Accounting Environment Topic 1

Introduction
Accounting is widely used in business to explain the nature of business transactions in any organization. It is widely used by the managers of the organization, the owners, investors, bankers, lawyers, estate agent, share brokers. The initial stage of accounting record is usually referred to as book-keeping. However, accounting is not merely bookkeeping, it is far more than that, emphasizing on use of information, analyzing and interpreting of the accounting information. The accountant must be able to scrutinize the relationship between the results available in the financial period and relate to the events that lead to such results.

Definition of Accounting
Accounting is
a) Collecting and recording economic data relating to a business enterprise b) Processing this data to produce useful economic information (often referred to accounting information) c) Communicating or reporting this accounting information to interested parties and, if necessary, interpreting if for their benefit.

Definition of Accounting
To determine profit
a) Collecting and recording data about the income and expenditure of the business during the year b) Processing this data to calculate the profit for the year

c) Reporting this information to the owner of the business and to others who need to be aware of it (e.g. tax authorities, bankers, investors)

Fields of Accounting
Types of Accounting

Financial Accounting

Managerial Accounting

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Financial Accounting is concerned with providing information to stockholders, creditors and others outside the organization. Recording and reporting of financial transactions, including the origination of the transaction, its recognition, processing, and summarization in the financial statements.

Managerial Accounting
Managerial Accounting is concerned with providing information to managers, i.e. people inside the organization. In Management Accounting the term cost is used in many different ways. Each different use of cost data demands classification & definition of costs. For example, preparation of external Financial Report requires the use of historical data, where as decision-making requires current cost data.

Financial Accounting Vs Managerial Accounting

Managerial Accounting provides essential data with which organizations are actually run, whilst Financial Accounting provides scorecard by which a companys past performance is judged.
Both financial & managerial accounting rely on the same financial data

Fields of Accounting
Other Types of Accounting Auditing

Taxation
Financial Management

Professional Accountancy Bodies

United Kingdom

The Institute of Chartered Accountants in England and Wales (ICAEW) The Institute of Chartered Accountant in Scotland (ICAS) The Institute of Chartered Accountants in Ireland (ICAI) The Chartered Institute of Management Accountants (CIMA) The Association of Chartered Certified Accountants (ACCA) The Chartered Institute of Public Finance and Accountancy (CIPFA)

Professional Accountancy Bodies

United States

Certified Management Accountant (CMA) Certified Internal Auditor (CIA) Certified Public Accountant (CPA)

Business Ethics & Regulation

Financial Accounting and Reporting Failures Eg. Enron, worldCom, Tyco, Xerox Financial Accounting Standards Board (FASB)

Regulatory requirements in Malaysia

Incorporation and Companies Regulation are provided under the Companies Act 1965 At least 2 members to sign on the Companys Memorandum Present the Companys Memorandum to CCM (Companies Commission of Malaysia) with the Articles of the Company together with other relevant forms, such as Form 6, Form 48A, etc.

Regulatory requirements in Malaysia(contd)

Contents of M&A of a company: Name of company (ends with Sdn Bhd or Berhad) Registered Address, Companys Objective, Capital of Company Articles - Shares, Proceedings at General Meeting, Directors Appointment, Power Duties of Directors, Accounts, Dividends, etc

Regulatory requirements in Malaysia(contd)

Regulation of Accounts & Audit is stated in the Companys Act 1965 under Part V1 Division 1 & Division 2 Section 167 (1) of Companies Act 1965: Requirement by every company and the directors and managers to keep accounting records and such that will sufficiently explain transactions and financial position of the company- true and fair P&L and B/S

Regulatory requirements in Malaysia(contd)

Section 169 of the Companies Act 1965: Not later than 18 months after the incorporation and subsequently once a year to lay at its annual general meeting a Profit & Loss Account & Balance Sheet; must be audited first Penalty: Imprisonment for five years or thirty thousand ringgit

Regulatory requirements in Malaysia(contd)

Section 169 of the Companies Act 1965: Not later than 18 months after the incorporation and subsequently once a year to lay at its annual general meeting a Profit & Loss Account & Balance Sheet; must be audited first. Requirements to follow Ninth Schedule (Schd. 9) Penalty: Imprisonment for five years or thirty thousand ringgit

Types of Businesses
Manufacturing Business e.g.. Sony, Honda, Coca Cola, Adidas Merchandising Business e.g.. Wal-Mart, Amazon. COM, Servicing Business e.g.. Tadamon Bank, Sabafon, Marriot Hotel

Types of Business Organisation

Proprietorship - Owned by individual Partnership - Owned by two or more individuals Corporation (Legal Entity) - Owned by individuals or businesses

Limited Liability Corporation - Owned by individuals - Liability is limited to capital contribution - Attributes of a partnership (taxed as a partnership) and a corporation

Characteristic of Qualitative Accounting Information

That makes What Makes Accounting Information Useful?

Relevance

Understandability

Reliability

Comparability and Consistency

Users of Accounting Information

External users make decisions about the entity.

Internal users make decisions for the entity.

Questions
Can you identify some internal and external users of accounting information? Why do each of the user groups identified need financial information?

Users of Accounting Information

Business Owner
Management Employees Internal users make decisions for the entity.

Users of Accounting Information

Investors Banks and Lenders Suppliers Customers Competitors The Government The General Public

External users make decisions about the entity.