and Bad Debts Recovery 111 M1 2 uz ug 118 us 123 130 131 131 139 139 139 40 ua Mi 45, “47 ur 152 153 153, 162 164 1656 166 169 Introduction to Accounting Learning Outcomes At the end of this chapter, you should be able to: * Define accounting and bookkeeping * Differentiate between accounting and bookkeeping * Explain the roles of an accountant * Describe both the internal users and external users of accounting information * Discuss how businesses use accounting information in their business planning «Explain the types of business entities * Identify the characteristics of business entities * Discuss basic accounting concepts + Explain the concept of cost accounting * Identify the differences between cost accounting and financial accounting EF introduction In this chapter, you will learn the basic theories of accounting. An introduction on the definition of accounting and how it differs from bookkeeping will be discussed in detail in this chapter. This will be followed with explanations about the accounting profession and an accountant’s role in decision-making, Next, an explanation about the types of business entities in the market is given and this, chapter will conclude with discussions on basic accounting concepts and the concept of cost accounting. | Definition of Accounting and Bookkeeping Accounting is the process of recording, classifying, summarizing, reporting, analysing, and interpreting business activities into monetary units to assist users of this information in decision-making. In other words, accounting consists ofPrinciples of Accounting all the above-mentioned processes ranging from the process of recording until the process of interpreting financial information gained within the stipulated accounting period. Bookkeeping is the process of recording business activities into the books of ‘accounts. It only involves one step of the accounting process. For easy understanding, the definitions of accounting and bookkeeping are explained in Figure 1.1. PROCESS BOOKKEEPING || Recording Classiying ‘Summarizing ACCOUNTING Reporting Analysing Interpreting Figure 1.1 Definitions of accounting and bookkeeping busoeaaue 7 In the financial department of a business entity, thero will be a few bookkeepers to assist the more senior financial officer in basic accounting work. Do you think it is necessary to have more or less bookkeepers in a financial department? Give reasons to support your answer Differences between Accounting and Bookkeeping ‘The differences between accounting and bookkeeping are explained in Table 1.1 Table 1-1 Diferences between accounting and bookkeeping ‘Accountin ing Accounting represents the complete Bookkeeping is only limited to the accounting process, from the process ef recording process, recording until interpreting the business financial informatistil ed of te reer ‘Accounting involves more tachnical Bookkeeping requires a basic standing and advance accounting | understanding and practice of financial accounting, ‘Aecounting tasks are per y Bookkeeping is performed by non- accounting graduates or certified accountants who have gained the professional accountants. necessary training and experience in bookkeeping, ‘Accounting is responsible for a wide | Bookkeeping comprises only the range of accounting tasks and menages | simple accounting tasks in a financial the various financial decisions from the | department such as: | respective business departments, * Issue bill from cash or credit activities Record receipts fram customers * Verify and record invoices from | _seppliers 2] Accountant An accountant is an accounting professional who provides the management of an organization with reliable and relevant financial information for decision- making. Accountants play vital roles in using their accounting professional qualification to provide the management of an organization with financial tasks, and at the same time, assist them with ample financial related advice crucial in the organization's financial planning and decision-making, In doing so, accountants may need to perform or monitor all processes of recording, classifying, summarizing, reporting, analysing, and interpret the activites of a business. PE] Roles of an Accountant ‘The ultimate goal of most businesses is to maximize profits, ‘To achieve this goal, business owners, investors or shareholders have to rely on accounting information, and professional accounting advice given by financial experts, about the financial aspects of the business. The management may need such information to help them decide whether they need to expand or minimize production, to increase or to reduce supply with a different company, to expand or reduce the budget in certain areas, or to continue or stop business operations. Among the essential duties and responsibilities of an accountant are: (a) Prepare and monitor fundamental accounting entries to document and journalize the business's source documents and books of for prime entry (b) Check daily cash and banking transactions (6) Update the status of accrued and prepaid activitiesPrincipies of Accounting (@) Manage payroll reconciliations (©) Prepare monthly sales and purchase reports (£) Budget business revenue and expenses () Ensure compliance with generally accepted accounting principles and ‘company procedures (h) Review, investigate, and correct errors and inconsistencies in financial entries, documents, and reports (0 Provide financial advice and alert the management of any risk prone business activities such as abnormal increases in business operations, excessive charges and potential penalties EEE 2 : ee Suzi Pinion, how does an accountant assst management in making Francia! ‘decisions? Why? (1. Users of Accounting Information ‘There are two types of users of accounting information: internal users and external ‘sers: These parties use the fancial information in business decision-making, Users of accounting Information Figure 1.2 Users of accounting information for their respective departments, Besides the business owner, the other intemal users of accounting information include: (a) Midate-tevel or top-level managementIntroduction to Accounting (b) Human resource department { (©) Marketing department (4) Strategic planning department L and ee t 3 es ial LBpphin bow diflorent departments inan exertion uso © Fran on : areal decisionmaking, (EEE external Users External users are parties outside the business organization who use the accounting information for their specific needs. The accounting information required by external users is in the form of financial statements. ‘Examples of external users are: (a) Potential shareholders (b) Government related authority bodies (©) Creditors (4) Analysts (e) Public at large icorsae 4 : eo Explain how external users use financial information in their financial decision-making. ‘TA Uses of Accounting Information for Business Planning A business plan is a formal statement prepared by a business organization to inttoduce a new business or a new project. The business plan gives description of the new business or project and how it will be developed, its business goals, objectives, and how they can be achieved. It may also include background information about the organization or the management team and how they aim ‘to achieve their goals. The organization may use the business plan as a blueprint to proceed and realize their plan within the target period, A business plan is often used to convince creditors or financial institutions for Joan applications or to gain approval from the top management in the organization before proceeding with the new business plan. As such, it is important for the business to disclose relevant accounting information to reflect the financial performance of the business and its viability in terms of financial control, This is presented in the financial planning section of the business plan. Basically, thefinancial plan section consists of three financial statements: the statement of comprehensive income the cash flow projection and the statement of financial position with a brief explanation or analysis, ‘Checkpoint a ‘Company ABC is preparing a business plan for their Corporate Social Responsibility (CSR) project. What kind of financial information do you think this company should include in their business plan? Types of Business Entities A business entity is formed and administered under the rules of the company law. All business entities in Malaysia must register their businesses with the Companies ‘Commission of Malaysia (CCM) under Act 197: Registration of Business Act 1956 (Revised 1978). The types of business entities are sole proprietorship, partnership and corporation, Sole proprietorship nail Perea ree ip Partnership EEE Limited Habitty Company partnership Figure 1.8 Business entity Sole Proprietorship Sole proprietorship is a business entity owned and managed by one individual. ‘The business owner or sole proprietor uses his own funds as capital to start the business and makes all the business decisions. ‘Ihe sole proprietor receives all Profits and bears all losses of the business. A sole proprietorship is not a separate ‘egal entity and there is no legal distinction between the owner and the business, In other words, the owner bears unlimited liability. Unlimited liability means that the owner is liable for all business debts and repayment can be obtained through, the seizure of personal assets, Sole proprietorship is ideal for new start-ups with a low entry cost, Sole proprietorships are regulated under the Registration of Businesses Act 1956 (RBA). 6 Name three sole proprietorships found in your state.Introduction to Accounting Partnership A partnership is a business owned by two or more persons (partners) who share their resources to start the business. The number of partners is usually limited to a maximum of 20, Each partner shares the responsibility of operating the business based on their partnership agreement. The partners share the profits and losses of the business among themselves. ‘Apartnership can be divided into two types; namely, general partnership and limited liability partnership (LLP). In addition to the above description, each of this type of partnership can be identified by the following unique traits: General Partnership General partnership isa version of conventional partnership. Partners contribute cash or any assets that can be converted to cash as their capital. General parmership is not a separate legal entity. Each partner bears an unlimited liability to debts, claims or charges against the partnership and this can extend to their personal assets. The liability for any debts of the business is borne by the partners. A partnership is regulated under the Registration of Businesses Act 1956 (RBA), and law of Partnership Act 1961 in Malaysia. Limited Limited liability partnership (LLP) is an alternative type of business entity regulated under the Limited Liability Partnerships Act 2012 which combines the characteristics of a company and a conventional partnership. Capital is contributed by partners in the form of shares. LLP is a separate legal entity in ‘which each partner contributes capital to the business and thus, technically, owns the business and has the advantage of limited liability. Limited liability means that the personal assets of the partners (je. shareholders) are protected from any legal action if the LLP business faces any misfortune. This type of business regulated under the Limited Liability Partnership Act 2012 (LLP) and Limited Liability Partnership Regulations 2012. Checkpoint a Name three pertnerships found in your state. bility Partnership (LLP) Company ‘A company is a type of business organization whereby the capital is funded by ‘owners called shareholders. The shareholders are the public who bought the shares and they may have access to the financial affairs of the business. The ‘business name ends with the word ‘Sdn Bhd’ or ‘Bhd’ Its a separate legal entity.Polyted Pri Acc This book chapters, polytechni The conter the opera important books for financial Key Fea + Compret concept: + Summer covered + Bamty, Emmawati and 2 doul Australia. S ‘Omar (PUC and busines Sharida Za ‘Tun Hussei Utara Malay is presently, teaching ex OXFQq FAI, Oxford F Each director or shareholder has limited liability and will not be business faces any misfortune. their liabilities ane only limited to 4 8 "Name three companies found in your state. Basic Accounting Concepts Basle accounting concepts can be divided into three types: Principles, accounting assumptions and accounting constraints, aoe ‘Accounting principles Accounting assumptions Accounting oa J Consistency concept «Prudence cond + Accrual concept * Materialty + Going concern concept * Money measurement concept + Business entity concept * Periodicity concept © Historical cost concept + Matching concept * Objectivity concept Figure 1.4 Basic accounting conceptsIntroduction to Accounting Historical Cost ‘The concept of historical cost requires all assets and liabilities of a business to be recorded at their historical cost. Historical cost is the original cost of obtaining an asset or liability. The historical cost can be accessed via the original source documents prepared from the business activities, Myo Prudence te Leuneh fool) ‘The concept of prudence requires accountants to exercise a degree of caution in the adoption of accounting policies to avoid overstating assets and revenues, and to avoid understating liabilities and expenses. ‘The idea behind this concepts that a business should not recognize an asset or revenue at a value thatis higher than the amount which is expected to be recovered {rom its sale or use. Conversely, liabilities and expenses of a business should not be prepaid below the amount that is likely to be paid in its respect in the future, Consistency ‘The concept of consistency requires a business to keep using the same specitic accounting method that the business has applied on a go-forward basis. Business are not allowed to change the method unless there is a sound reason to do otherwise. This concept may then ensure that the financial statements prepared in multiple periods can be reliably compared. Matching ‘The matching concept requires that expenses incurred by a business be changed to the income statement in the same accounting period in which the revenue, related ‘o those expenses, is earned. This may ensure users that all aspects of business expenses have been recorded at the same time as the business revenue is eamed. Accrual ‘The accrual concept requires a business to recognize revenues based on the cash received into the business, and to recognize expenses when cash is issued for Payments. In other words, revenues are recognized when earned, and expenses are recognized when assets are consumed. Materiality Materiality means the significance of transactions, balances or errors contained in the financial information. However, some businesses may define materialityPrinciples of Accounting in a different context and in accordance to their business size or busines circumstances, ‘The materiality concept requires a business to record transactions that the think would otherwise alter the decisions made by users of a business financi: statement. This concept tends to result in relatively small-size transactions bein recorded, so that the financial statements comprehensively represent the financic results, financial position, and cash flow of a business, TR Business Entity ‘The concept of business entity claims that the personal activities of the busines ‘owner have nothing to do with the business and are not considered as busines activities, As such they cannot be recorded in any of the business transaction: For the purpose of accounting, the business entity is treated as a unit on its ow and is separate from the financial information of the owners, (ERY Going Concern ‘The going concern concept states that accounting for business should be prepare with the assumption that the business will continue to operate for an indefiniw period of time. The business accounting should be done catefully and complete to avoid jeopardizing the operational activities of the business. ‘his will enable the business to realize its assets and settle its obligations in the normal cours of business. F Objectivity ‘The objectivity concept requires a business financial record to be prepared basec on verifiable evidence and transaction details obtained from source documents to support the business transactions that has taken place. Entries based on personal views or perceptions should be avoided because they are inaccurate and not reliable. Money Measurement ‘The concept of money measurement explains that only transactions and events that are capable of being measured in monetary terms are recognized in the financial statements, Thus any business activities which cannot be measured in monetary value shall not be recorded in the financial statements, Periodicity (Time Period) ‘The periodicity concept states that the financial report ofa business can be divided Into specific accounting time periods such as monthly, quarterly or annuallyIntrod ion fo Accounting ‘This is because some users of the accounting information may need them on a periodical basis. As such the preparation of accounting information according to the requested time period may assist them in making relevant financial-related decisions. [) Concepts of Cost Accounting {RIND Definition of Cost Accounting In cost accounting, the principle, method and techniques of accounting and costing are used to determine cost and analyse savings. ‘Thus, cost accounting is ‘a method used to plan and control the cost of the business operations. ‘{@2) Importance of Cost Accounting to Management Cost accounting provides information about the total cost or cost per unit of the products or services to management. Cost accounting helps the management in ‘cost control so production costs can be reduced and business profits increased. ‘Table 1.2 explains the differences between cost accounting and financial accounting. Knowing the differences helps you understand the concepts and you are able to apply them better. ‘Table 1.2 Differences between cast accounting and finanelal accounting Ce en ee Users Information is used by the | Information is used by internal management of | external parties such ‘the business. as investors, accounts payable, accounts payable rating agencies and regulatory agencies. | Format of report | No specific format for the | A specific format for | report. Follows the format | report. Adheres to the from the management. | accounting principles or | The report oniy includes | international Financial the information related _| Reporting Standards to a specific decision or | (IFRS) | situation, | Level of details | Focuses on details euch as | Focuses primarily on | product lines, geographical | reporting results and the ‘areas, customers and financial position of the subsidiaries. business,Principles of Accounting es eas Financial accounting | Product cost ‘Complies the cost of | Incorporatos tis raw materals, about, | information into Svetheade of workin | ts financial reports (primarily into the statoment of financial posit process and finished goods inventory. | Regulatory framework | No regulatory framework | Must follow the structure | | | governing cost in of financial accounting | | Accounting reports ‘are tightly | | | governed by ether | generally accepted Scounting principles | onFRS. Reporting time Focuses primary on | Focuses on resis in reporting recuits and greater detain reports finencial position of the within the business. | | Busnes | | Product cost lssues report as needed | Issues report only at the | | by the menagomont of the | end of a reporting period. | business [Tire Foren Towohes avery of |v only concerned wth | current and future business | reporting the results | | projections. of reporting periods | | that have already been | completed. hi i TINE ‘Accounting consists of the complete process of recording, classifying, summarizing, reporting, analysing, and interpreting business activities. Bookkeeping, however, only covers one process—recording. The role of an accountant is to manage all financial aspects of the business organization. ‘©The two types of accounting information users are: = Internal users = External users ‘© Internal users use the accounting information for making intemal decisions, ‘and the external users use the accounting information for extemal decision- making. * Accounting information enables management to measure their capabilities before venturing into short-term or long-term business projects.