OVERVIEW OF ACCOUNTING

Prepared by: Noor Hasniza Haron

LEARNING OBJECTIVES
 Understand objective of financial statements
 Main users of financial statements
 Distinguished types of business entities and different
reporting requirements (sole trader, partnership and
company)
 Statement of Financial Position and the classification of
items in it
 Statement of Profit/Loss & Other Comprehensive Income
and the classification of items in it
Objective of financial statements

 Financial position
 Economic resources
 Financial structures
 Liquidy and solvency

 Performance
 Changes in financial position
 (Cash flow from operating, investing and financing)
 Others
Underlying Assumption

 Accrual basis:-
 Transactions are recognised and recorded when they
are ocurred regardless whether they have been
paid/received.
 Matching concept

 Going concern concept

 Entity will be continue to be operating in the future
Qualitative characteristic
 Understandability
 Relevence (influence economic decision of
users)
 Reliability (free from error and bias)
 Comparability
 USERS OF FINANCIAL INFORMATION

EXTERNAL
INTERNAL
•Those who are indirectly
•Those who take part in
involve with organisation.
the management of the
•Some of the examples:-
business
•Creditors/bankers
•Some of the examples:-
•Current and potential
•Owners
investors
•Managers
•Government
•Employees
•Consumers of products
and services
Characteristics Sole Proprietorship
Registration Registered with the business
registrar under the Business
Registration Act 1957
Capital Contributed by the owner
from savings or other
properties brought in
•Ownership Own by one person
Management Manage and control by the
and Control owner with the help from his
family and workers
•Liability Unlimited liability
If the business fails and the
assets are not enough to
cover the debt, the creditors
have a right against the
owner personal properties
•Profit or Loss Profit belong to the owner
and any losses incurred will
be bear by the owner
Books and No legal obligation to keep
Accounts the books and prepare
accounts
Partnership
Registered with the business
registrar under the Business
Registration Act 1957
Contributed by partners
according to the agreement
Own by 2 - 20 partners
Manage and control by
partners or by a board which
consists of a few partners
Unlimited liability
If the business fails and the
assets are not enough to cover
the debt, the creditors have a
right against the owner
personal properties
Profit or loss will be shared by
partners according to their
profit sharing ratio as stated in
the Partnership Agreement
No legal obligation to keep the
books and prepare accounts
Limited Companies
Registered with the Registrar of
Companies under the Companies
Act 1965
Contributed by shareholders
through buying of shares
A private company must have a
minimum of 2 and a maximum of
50 shareholders. A public company
must have a minimum of 2
shareholders and the maximum
amount will be as to the authorised
capital
Manage and control by a board of
directors appointed by the
shareholders
Limited liability
If the business fails and the
company’s assets are not enough
to cover the debt, the creditors do
not have a right against the
shareholders personal properties
Profit will be paid to the
shareholders in the form of
dividend
Proper books of account must be
kept and annual accounts must be
sent to the registrar of company
COMPANY FORMATION
 Any two or more person associated for any lawful purpose can apply to form a company by
subscribing their names to a memorandum and complying with a requirement as to the
registration of the company

 Constitution of company comprise of:- Can alter, subject to Section 31 (1)

 The Memorandum of Association
Companies Act but need special
resolution
 The Article of Association

 The documents, apprriopriate fees must be lodged with Commission of Companies in

Malaysia

 Once the Registrar had satisfied Certificate of Incorporation is issued. Private company
can commenced immediately. Public company must received Certificate To Commence
Business before commencement.

 Expenses involved:-
 Registration fees paid to CCM, Solicitors fees for M&A/A&A, Printing costs of various
documents i.e prospectus, payment to the promoters of organization.
MEMORANDUM OF ASSOCIATION –
essential component of the structure
 The name of the company (“Sendirian Berhad” / or just “Berhad”);
 The situation of the company’s registered office;
 The objects of the company, i.e the nature of business intended to be carried out;
 That the liability of the members is limited
 The nominal amount of the authorized share capital with which it is proposed to
register the company and the division of such capital into shares of a fixed amount;
and
 The association clauses

The “Memorandum of Association” must be signed by at least two subscribers; duly

dated. The signature of each subscriber must be witnessed by a third person. Each of
the subscribers must undertake to subscribe for one or more shares of the company.
ARTICLE OF ASSOCIATION – internal
regulations of a company
 The rights of different classes of shareholders
 The transfer of shares
 The duties, power and proceeding directors
 Notice and proceedings of meetings
 The borrowing power of company etc
 Accounting vs. Bookkeeping
 Accounting is defined as the art of classifying, recording and summarising of
transactions and business events in monetary terms and interpreting the results to
interested parties to enable them to make decision.

 Four stages of accounting:

 1.Classifying - sorting out accounting data into orderly and meaningful
categories. Example: receipts, payment, purchases, sales etc.

 2. Recording - transactions are recorded in the books of the business.

Example: journals and ledgers.

 3. Summarising - periodically accounting data are summarised in the form of

financial statement. Example: Trading and Profit and Loss Account and Balance
Sheet.

 4.Interpreting – the financial statements are analysed and the result of the
analysis is used as a guide to make decisions.

 Bookkeeping is different from accounting. Bookkeeping is only a part of

accounting. It is the mechanical aspects of accounting such as classifying, recording
and summarising transactions systematically. The needs of recording transactions
systematically give rise to double entry system.
 Cost accounting v.s Financial Accounting
 Financial accounting:

 A discipline of accounting that mainly deals with the keeping of accounting

records to enable the preparation of accounting reports

 Accounting records are maintained based on specifically designed guidelines or

rules

 the field of accountancy concerned with the preparation of financial statements

for decision makers, such as stockholders, suppliers, banks, government
agencies, owners, and other stakeholders.

 Cost accounting:

 the process of tracking, recording and analyzing costs associated with the
products or activities of an organization.
 Classsified and recorded –
journalising
Accounting Process Classifications i.e: General,
purchase, sales, cash
Assets, Liabilities, Owners payments, receipts journal,
Equity, Revenue, Expenses return inwards

Transactions Source Documents Journals

Total posted to appropriate

accounts – Posting.
Classifications:- General, Ledger
Sales/Debtors,
Purchase/Creditors
Prepared at the end of month/acc
Trial Balance period

Adjustments
Yes – errors/ accruals/ prepayments/
depreciation/ doubtful debts
No

Financial Statements
Activity

 Distinguish between the different types of

business organization
 What are the various users of financial
statement and briefly explain the purpose of
each users in using financial statement
PREPARATION OF
FINANCIAL
STATEMENT
 ACCOUNTING EQUATION
Assets = Equity
Assets = Capital + Liabilities

ASSETS CAPITAL LIABILITIES

Property owns by the business

Two types of assets: Financial obligations of the business.
Financial obligations
a. Non-Current Assets - assets Two types of liabilities:-
of the business to
acquired/bought not for resale. Use
the owner.
them in running the business. It has a Long Term Liabilities - Amount owing by
useful life of more than one year. the business that is not expected to be
Owner’s Equity
Example: Tangible (land and building, repaid within one year.
(Capital either in
motor vehicle, machinery) Intangible e.g. Long Term Loan, Mortgage on
the form of
(goodwill, pattern), investment (Fixed Premises, Debenture
cash/other assets
deposit>1 year)
that owner
Current Liabilities
brought into the
b. Current Assets - constantly changing Amount owing by the business that is
business) =
their form during an accounting expected to be repaid within one year.
Capital + /(-)
period. Example: Stock, Debtors or e.g. Short Term Loan, Bank Overdraft,
Profit (Losses) -
Accounts Receivables, Cash at bank, Creditors or Accounts Payable, accrued
Drawings
Cash in hand. Prepaid expenses, expenses, unearned revenue.
accrued revenue
 Statement of Financial Position as at 31 Dec 2011
RM RM RM RM
Fixed Assets Owners Equity
Land and building xx Capital xx
motor vehicle xx + net profit xx
machinery xx xx
Total fixed assets xx - drawings xx
xx
Current assets
Cash in hand xx Long term liabilities xx
Cash at bank xx
Stock xx Current liabilities
Debtors/Accounts recievables xx Bank overdraft xx
Prepaid expenses xx Short term loan xx
Accrued revenue xx Creditors/Accounts Payable xx
Total current assets xx Accrrued expenses xx
Unearned revenue xx
Total current liabilities xx

xxx xxx
 Double effects of the accounting equation
Assets = Capital + Liabilities

Accounts
Transaction Double Effect affected
Ali started a business with RM10,000 cash in Cash increase and Capital
hand. increase Assets, Capital

The business deposited RM8,000 of the cash

into the bank account. Cash decrease and Bank increase Assets, Assets

Received loan by cheque RM5,000. Bank increase and Loan increase
Purchased furniture worth RM1,000 by Furniture increase and Bank
cheque. decrease
Cash decrease and Capital
The owner took cash RM100 for his own use decrease
Assets, Liabilities
Assets, Assets
Assets, Liabilities
 SOP/L & OCI for the year end 31 Dec 2011
Show the trading result of the business.
RM RM
Sales xx
Sales/revenues: Increase in owner’s equity
resulting from business activities. Trading Opening inventory xx
business – sale of the goods. Service + Purchases xx
business – performance of the service (i.e. - Closing inventory (xx)
commission received)
Less: cost of good sold (xx)
Gross profit/(Loss) xx

Other revenues that coming from other than Add Revenues

the main business activities Rent received xx
Interest received xx
Total revenues xx
Expenses: cost consume in the process of
earning revenue. Items that are necessary Less: operating expenses
for continuing operation of the business.
Salary xx
Printing and stationary xx
Rent xx
Transferred to balance sheet. Belongs to the Total operating expenses (xx)
owner of the business and should be added Net profit (Loss) xx
to the capital of the business
 ACCOUNTING EQUATION.. Cont..
Assets = Equity

Assets = Capital + Liabilities

Assets = Capital + Net Profit + Liabilities

Profit = Revenues - Expenses

Assets = Capital + Revenues – Expenses + Liabilities

Therefore the expanded accounting equation:

Assets + Expenses = Capital + Revenues + Liabilities