FINANCIAL ACCOUNTING 1

BA 1012
 TOPIC 1
INTRODUCTION TO
ACCOUNTING
 SUB TOPICS
• Introduction to Accounting
• What is accounting?
• Financial Statements – purpose, characteristic, elements, components, users
and other disclosures
• Professional accountancy bodies
INTRODUCTION TO ACCOUNTING
• Accounting is language of business.
- Consists of figured or numbers and interpretation of the figures
- Communicates among all businesses regardless of their sizes to
provide an insights of the economic transactions of a business
organization.
• Accounting plays an important role to communicate financial information of a
business entity.
• Accounting began because people needed to record business transactions, know
how much they owned and how much they owed.
• Language of business- represent words & symbols to communicate financial
information for decision making by managers, investors, creditors, debtors & others.
• Group involved in business from employees to top managers also need to learn the
messages in financial summaries & reports.
• It is important to understand the accounting information for techniques &
procedures used for all types of economic units in various business entities.
• At the end of certain period, this financial information will be summarised in a
format which will provide useful information to the management, owner of the
business and other users such as potential investors, lenders, customers of the
business and for making financial decision regarding the business.
• Economic activities refers to transactions whether external or internal.
• External : Happens between the firm & third parties
(banks, suppliers, customers).
Examples: loan borrowing process, purchase of
material, sales to customers.
• Internal : Happens within the firm that involve the internal process of the
firm.
Examples: process of making bread in manufacturing
company, process of petty cash disbursement for
staff’s claim.
BASIC ACTIVITIES
• Activities : i) Identifying
ii) Measuring
iii) Recording
iv) Communicating economic information
i) Identifying
- Observing economic events and determining those events
represent economic activities.
- Examples: Selling goods to customers, purchase goods from
suppliers, payment of salary to employees.
ii) Measuring
- Takes place before the effects of transactions are recorded.
- Business activity is measured by prices expressed in terms
of money (medium of exchange & measure of value).
- Accounting transactions e.g in RM, dollar & cents.
iii) Recording
- Transactions are recorded to provide a history of the
economies of a particular business.
- The recorded data must be classified and summarized to be
useful in making decision.
- E.g cash & bank book, customers & suppliers ledger.
iv) Communication
- Information contained in accounting records can be
communicated to the potential users.
- Process of preparing and distributing accounting reports to
potential users of the accounting information.
- Users are able to analyse and interpret the reports for
decision making process.
- Main accounting reports are the financial statements (Statement of
Comprehensive Income, Statement of Financial Position, Statement
of Change of Equity & Statement of Cashflows)
 Types of accounting
• Generally ,there are 2 types of accounting:
i) Financial Accounting
ii) Management Accounting
Financial Accounting
• Accounting information used to report the financial performance and
position of the business entity.
• The information is in form of financial statements such as :
- The statement of comprehensive income (Statement of Profit & Loss)
- Statement of Changes in Equity
- Statement of Financial Position
- Statement of Cashflows
• The accurate recording of all transactions and combining these into a statement
which shows the performance for an accounting period which is normally a year and
a statement which shows the resources and liabilities at the end of the period.
ii) Management Accounting
• Provides economic and financial information for management purposes.
• The information is normally used by internal users for budgeting, planning,
controlling and decision-making.
• The information is circulated within users in organization, and not revealed
for outside parties.
• The information of management accounting shall be useful for current and
future planning of the organization in many aspects such as revenue making,
cost analysis as well as sales diversification analysis.
FINANCIAL STATEMENTS
• The conceptual framework for financial reporting states that the objective of
general-purpose financial statements is to provide information about the
financial position, performance and cash flows of an enterprise that is useful to
existing and potential investor, lender and creditors in making economic decision
about providing resources.
• The main objective of financial reporting according to the Malaysian Accounting
Standard Board (MASB) is to provide financial information to the primary users
which comprise the owner or the existing investors, potential investors, lenders
and other creditors.
• There are also other users such as employees and government that might be
interested in the financial information.
• How the users use the financial information depends on their intentions or
business decisions to be made.
• Financial reporting presents the performance, the resources and liabilities to the
stakeholders in accordance with International Financial Reporting Standards
FINANCIAL STATEMENTS
• The International Accounting Standard Board (IASB) recognizes that all users
cannot be met by financial statements, but it takes the view that some needs are
common to all users in particular ,they have some interest in the financial
position, performance and adaptability of the enterprise as a whole.
• IASB states that as investors are providers of risk capital, financial statements
that meet their needs would also meet most of the needs of other users.
• In addition to assisting in making economic decisions, financial statements also
show the results of the stewardship of management that is the accountability of
management for the resources entrusted to it.
FINANCIAL STATEMENTS
• The IASB view is that users who assess the stewardship do so in order to
make decisions, e.g whether to hold or sell shares in a particular company
or change the management.
• In 2007, IASB has stated that a complete set of financial statement should
comprise:
i) a statement of financial position as at the end of the period
ii) a statement of comprehensive income for the period
iii) a statement of changes in equity for the period
iv) a statement of cashflows for the period
v) notes comprising a summary of significant accounting policies
and other explanatory information.
Financial statement of companies
Financial statement can be prepared after the adjustment of the trial balance.
Financial statements are the final product of the accounting process.
Users of accounting information must be able to read and understand these
financial statements.
Need to prepare the final management accounts for internal and external use.
Internal use- as reference for related internal users (e.g management team,
accounts & finance department)
External use- filing with the registry of companies and for publication.
• Accountants are communicators.
• Accountancy is the art of communicating financial information about a
business entity to users such as shareholders and managers.
• The communication is generally in the form of financial statements that
show in money terms of the economic resources under the control of the
management.
• The information of financial statements is relevant to the user and is reliable.
MAIN USERS OF FINANCIAL STATEMENT
• i) Internal user
• ii) External user
Internal User
-Can be defined as those who are from within the business organization and who
use the information to run the business on a day-to-day basic and for making
decision.
-e.g Financial Manager/Accountant/Chief Financial Officer, Marketing Managers.
-Must have accurate financial data for planning and
controlling operations of the business.
-The financial data will help the internal decision maker to
analyse and interpret the financial position of the company.
-The management needs to plan, organize, control and analyse the performance of
the business.
e.g : How much is the bank balance?
How much is the profit for the month?
How much does the company owe to supplier?
Managers :
• are internal user
• require information in order to control the business and make investment decisions.
• Have access to detailed financial statements showing the results, the extent to which
these vary from the budgeted results and the future budgeted results.
Other examples of internal users are sole traders, partners and company directors.
The is no statutory restriction on the amount of information that an internal user may
received, the only restriction would be that imposed by the company’s own policy.
ii) External User
-Can be defined as those who are not from within the business
organization.; outside the organization and those who have no
involvement in a day-to day business operations and decisions.
-The external users include individuals or organisations that require the
information to assist them in making decisions for current future
interests.
- Lenders and investors are two main types of external users.
- e.g Shareholders, banks, creditors ,debtors.
- Need to have financial information for assessments &
analysis for decision making process.
e.g Will the company able to repay the money ?
Is the company financially stable?
Is the company
Shareholders :
• are external users
• unable to obtain access to the same amount of detailed historical information as the
managers e.g total administration costs are disclosed in the published profit and loss
account, but not an analysis to show how the figure is made up.
• unable to obtain associated information e.g budgeted sales and costs. Even though the
shareholders own a company, their entitlement to information is restricted that specified
by statute : Company Acts or by professional regulation e.g Financial Reporting Standard
or by market regulations e.g listing requirements.
• the financial reports presented to the shareholders are also used by other parties such as
lenders and trade creditors and they come to be regarded as general-purpose reports.
GLOBAL PROFESSIONAL ACCOUNTING BODIES
a) The International Accounting Standards Board (IASB)
- Responsible for all technical matters including the preparation and
implementation of accounting standard.
- Committed to developing, in the public interest, a single set of high quality,
understandable and enforceable global accounting standards that require
transparent and comparable information in general purpose financial statements.
- IASB co-operates with national accounting standard setters to achieve
convergence in accounting standards around the world.
PROFESSIONAL BODIES & ACCOUNTING BODIES IN
MALAYSIA
a) Malaysian Institute Of Accountants (MIA)
- The regulator for the accountancy profession in Malaysia through powers
given by Accountants Act, 1967.
-MIA is under Ministry of Finance that report to Accountant General’s office
in Putrajaya.
- Sets by laws and audit standards for the accountancy profession.
- Within standard issued by the International Federation of Accountants
(IFAC) and International Auditing and Assurance Standards Board (IAAASB)
b) Malaysian Accounting Standard Board

• Malaysia has Malaysian Accounting Standard Board (MASB) is established under the
Financial Reporting Act 1997(the Act) as an independent authority to develop and issue
accounting and financial reporting standards in Malaysia.
• The MASB, together with the Financial Reporting Foundation (FRF), make up the new
framework for financial reporting in Malaysia.
c) The Companies Commission Of Malaysia (CCM)
-formed from merger of Registrar of Companies (ROC) & Registrar of Business (ROB)
-Main objective is to regulate companies and business entities in
Malaysia.
-to serve as an agency to incorporate companies and register businesses as well as to
provide company and business information to public.
d) Kuala Lumpur Stock Exchange
• Formerly known as Kuala Lumpur Stock Exchange.
• An exchange holding company approved under Section 15 of the Capital
Markets and Services Act 2007.
• Responsible to:
i) Governs the conduct of its members and members stockbroking in
securities dealings.
ii) Enforces the listings requirements which spell out the listing and
disclosure standards to be maintained by public listed companies.
iii) Is responsible for the surveillance of the marketplace.
e) Bank Negara Malaysia (BNM)
• The Central Bank of Malaysia (a statutory body)
• Started the operations on 26 January 1959.
• Governed by the Central Bank of Malaysia Act 2009.
• The main role of BNM is to promote the monetary and financial stability of the
Malaysian economy.
• Acts as the banker and the adviser to the Malaysian government in terms of
macroeconomics policies and management of public debt.
• Also the sole authority to issue Malaysia currency and manage the country’s
reserves.
• As one of the three advisors to the MASB, Securities Commission Malaysia and
Companies Commission of Malaysia