ACC 407

Introduction to
Financial Accounting
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 LEARNING OBJECTIVES

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

Explain difference terms and basic concepts of
financial accounting
Identify the users of accounting information
Distinguish the different types of business
organization
Differentiate between bookkeeping and accounting

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IN T R O D U C T IO N
Business???
A business can be defined as an
organization that provides
goods and services to others
who want or need them.

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

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 DE F IN IT IO N O F A C C O U N T IN G

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.

Summarizin
Classifying Recording Interpreting Accounting
g

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 PR O C E S S O F A C C O U N T IN G

• Sort out accounting data into orderly and meaningful

Classifying categories.
• Example: Sales, Purchases, Receipt, Payment

Recording • Record the transactions in the books of business.

• Example: Record in journals and ledgers

Summarising • Summarized accounting data in the financial statements.

• Example: Profit & Loss Account and Balance Sheet

Interpreting • Analyze the financial statement and used the result of

that analysis as guidance to make decision. 5
TH E P U R P O S E S O F A C C O U N T IN G
As an
evidence that
the
transactions
have been
taken place. To gather the
accounting
information
(firm financial
position) to
prepare the To analyze
financial report. and interpret
the business
transactions
(based on
financial report) 6
to make
decision.
 TH E U S E R S A N D T H E U S E O F A C C O U N T IN G
IN F O R M AT IO N

IN T E R N A L US E R S
Manager Employee
Business owners

Interested in Interested to
the profits know the
earned from ability of the
their business to
investment progress
and the and expand.
financial
stability of
the
business.
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TH EU S E R S A N D T H E U S E O F A C C O U N T IN G
IN F O R M AT IO N
EX T E R N A L
US E R S
Current/Potential Government
Creditor/Bankers Investors

Interested Interested
to know in the
whether business
the accounting
business information
can pay for tax
the amount purposes.
owing to
them.
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TY P E S O F B U S IN E S S O R G A N IZ AT IO N

Sole
proprietorship

Company
(private
Partnership
limited &
Public limited)

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CHARACTERISTICS OF BUSINESS ORGANISATIONS
CHARACTERISTICS SOLE TRADER PARTNERSHIP COMPANY

Source of capital Owner s savings / Contributed by partners Contributed by shareholders

owner s properties according to the agreement through buying of shares
brought in the business

Ownership Owned by 1 person Owned by 2-20 partners (ord) Owned by 2-50 s/holders (Sdn
2-50 partners (Professionals) Bhd) & 2-∞ s/holders (Bhd)

Existence Not a separate entity Not a separate entity Separate entity

Liability Unlimited liability Unlimited liability Limited liability

Management Manage and control by Manage and control by the Manage and control by the
and control the owner with the help partners or by a Board which Board of Directors appointed
from his family and consist of a few partners by S/holders
workers

Profit Sharing Profit belongs to the Profit and losses will be shared Profit will be paid to s/holders
owner and losses will by partners based on in a form of dividends
also be borne by the Partnership Agreement
owner

Books and Accounts Not required to keep Not required to keep proper Required to keep proper books
proper books of accounts books of accounts of accounts and submit annual
accounts to Registrar of
Company
ENTITY CONCEPT
• The business is regarded as an entity or a unit by itself.
• This entity is exists as an entity that is separate from its owner.
• The business can own assets, can have liabilities or enter into
transactions.
Eg. The financial statements of ABC Company report only the
economic activities of the business and do not included economic
activities of Ali, the owner.
LIMITED/UNLIMITED LIABILITY
• Limited Liability – If the business fails and the company’s assets are
not enough to cover the debt, the payables/creditors do not have a
right against the shareholders’ personal properties. Creditor may sue
the corporation to recover money damages rather than suing the
shareholder individually.
• Unlimited liability – If the business fails and the company’s assets are
not enough to cover the debt, the payables/creditors have a right
against the owner’s personal properties.

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 DIF F E R E N C E
BETW EEN
B O O K K E E P IN G A N D A C C O U N T IN G

Is Bookkeeping and Accounting the same? The

answer is NO

BOOKKEEPING
Is part of accounting process
( classifying, recording
and summarising
the business transactions )
and done in accordance
with certain principle or rules.
Person responsible to handle
the bookkeeping process is a
Bookkeeper
that has less qualification and skills
ACCOUNTING
Is the whole process of classifying,
recording and summarising the business
transactions in monetary terms and
interpreting the result to the interested
users.
-Person responsible to handle the
accounting process is an Accountant that
posses a certain standard qualification and
working experience recognised by the
accounting regulatory body.

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ACCOUNTING CYCLE / PROCESS

Transactions

Source
Documents

Journals

Ledgers

Trial balance

Adjustments

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Financial
Statements