Introduction to

Financial Accounting

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 LEARNING OBJECTIVES

At the end of this chapter, you should be able to:

 Explain the definition, of accounting and
differentiate between accounting and
bookkeeping.
 Explain the functions of financial statements.

 Identify different groups of users and explain

how they use the financial statements.
 Explain the different types of business
entities.
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 Business???
INTRODUCTION A business can be defined as an
organization that provides
goods and services to others
who wanted or needed them.

Accounting is concerned
with the provision of
information which
will be useful to those
who are directly or The information
indirectly connected provided would be useful
with an organization
both in assessing the
performance of the
managers and position
of the organization

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 DEFINITION OF ACCOUNTING

 The process of classifying, recording and summarizing

of transactions and business events in monetary
terms, and interpreting the results to interested
parties (users of financial statements) to assist them
in decision making.

Classifying Recording Summarizing Interpreting Accounting

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 PROCESS OF ACCOUNTING

• Sort out accounting data into orderly and

Classifying meaningful categories.
• Example: Sales, Purchases, Debtors, Expenses

• Record the transactions in the books of

Recording business.
• Example: Record in journals and ledgers

• Summarized accounting data in the financial

statements.
Summarising • Example: Profit & Loss Account and Balance
Sheet

• Analyze the financial statement and used the

Interpreting result of that analysis as guidance to make
decision. 5
 THE PURPOSES OF ACCOUNTING

To gather the accounting

To supervise others, who information (firm’s
As an evidence that
are collecting, recording
the transactions have and summarizing financial position) to
been taken place. accounting data. . financial
prepare the
report.

To evaluate To analyze and interpret

performance of the the business
company @ choose transactions (based on
project financial report) to
make decision

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 DIFFERENCE BETWEEN BOOKKEEPING
AND ACCOUNTING

 Accounting is the process of classifying,

recording and summarizing of
transactions and business events in
monetary terms, and interpreting the
results to interested parties (users of
financial statements) to assist in decision
making while
 Relate with the system that keeps track
of the data, including people, and records
the transaction by taking the information
from bookkeeping involve analyse the
results
 Give a reports and information needed for
management to make decisions

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 DIFFERENCE BETWEEN BOOKKEEPING
AND ACCOUNTING

 Bookkeeping is the mechanical aspects

of accounting involving recording,
classifying and summarizing business
transactions
 It involves the systematic recording of
the:
 Amounts
 Dates
 sources of each revenue and expense
transaction.
 Bookkeeping is concerned with the
systems that enable the financial
information to be extracted in the
transactions.
 Bookkeeping is only a part of accounting 8
which concerned with the accurate
recording of transactions.
 THE USERS AND THE USE OF ACCOUNTING
INFORMATION

INTERNAL USERS
Manager Employee
Business owners

Interested in Need Interested to

the profits information to know the
earned from guide them in firm’s ability
their planning, to pay
investment organizing and wages
and the controlling the &other
financial organizations
benefits.
stability of the and analyzing
business. the operations of To get an
the business. idea of
To evaluate the their
employment
financial status
prospects.
of the biz.

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 THE USERS AND THE USE OF ACCOUNTING
INFORMATION

EXTERNAL USERS

Others
Creditor/Bank Current/Poten Government Public
ers tial Investors
Interested Interested Interested To evaluate For academic
to know in knowing in the the ability of purposes
whether the business reduction in For planning
the business business accounting prices of the of projects
can pay the solvency information goods
amount and for tax purchased.
owing to financial purposes.
Corporate
them. strengths.
Social
Responsibility

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THE ACCOUNTING PROCESS

Source
Transactions Journals Ledgers Trial Balance
Documents

Adjustments

Financial Statements 11
TYPES OF BUSINESS ORGANIZATION

Sole
proprietorship

Company
(private
Partnership limited &
Public
limited)

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 CHARACTERISTICS OF SOLE PROPRIETORSHIP,
PARTNERSHIP AND COMPANY

1) OWNERSHIP
Sole Partnership Company: Company:
Proprietorship Private Limited Public Limited

❖Usually owned ❖Normal: 2-20 ❖ 1-50 ❖1 to unlimited

by single owner partners shareholders number of
shareholders
❖On his/her own ❖Professionals: ❖Shares are
name 2-50 partners offered to a ❖The ownership
certain group of is opened to the
❖Partners people only and public through the
contribute capital not opened to the selling of shares
and are the legal public
owners of the ❖Shares are
business ❖Shares are not listed in the share
listed in the share market
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market
2) CAPITAL CONTRIBUTION

Sole Partnership Company: Company:

Proprietorship Private Public Limited
Limited
❖Get the capital ❖Get the capital ❖Collected from ❖Collected from
from personal from contribution the units of the selling of
savings, loans by the partners shares bought shares to public
from relatives according to the
and friends, percentage ❖The size is ❖The size of
loans from agreed. quite large capital is large
financial
institutions ❖The size of
capital is larger
❖The size of than sole
capital is small proprietor
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 3) BUSINESS ESTABLISHMENT
Sole Partnership Company: Company:
Proprietorship Private Limited Public Limited
❖Easy to be ❖There is an ❖Register to SSM ❖Register to SSM
established agreement of as required by CA as required by CA
partnership which 2016 2016
❖Less contains:
regulations and • Name of ❖Should put ❖Should put
restrictions partners “Private Limited” “PublicLimited”
• % of profit (Sdn. Bhd.) at the (Bhd.) at the end
❖Register with division end of the of the company’s
the business • Capital company’s name name
registrar under contribution
the Business • Types of
Registration Act partners (Active,
1957 Sleeping, etc)
❖Register with
Companies
Comission of
Malaysia under the 15
Business
Registration Act
1956 & 1957
4) LIABILITY
Sole Partnership Company: Company:
Proprietorship Private Public Limited
Limited
❖ Unlimited ❖Limited ❖Limited ❖Limited
liability liability if it is a according to according to
LLP capital capital
❖If the business ❖Unlimited contribution contribution
assets are not liabilities – for
enough to cover partnership
the debt, under
payables have Partnership Act
the right against 1961
owner personal
properties

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5) PROFIT OR LOSS
Sole Partnership Company: Company:
Proprietorship Private Public Limited
Limited
❖Profit belong ❖Profit or loss ❖Profit will be ❖Profit will be
to the owner and will be shared by paid to the paid to the
any losses will be the partners shareholders in shareholders in
borne by the based on the form of the form of
owner partnership dividends dividends
agreement or .
Partnership Act
1961

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6) MANAGEMENT & CONTROL
Sole Partnership Company: Company:
Proprietorship Private Public Limited
Limited
❖Manage and ❖Manage and ❖Manage and ❖Manage and
controlled by the controlled by the controlled by the controlled by the
owner partners board of directors board of directors
appointed by appointed by
shareholders shareholders
.

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7) BOOKS OF ACCOUNTS
Sole Partnership Company: Company:
Proprietorship Private Public Limited
Limited
❖No legal ❖No legal ❖Proper books of ❖Proper books
obligation to keep obligation to keep accounts must be of accounts must
the books and the books and kept and annual be kept and
prepare accounts prepare accounts accounts must be annual accounts
sent to CCM must be sent to
CCM
.

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ADVANTAGES AND DISADVANTAGES

ADVANTAGES DISADVANTAGES
SOLE • Simple to establish • Unlimited liability -
PROPRIETORSHIP • Owner controlled Owner personally liable
• Subject to few govt. for the debt
regulations • Financing may be
difficult
• Life of business is
limited to life of creator.
PARTNERSHIP • Simple to establish • Unlimited liability
• Shared controlled • May have limited life
• Broader skills and • Difficulty of transferring
resources ownership
• Difficulty of raising large
amounts of capital
COMPANY • Easy to raise capital • Complex to administer
• Limited liability
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