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CHAPTER TEN

Financial Information
& Accounting

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 LEARNING OUTCOMES

In this chapter, you will learn to:

 Define the accounting system and bookkeeping.
 Differentiate between financial accounting and management
accounting.
 Explain the accountants and accounting profession.
 Differentiate between public and private accountant.
 Define auditing and tax accounting.
 Identify fundamental accounting concepts.
 Elaborate on financial statements: income statement,
balance sheet and cash flow statement.
 Analyse the financial statements.

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 INTRODUCTION

• Ultimate business goal is to maximize owners’ or

shareholders’ wealth.
• Business transactions involve financial matters that
require financial decisions.
• To survive in today’s competitive market,
comprehensive knowledge in accounting and
financial management is vital.

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 ACCOUNTING AND
BOOKKEEPING

Accounting
• Process of identifying, classifying, recording and
summarizing business transactions, interpreting
and communicating the results to interested parties
to assist them in making decisions.
Bookkeeping
• Process of recording every business transaction in
books of account such as journals and ledgers.
• Involves identifying, classifying and recording
transactions.
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 ACCOUNTING PROCESS

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 MANAGEMENT ACCOUNTING
AND FINANCIAL ACCOUNTING

Management accounting
• Internal accounting concerned with providing
internal users financial information to assist
them in making effective and efficient decisions.

Financial accounting
• External accounting that focuses on the
provision of financial information to external
users.

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 ACCOUNTANT

• A person skilled in recording and reporting

financial transactions.
• Accountants Act 1967
• Malaysian Institute of Accountant (MIA)
• Public accountant and private accountant

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 FUNDAMENTAL
ACCOUNTING CONCEPTS

Two fundamental accounting concepts in record

keeping:
• Accounting equation
• Double-entry system

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 ACCOUNTING EQUATIONS

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 ELEMENTS OF
ACCOUNTING EQUATIONS

• Assets: Economic resources owned by the business.

• Liabilities: Amounts owed by the business to external
parties.
• Owner’s equity: Residual amount after deducting all
business assets with all business liabilities, i.e. owner’s
claim against net assets of a business.
• Capital: Resources supplied by the owner to the business.
• Drawings: Any business resource that is taken by the
owner from the business for personal purposes or uses.
• Revenue: Income earned by a business.
• Expenses: Costs incurred to operate a business.
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 DOUBLE ENTRY SYSTEM

• Every record of business transaction will affect

two items in the accounting equation.
• Recording is from the business point of view.
• Every transaction involves two accounts: one
account will be recorded in the debit side; at the
same time, the other account will be credited.
• Accounting equations must be maintained.

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 DETERMINATION OF ACCOUNTS

Debit Group: Asset, Expenses and Drawings

(Increase: Debit, Decrease: Credit)

Credit Group: Capital, Revenue and Liabilities

(Increase: Credit, Decrease: Debit)

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 INTRODUCTION TO
FINANCIAL STATEMENTS

• Preparation: Financial Reporting Standard 101

(FRS 101).
• Main objective: Provide information regarding the
financial position, performance and cash flows of a
business.
• Components: Balance Sheet, Income Statement
(Trading Profit and Loss account), Statement of
Changes in Equity, Cash Flow Statement,
accounting policies and explanatory notes.

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 BASIC ACCOUNTING CONCEPTS

• Business entity concept: Business entity is distinct from

owner or other.
• Going concern concept: Business is assumed to continue its
operation for an unlimited time in future.
• Money measurement concept: In Malaysia, the Ringgit is
used as a basis of accounting measurement and analysis.
• Periodicity concept: Accounting record and report are
prepared based on the relevant time period.
• Historical cost concept: Assets of business must be recorded
at cost until assets are sold.

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 BASIC ACCOUNTING CONCEPTS
(cont.)

• Consistency concept: Businesses should be consistent

in using accounting method; if they change any
accounting method, they must disclose the reason in the
notes to the account.
• Accrual or matching concept: Net profit is ascertained
by matching total revenue earned with total expenses
incurred for a given accounting period.
• Realisation: Revenue is earned when goods or services
are transferred or sent to customers and not when goods
or services are received by customers.

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 BASIC ACCOUNTING CONCEPTS
(cont.)

• Dual aspect: Every business transaction will affect

two items and should be entered twice; one in debit
side and the other in credit side.
• Materiality: Accountants are allowed to make a
special treatment for the trivial items that are
immaterial and insignificant since it does not affect
the report on net income of the business.
• Prudence: Accountant should be conservative in their
actions and duties.

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 FINANCIAL STATEMENT

• Income Statement/Trading Account and Profit and

Loss account.
• Maintained to calculate profit or loss of business
for a given accounting period.
• Consists of two main account:
– Trading account
– Profit and loss account.

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 TRADING ACCOUNT

• Used to ascertain
the gross profit
for a particular
accounting
period.

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 PROFIT AND LOSS ACCOUNT

• Prepared to calculate net profit for a particular

accounting period.

Gross Profit + Revenue – Expenses = Net Profit

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 BALANCE SHEET

• Statement that discloses total assets, liabilities and owner

equities of a business for a particular financial period.

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 CASH FLOW STATEMENT

• Purpose: To enable the financial statements’ users

to evaluate the ability of a business to generate
cash and cash equivalents and how businesses
utilized those cash flows.
• Three major activities involving cash: operating
activities, investing activities and financial
activities.

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 INTRODUCTION TO
RATIO ANALYSIS

Purpose: Used to analyse the performance of a

business compared with the previous year, budgeted
or industry.
Objectives:
•Evaluate strengths and weaknesses of an organization’s
performance.
•Help management take remedial action if any
weaknesses arise.
•Enable the comparison on business performance.

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 LIMITATIONS OF
ACCOUNTING RATIOS

• Misleading decision since calculation of ratio are

based on historical accounting information.
• Ratios only show strengths and weaknesses of
business performance but do not explain the reasons
or causes of such strengths or weaknesses.
• Comparison of ratio will only be meaningful and
valid between businesses that use similar
accounting policies.

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 TYPES OF
ACCOUNTING RATIOS

1. Profitability ratio
• Used to measure the profit of an organization in
relation to sales and net assets.
• Measure the organization’s earning ability.
• Allow to evaluate how efficient the invested funds
are being used.

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 TYPES OF
ACCOUNTING RATIOS (cont.)

• Types:

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 TYPES OF
ACCOUNTING RATIOS (cont.)

2. Liquidity ratio (or solvency ratio)

• Used to measure ability of an organization to
meet its current obligations or liabilities.
• Types:

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 TYPES OF
ACCOUNTING RATIOS (cont.)

3. Leverage ratio
• Leverage: Ability of a business to finance an
investment through loans or borrowed funds.
• Used to measure an organization’s ability to
meet short- and long-term obligations.
• Type:

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 TYPES OF
ACCOUNTING RATIOS (cont.)

4. Activity ratio
• Used to measure the stock movement of an
organization and the length of time at which
debtors are paying their credit sales or debt.
• Types:

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