the value of amount that has been spent on buying goods or services for business use. For example, purchasing goods which will be going to resell in future is an expense. The other examples are like discount given, workers’ salaries, utility bills, and etc.

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5.3 Accounting Cycle

The illustration above is the accounting cycle. The accounting cycle is an accounting process which involves recording, posting, adjusting and preparing the financial statements. It will be repeated in every accounting year. When a transaction is made, both parties involved will receive the relevant source documents such as invoices, debit notes, credit notes, and cash bills. The information of source documents will be recorded in the journals such as General Journal, Sales Journal, Purchases Journal, Return Inwards Journal, Return Outwards Journal, Petty Cash Book and Cash Book. Then, book-keeper will post the records to relevant accounts in the ledger such as General Ledger, Sales Ledger and Purchases Ledger. At a certain date (usually at the end of accounting period), an unadjusted Trial Balance will be opened to check the accuracy of accounting. By the way, some adjustments have to be made for some additional information such as accrued expenses, prepaid revenue, bad debts, and depreciation of motor vehicles. An adjusted Trial Balance will be made after making the adjustments. Then, the financial statements such as Statement of Comprehensive Income (Profit & Loss Account) and Statement of Financial Position (Balance Sheet) will be prepared according to the adjusted Trial Balance. In the end, closing entries will be made to bring down the balance of the accounts to another accounting period. Source: http://basiccollegeaccounting.com/what-is-an-accounting-cycle-and-thesteps-involved/ 7

5.4 Users of Accounting Information There are two categories of users of accounting information: Internal users and external users. Internal users are the people inside a company who plan, organize and run the business activities (Jerry J.Weygandt et al, 2008). The examples of internal users are the management team, board of directors etc. Those users would like to know if the company makes profit or sustains loss so that they can make decision, planning or control the business activities. Board of directors needs the information to decide whether or not to expand their business according to the financial status of company. External users are the people or organizations outside the company who want the financial information. The examples of external users are the government, creditors (suppliers/bankers), investors and customers. The creditors will be keen to know if the company is able to settle the debts and the customers would like to know if the supply of goods by the company is stable and secured. Besides, government agencies (tax inspectors) need accounting information to calculate the taxes charged on the companies. Investors need it also to decide which company they should invest (Frank Wood, 2008).

5.5 Types of Business in Malaysia There are various types of business in Malaysia, they can be categorized into:
Type of Business Trading: Business that purchases goods from suppliers for resale. Manufacturing: Business that produces goods by using raw materials and sell it to retailers. Service: Business that provides services to customers. Example of Company Ikea 7 Eleven Popular Secret Recipe Pensonic Proton Nestle Sony Malaysia Airlines Ernst & Young Public Bank bhd. Example of product/service Furniture Groceries Books Cakes Electronic Products Motor Vehicles Dairy Products Electronic Products Transportation (Flight) Auditing service/ Accounts Banking service

Source: Reeve et. al, 2007, p.3

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5.6 Format of Financial Statements There are two types of financial statements: Statement of Comprehensive Income and Statement of Financial Position. Statement of Comprehensive Income reports the revenue and expenses for a period of time. It shows the net profit/net loss based on the matching concept. The format of the statement is illustrated as below: Khairul Trading Sdn. Bhd. Statement of Comprehensive Income For the year ended 31 DECEMBER 2009 RM Sales Less: Return Inwards Net Sales Less: Cost of Inventories Sold Opening Inventories Purchases Less: Return Outwards Net Purchases Cost of Inventories Available for Sales Less: Closing Stock Gross Profit Add: Income Discount Received Less: Expenses Salaries Rent Discount Allowed Van Running Costs Bad Debts Doubtful Debt Allowance Depreciation: Office Equipment Delivery Van RM 157,165 165 RM

157,000

4,120 92,800 800 92,000 96,120 2,400 93,720 63,280

160 63,440 31,740 3,170 820 687 730 91 380 1,250 1,630 38,868 24,572

Net Profit

Statement of Financial Position shows a list of assets, liabilities and owner’s equity at a particular date. It shows the financial position of a business based on the Accounting Equation. The format of Statement of Financial Position is illustrated as below: 9

Khairul Trading Sdn. Bhd. Statement of Financial Position as at 31 DECEMBER 2009 RM RM RM Non-current Assets Office Equipment 2,900 Less: Accumulated Depreciation on Office Equipment 380 Delivery Van Less: Accumulated Depreciation on Delivery Van 3,750 1,250

RM

2,520

2,500 5,020 Current Assets Inventories Balance Trade Receivables 12,151 Less: Allowance for Doubtful Debts 496 Prepaid Rent Cash at Bank Cash in Hand Less: Current Liabilities Trade Payables Accrued Salaries Working Capital Financed By: Owner’s Equity Opening Capital Add: Net Profit Less: Drawings Closing Capital Non-current Liability Bank Loan Source: Frank Wood et al, 2008. pg. 691 (Appendix) 7. Conclusion By completing this Accounting coursework, we have gained a lot of knowledge on the Principles of Accounting. We know that accounting is the language of business (Andrew Leong Fook Chee et. al, 2010, p.1) as it enables us to understand more about the uses as well as the importance of accounting. Furthermore, we have learnt how to co-operate with each other in order to complete this assignment. In short, we can say that the accounting plays an important role in our society. 2,400 11,655 230 9,100 324 23,709 4,445 412 4,857 18,852 23,872

11,400 24,572 35,972 17,100 18,872 5,000 23,872

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8. APPENDIX

Appendix 8.1: Accounting Equation

Source: http://www.understand-accounting.net/images/Fulcrum.jpg

Appendix 8.2: Accounting Cycle

Source: http://www.bookkeeping-financial-accounting-resources.com/images/accountingcycle.jpg

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Appendix 8.3: Source Documents

Invoice Source (Invoice):

Cash Bill

http://www.turbocashuk.com/TurboCASHRefGuide/TCashRefImages/TurboCASHAccounting-Software-Source-Documents-Supplier-Credit-Note-413.jpg Source (Cash Bill): http://www.accstream.com/5559/48379.jpg

Appendix 8.4: Users of Accounting Information

Source: http://simplestudies.com/repository/lectures/ch1_accounting_types_users.gif

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9. Reference 1. Clave Finch, 2007. A Student’s Guide to International Financial Reporting Standards. Great Britain: Kaplan Publishing UK. 2. Betsy Li, Tan Sai Kim, and Goh, Ling Chin. 2006. Principle of Accounting, 22nd Edition. Canada: Thomson South Western. 3. Monger, Rod F. 2010. Financial Accounting: A Global Approach. United Kingdom: John Wiley & Sons Limited. 4. Frank Wood and Alan Sangster. 2010. Business Accounting 1, 11th Edition. Harlow: Pearson Education Limited. 5. Loh Boon Foo, Ng Kim Hwa, Ng Lai Seon, Adrian Chan and Lee-Ng Lee Boon. 2006. Singapore: Pearson Education South Asia Private Limited. 6. Jerry J. Weygandt, Donald E. Kieso and Paul D. Kimmel. 2008. Accounting Principles, 8th Edition. United Kingdom: John Wiley & Sons Inc. 7. Andrew Leong Fook Chee and Wong Sei Yan. 2010. Business Accounting, 3rd Edition. Malaysia: Pearson/Prentice Hall. Selangor: McGraw Hill Education. 8. Roshayani Arshad, Laily Umar, Kamaruzzaman Muhammad, Siti Maznah Mohd Arif,
2007. Financial Accounting: An Introduction, 2nd Edition.

9. http://www.quickmba.com/accounting/fin/equation/ 10. http://www.accountingcoach.com/online-accounting-course/14Xpg01.html 11. http://basiccollegeaccounting.com/what-is-an-accounting-cycle-and-the-stepsinvolved/ 12. http://www.netmba.com/accounting/fin/process/ 13. http://www.enotes.com/business-finance-encyclopedia/accounting-cycle 14. http://simplestudies.com/introduction-to-accounting.html 15. http://answers.yahoo.com/question/index?qid=20080621054014AAidg7f 16. http://www.quickmba.com/accounting/fin/statements/

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