ACCOUNTING

Chapter
IN BUSINESS

1
ACCOUNTING
ENVIRONMENT
- Lecture 1
 Learning
Learning Objectives
Objectives
After studying this chapter, you should be able
to:
1. Describe what is accounting.
2. State the users of the accounting information.
3. Describe the profession of accounting,
accounting professional bodies and code of
professional conduct & ethics.
4. State the characteristics of the qualitative
accounting information.
5. Describe the assumptions, principles and
constraints related to the practice of accounting.
6. Describe the forms and types of business.
7. Describe the elements of financial statements.
 Definition
Definition of
of Accounting
Accounting
 As an information system that provides report
to stakeholders about the economic activities
and condition of a business.
 So, accounting is the process of:
 Identifying
 Measuring
 Communication economic information to
permit informed judgements, and
 Decisions by users of the information
 Importance
Importance of
of Accounting
Accounting
is a
Accounting
Accounting Identifies
Identifies
system that

Records
Records

information
Relevant
Relevant Communicates
Communicates
that is

Reliable
Reliable
to
tohelp
helpusers
usersmake
make
Comparable better
betterdecisions.
decisions.
Comparable
 Accounting
Accounting Activities
Activities

 Identifying  Recording
Business Business
Activities Activities

Communicating
Business
Activities
 Users
Users of
of Accounting
Accounting Information
Information

External Users Internal Users

•Lenders •Consumer Groups •Managers •Sales Staff

•Shareholders •External Auditors •Officers •Budget Officers
•Governments •Customers •Internal Auditors •Controllers
 Users
Users of
of Accounting
Accounting Information
Information

External Users
Internal Users

Financial accounting provides

Managerial accounting provides
external users with financial
information needs for internal
statements.
decision makers.
 Opportunities
Opportunities in
in Accounting
Accounting
Financial
Financial Managerial
Managerial Taxation
Taxation
•Preparation
•Preparation •General
•Generalaccounting
accounting •Preparation
•Preparation
•Analysis
•Analysis •Cost accounting
•Cost accounting •Planning
•Planning
•Auditing
•Auditing •Budgeting
•Budgeting •Regulatory
•Regulatory
•Regulatory
•Regulatory •Internal
•Internalauditing
auditing •Investigations
•Investigations
•Consulting
•Consulting •Consulting
•Consulting •Consulting
•Consulting
•Planning
•Planning •Controller
•Controller •Enforcement
•Enforcement
•Criminal •Treasurer •Legal
•Criminal •Treasurer •Legalservices
services
investigation •Strategy •Estate
investigation •Strategy •Estateplanning
planning

•Lenders
•Lenders •FBI
•FBIinvestigators
investigators
•Consultants
•Consultants •Market
•Marketresearchers
researchers
•Analysts
•Analysts •Systems
•Systemsdesigners
designers
•Traders
•Traders •Merger services
•Merger services
Accounting- •Directors
•Directors •Business
•Businessvaluation
Accounting- •Underwriters •Human
valuation
•Underwriters •Humanservices
services
related
related •Planners
•Planners •Litigation
•Litigationsupport
support
•Appraisers
•Appraisers •Entrepreneurs
•Entrepreneurs
Branches
Branches of
of Accounting
Accounting
 Differences
Differences Between
Between Financial
Financial Accounting
Accounting
and
and Management
Management Accounting
Accounting
 FINANCIAL ACC.  MANAGEMENT ACC.
- Measure and report -Provides management
economic events with information about
- In accounting period overall planning and
- To determine control of the business.
results and overall - Focus on preparation
financial position and interpretation of
- Prepare a financial accounting information
statements for management
purposes.
 Profession
Profession of
of Accounting
Accounting
 Private Accounting
• Frequently called management accountant.
• As industrial or cost accountant if they are
employed by manufacturer.
• The chief accountant in a business may be called
the controller.
 Public Accounting
• An accountant may practice as an individual or as
a member of a public accounting firm.
• Public accountants who have met a state’s
education, experience, and examination
requirements may become Certified Public
Accountants (CPAs)
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 Non-Profit Accounting
• Reporting and control for government units,
foundations, hospitals, labor unions, colleges or
universities, and charities.
 Code
Code of
of Professional
Professional Conduct
Conduct &
& Ethics
Ethics
 Set out in two sections:
(1) The Fundamental Principles
(2) The Professional Statements
 The Fundamental Principles are:
• Integrity – should be straightforward, honest and
sincere.
• Objectivity – must be fair and must not allow
prejudice or bias or influence of others to override
his objectivity.
• Independence – should both be and appear to be
free of any interest which might be regarded as
being incompatible with integrity & objectivity.
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• Confidentiality – should respect the confidentiality
of information acquired during of his professional
work and should not disclose any such information
to a third party without specific authority or unless
there is a legal or professional right or duty to
disclose.
• Professional Competence and Due Care – should
carry out his professional work with due care,
competence and diligence and has a continuing
duty to maintain his professional knowledge and
skill up-to-date.
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• Compliance with Technical Standards – should

carry out his professional work in accordance with
the relevant technical and professional standards
and in compliance with the relevant legislation (he
must comply with the approved Accounting and
Auditing Standards & other pronouncements)
• Professional Behaviour – should observe the
ethical guidance of the Association and in
circumstances not provided for by the that
guidance
 Malaysian
Malaysian Accounting
Accounting Professional
Professional
Bodies
Bodies
 Financial Reporting Foundation (FRF)
• Oversees MASB performance, financial and
funding requirement, and reviews proposed
standards by MASB.
 Malaysian Accounting Standard Board (MASB)
• Adopt international accounting standard or develop
new accounting standard for Malaysian companies
 Malaysian Institute of Certified Public
Accountant (MICPA)
• To advance the theory and practice of accounting,
to provide education, training and examination to
accountants.
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 Malaysian Institute of Accountants (MIA)
• To develop, support and monitor quality and
expertise, consistent with global practice in
accounting profession.
 Organizations
Organizations Affecting
Affecting Financial
Financial Reporting
Reporting and
and
Audits
Audits
 Generally, there are four related parties involved
in the financial reporting process and practice of
public accounting in Malaysia:
• Malaysian Accounting Standard Board (MASB)
• Malaysian Institute of Accountants (MIA)
• Companies Commission of Malaysia (CCM)
- responsible to ensure the laws provision are
enforced & complied with by corporations,
companies and businesses in the corporate
sector.
- as a regulator to promote proper conduct of
corporate officers and exercise good corporate
governance.
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• Securities Commission (SC) and Bursa Malaysia
(BM) (or previously known as KLSE)
- SC responsible for the regulation and supervision
of capital markets and securities industry.
- SC has relatively wide investigate and
enforcement powers.
- BM is a regulatory organization which governs
the conduct of stock broking companies and
companies listed on the exchange.
- listed companies must comply with BM
Requirements .
Characteristics
Characteristics of
of the
the Qualitative
Qualitative Accounting
Accounting
Information
Information
 Primary qualities that make accounting
information useful for decision making are:
• Relevance – it is capable of making a difference in
a decision and helps users make predictions about
ultimate outcome of past, present and future
events.
• Reliability – accounting information must posses
three key characteristics; (a) verifiable, (b)
representational faithfulness and (c) neutrality
 The secondary qualities identified are
comparability and consistency.
 Generally
Generally Accepted
Accepted Accounting
Accounting
Principles
Principles
Financial
Financialaccounting
accounting practice
practiceis isgoverned
governedby
by
concepts
conceptsand
and rules
rules known
knownas as generally
generallyaccepted
accepted
accounting
accounting principles
principles (GAAP).
(GAAP).

Relevant
RelevantInformation
Information Affects
Affectsthethedecision
decisionof
of
its
itsusers.
users.

Reliable
Reliable Information
Information Is
Istrusted
trustedby
by
users.
users.

Comparable
Comparable Is
Ishelpful
helpfulin
incontrasting
contrasting
Information
Information organizations.
organizations.
 Setting
Setting Accounting
Accounting Principles
Principles

Financial
FinancialAccounting
Accounting
Standards
StandardsBoard
Board is
isthe
the private
private
group
groupthat
that sets
setsboth
bothbroad
broadand
and
specific
specific principles.
principles.

The
TheSecurities
Securities and
andExchange
Exchange Commission
Commission isis
the
thegovernment
government group
groupthat
that establishes
establishes
reporting
reportingrequirements
requirementsforforcompanies
companiesthatthat
issue
issuestock
stockto
tothe
thepublic.
public.
 Custodians
Custodians of
of Accounting
Accounting Standards
Standards in
in
Malaysia
Malaysia
 Financial Reporting Act 1997 established the
Financial Reporting Foundation with oversight
responsibility for the Malaysian Accounting
Standards Board.
 This structure preserves the integrity and proper
functioning of the financial reporting regime in
Malaysia.
 The Financial Reporting Act 1997 empowers the
Malaysian Accounting Standards Board to issue
approved accounting standards for use by entities
in Malaysia.
 Principles
Principles of
of Accounting
Accounting
 There are at least five main accounting
principles, which provide guidance in
accounting practice:
• Historical cost principle (Cost principle)
• Objectivity principle
• Revenue recognition principle
• Matching principle
• Full disclosure principle
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Objectivity Principle
Historical Cost Principle
Accounting information is
Accounting information is
supported by independent,
based on actual cost.
unbiased evidence.

Revenue Recognition Principle

1. Recognize revenue when it is earned.
2. Proceeds need not be in cash.
3. Measure revenue by cash received plus
cash value of items received.
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 Matching principle – to report expenses

incurred in the same period as of the revenue
is actually earned as a result of these
expenses
 Full disclosure principle – requires the
business to disclose sufficient information for
the users in helping them of making
reasonable decision making (business should
report relevant, reliable and comparable
information about the business activities)
 Accounting
Accounting Assumptions
Assumptions
 Four main accounting assumptions are:
• Separate business entity
• Going concern
• Monetary unit
• Time period
 Separate business entity – the business is
viewed as an separate entity from its owners,
creditors or stakeholders.
 Going concern – the preparation of company’s
financial reports should consider assumption
that the operation shall continue in foreseeable
future without being closed or sold.
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 Monetary unit – we should report all the
business transactions or events in monetary
units such as RM (Ringgit Malaysia)
 Time period – business activities can be
divided into specific period such as a month, a
quarter and a year.
 Accounting
Accounting Constraints
Constraints
 There are two constraints involved in
accounting:
• Conservatism
• Materiality
 Conservatism – no gain or profit but to
recognize possible loss.
 Materiality – requires business to account only
for the items that are deemed significant for a
given size of operation (if the misreporting of
that items give effect to users decision making)
 Business
Business Entity
Entity Forms
Forms

Proprietorship
Proprietorship Partnership
Partnership Corporation
Corporation
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 Sole proprietorship – owned by one individual.

 Partnership – owned by two or more
individuals.
 Corporation – organized under state or federal
statutes as separate legal entity. The
ownership of corporation is divided into shares
of stock. A corporation issues the stock to
individuals or other businesses, who then
become owners or stockholders of the
corporation.
 Corporation
Corporation

Owners of a corporation are called

shareholders (or stockholders).

When a corporation issues only

one class of stock, we call it
common stock (or capital stock).
 Characteristics
Characteristics of
of Businesses
Businesses

Characteristics
Characteristics Proprietorship
Proprietorship Partnership
Partnership Corporation
Corporation
Business
Businessentity
entity yes
yes yes
yes yes
yes
Legal
Legal entity
entity no
no no
no yes
yes
Limited
Limited liability
liability no
no no
no yes
yes
* *
Unlimited
Unlimited life
life no
no no
no yes
yes
Business
Businesstaxed
taxed no
no no
no yes
yes
One
One owner
owner allowed
allowed yes
yes no
no yes
yes

**Proprietorships
Proprietorshipsand andpartnerships
partnershipsthat
that are
areset
setup
upas
as LLC’s
LLC’s
provide
provide limited
limited liability.
liability.
 Types
Types of
of Business
Business
 Manufacturing Business
• Change basic inputs into products that are sold to
individual customers.
• Example: Proton, Sony
 Merchandising Business
• Purchase inventories from other businesses and
resell the inventories to individual customers.
• Example: hyper market, book store
 Service Business
• Provide service rather products to customers.
• Example: hotel, transportation
 Financial
Financial Statements
Statements
Financial Statements consist of four elements,
there are:

1. Income Statement
2. Statement of Owner’s Equity
3. Balance Sheet
4. Statement of Cash Flows
P1 Income
Income Statement
Statement

Net income is the

difference between
Revenues and
Expenses.

The income statement describes a company’s revenues

and expenses along with the resulting net income or loss
over a period of time due to earnings activities.
 The net income of $4,400
increases Owner's Equity by
$4,400.

The Statement of FastForward

Owner’s Equity Statement of Owner's Equity

explains changes in For Month Ended December 31, 2009

equity from net C, Taylor, Capital December 1, 2009   $ -

income (or net loss) Plus: Investment by ower $ 30,000  

and from owner ‘s Net income 4,400  

    34,400
investments and
Less: Withdrawals by owner   200
withdrawals for a
C. Taylor, Capital, December 31, 2009   $ 34,200
period of time
     
 FastForward
The Balance Sheet Statement of Owner's Equity
For Month Ended December 31, 2009
describes a C, Taylor, Capital December 1, 2009   $ -
company’s financial Plus: Investment by ower
Net income
$ 30,000  
4,400  
position at a point in
    34,400
time. Less: Withdrawals by owner   200
$
C. Taylor, Capital, December 31, 2009   34,200
     
The Statement of Cash Flows identifies cash inflows and
cash outflows over a period of time
End of Chapter 1
- Lecture 1