8

Chapter

BASIC ACCOUNTING AND

FINANCIAL MANAGEMENT
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 LEARNING OUTCOMES

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

Define the accounting system and understand how it
differs from bookkeeping.
Differentiate between financial accounting and
management accounting.
Define the accounting equation
Identify the accounting elements
Prepare the financial statements: income statement,
balance sheet and cash flow.

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 DEFINITION OF
ACCOUNTING

 Accounting can be defined as a process of

identifying, classifying, recording and
summarizing business transactions in
monetary terms.

 Then, the results can be interpreted and

communicated to interested parties to enable
them to make informed decisions.

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 ACCOUNTING AND
BOOKKEEPING

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 MANAGEMENT ACCOUNTING
AND FINANCIAL ACCOUNTING
DIFFERENCES
Characteristic Financial Accounting Management Accounting
User report is utilized by external users report is used by external users

Legal requirement statutory requirement for public listed management accounting report is
companies optional for organization
Scope Provides information about the whole of Focus on one part or several parts of
the organization the organization
GAAP and FRS Financial reporting must follow GAAP Management accounting reporting is
and FRS and conform with legal not subject to the legal requirement,
requirement FRS and GAAP principles

Timeframe The report contains past information, The report delivers information which
e.g. historical cost is expected to occur in the future
such as forecasted sales

Frequency Normally, the report will be produced on The report will be produced more
semi-annual or annual basis frequently, such as daily, weekly or
monthly

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 MANAGEMENT ACCOUNTING
AND FINANCIAL ACCOUNTING
SIMILARITIES
Characteristic Description
Use basic Both gather information by applying basic
accounting process accounting process
Objective Both aim to deliver relevant information to the
interested users of the organization in assisting
them to make decisions.
Controlling and Both processes are used for the purpose of
performance evaluation controlling and performance evaluation
purposes

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 BASIC ACCOUNTING EQUATION

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 ELEMENTS OF ACCOUNTING

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 ASSETS

 Fixed Assets (Non Current Asset):

– These assets have physical existence, such as
land, buildings, office equipment, machinery and
motor vehicles.

 Current Assets
– These assets are either cash in-hand, deposits in
the bank or items that are expected to be
converted into cash within one year, e.g. stocks
and debtors.
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 LIABILITIES

 Long-term Liabilities
– Long-term liabilities refer to amount owing by the
business on a long-term basis, which is more
than one year, such as loans and mortgages.

 Current Liabilities
– Current liabilities are amount owing by the
business for a short-term basis and are expected
to be repaid within one year, such as bank
overdrafts, trade creditors and sundry creditors.
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 OWNER’S EQUITY

 Capital
– Capital refers to resources supplied by the owner
to the business, such as money, motor vehicles
and buildings.

 Drawings
– Drawings can be defined as any business
resources that are taken out by the owner from
the business for personal purposes or use.

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 REVENUES

Revenue are related to the income earned by a business,

which results in a inflow of assets such as money or
debtor. In general, the business gains revenues mainly from
providing goods or services to customers.

Business Revenue Sources

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 EXPENSES

Expenses are costs incurred to operate a business.

Business Expenses

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 FINANCIAL STATEMENTS

 The main objectives of these statements are to

provide information regarding the financial
position, performance and cash flows of a
business to entrepreneurs.

 It’s main components are:

– Income Statement / Statement of
Comprehensive Income
– Balance Sheet / Statement of Financial Position

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 INCOME STATEMENT / TRADING P &
L ACCOUNT / STATEMENT OF
COMPREHENSIVE INCOME
 It comprises two main accounts, which are:
– Trading account
– Profit and loss account

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 TRADING ACCOUNT

Trading Account:
Ascertaining the
Gross Profit

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 PROFIT AND LOSS
ACCOUNT
 Profit and loss account is prepared to calculate
the net profit of a business for a particular
accounting period.
 The formula used to determine net profit is as
follows:

Gross Profit + Revenues – Expenses = Net Profit

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 INCOME STATEMENT / TRADING P &
L ACCOUNT / STATEMENT OF
COMPREHENSIVE INCOME

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 INCOME STATEMENT / TRADING P &
L ACCOUNT / STATEMENT OF
COMPREHENSIVE INCOME

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 BALANCE SHEET / STATEMENT
OF FINANCIAL POSITION

 Balance sheet is a statement that discloses the

total of assets, liabilities and owner equities
of a business for a particular financial period.

Capital Employed = Owners' Equity + Long Term Liabilities

Working Capital = Current Assets – Current Liabilities

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 BALANCE SHEET / STATEMENT
OF FINANCIAL POSITION

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 CASH FLOW STATEMENT

 The main purpose of preparing a cash flow statement is

to enable the financial statement’s users to evaluate the
ability of business to generate cash and cash
equivalents and how business utilized those cash
flows.

 This statement will disclose the information regarding

cash inflows and cash outflows for a given
accounting period, which is derived from three major
activities – operating, investing and financial
activities.

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 CASH FLOW STATEMENT

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 TUTORIAL
The following account balances were extracted from books of Aman Sentosa
Sdn Bhd as at 31 December 2020.

Account RM
Sales 327, 624
Opening stock 35, 000 Refer the
detail
Salaries 3, 000
information
Discount allowed 1, 700 in word file
Closing stock 40, 000

a) Prepare the statement of comprehensive income for the year ended 31

December 2020
b) Prepare the statement of financial position as at 31 December 2020

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