BKAN1013 Chapter 2

Chapter Accounting
2
Concept and
Practice
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Learning Objectives
 Understand the Generally Accepted Accounting Principles.
 Explain the Accounting Principles, assumptions, constrains.
 Define and interpret the accounting equation and each of its

components
 Analyze business transactions using the accounting equation
 Identify and prepare basic financial statements and explain

how they interrelate
Generally Accepted Accounting Principles
• Financial accountants follow generally accepted accounting

principles (GAAP) in preparing reports.
• Within the U.S., the Financial Accounting Standards Board
(FASB) has the primary responsibility for developing
accounting principles.
• The Securities and Exchange Commission (SEC), an agency
of the U.S. government, has authority over the accounting and
financial disclosures for companies whose shares of ownership
(stock) are traded and sold to the public.
• Many countries outside the U.S. use generally accepted
accounting principles adopted by the International
Accounting Standards Board (IASB).
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
• Accounting principles and concepts are developed from research,

practices, and pronouncements of authoritative bodies such as the
Malaysian Accounting Standards Board (MASB).
• Principle functions of MASB:
o To issue new accounting standards
o To review or adopt existing accounting standards
o To contribute directly to the international development of financial
reporting
o To undertake public consultation in the determination of its standards and
other technical pronouncements
o To continually improve the quality of financial reporting in Malaysia
o the standard framework of guidelines for financial

accounting used in any given jurisdiction;
generally known as accounting standards or
standard accounting practice.
o These include the standards, conventions, and rules
that accountants follow in recording and
summarizing and in the preparation of financial
statements.
Principles Assumptions Constraints

(5) (4) (2)
Accounting Principles
Historical cost Objectivity
Matching
Revenue
Full-disclosure
recognition
• Historical cost principle

requires companies to account
and report based on acquisition
Historical cost costs rather than fair market
value for most assets and
liabilities.
Cost Concept (slide 1 of 3)
• Under the cost concept, amounts are initially

recorded in the accounting records at their cost or
purchase price.
• Harun Publishers purchased a building on February
20, 2016, for RM150,000. Other amounts related to
this purchase are:
Under the cost concept, Harun Publishers records the purchase

of the building on February 20, 2016 for how much?
RM150,000.
The other amounts listed above have no effect on the accounting

records.
• The cost concept also involves the objectivity and

unit of measure concepts.
o The objectivity concept requires that the amounts recorded
in the accounting records be based on objective evidence.
 Only the final agreed-upon amount is objective enough to be
recorded in the accounting records.
o The unit of measure concept requires that economic data be
recorded in dollars.
• financial and accounting

information needs to be
independent and free from bias.
This means that financial
reporting like a company's
Objectivity financial statements need to be
based on evidence and not
opinions.
• Expenses have to be matched

with revenues as long as it is
reasonable to do so. Expenses
are recognized not when the
• Matching work is performed, or when a
product is produced, but when
the work or the product actually
makes its contribution to
revenue.
• companies may not record

revenue until (1) it is realized or
realizable and (2) when it is
Revenue earned. The flow of cash does
recognition not have any bearing on the
recognition of revenue. This is
the essence of accrual basis
accounting.
• It requires that all material

information has to be disclosed
in the financial statements
either on the face of the
Full-disclosure financial statements or in the
notes to the financial
statements.
4 Accounting Assumptions
Economic entity
Going concern
Time period
Monetary-unit
• a business or an organization
Economic entity and its owners are treated as
two separately identifiable
parties
• It is necessary to record the
business's transactions
separately, to distinguish them
from the owners' personal
transactions
• a business that functions

Going concern without the threat of
liquidation for the foreseeable
future
• the entity has neither the
intention nor the need to stop its
operations.
Time period • a firm's operating cycle is

divided into separate accounting
periods that can be reported on in
a manner that is timely
The time period principle is the
concept that a business should
report the financial results of its
activities over a standard time
period, which is usually monthly,
quarterly, or annually
2 Accounting Constraints
Conservatism Materiality
when in doubt on how to record or Report only those that are considered
report or when two different significant. Insignificant amounts need not
acceptable methods could be used, be recorded and reported
choose the one that won’t overstate
assets or profits Strong or impactful to change a
decision
Not to overstate or give false
impression
Example Exercise Cost Concept
On August 25, Mamat Repair Service extended an offer

of RM125,000 for land that had been priced for sale at
RM150,000. On September 3, Mamat Repair Service
accepted the seller’s counteroffer of RM137,000. On
October 20, the land was assessed at a value of
RM98,000 for property tax purposes. On December 4,
Mamat Repair Service was offered RM160,000 for the
land by a national retail chain.
At what value should the land be recorded in Mamat
Repair Service’s records?
Accounting Equation
 The most fundamental equation of the
accounting system, it expresses the
relationship between what is owned and what
is owed by an entity.
Owned = Owed
 It is the basis upon which the double entry

accounting system is constructed
Accounting Equation
Assets = Liabilities + Equity
Liabilities
Assets & Equity
Assets
Cash
Accounts Notes
Receivable Receivable
Resources
owned or
Vehicles controlled by Land
a company
Store Buildings
Supplies
Equipment
Liabilities
Accounts Notes
Payable Payable
Creditors’
claims on
assets
Taxes Wages
Payable Payable
Equity
Owner Owner
Investments Withdrawals
Owner’s
claims
on
assets
Revenues Expenses
Accounting Equation Rule
The accounting equation must remain in
balance after each transaction.
Example Exercise
Johan is the owner and operator of You’re A Star, a motivational
consulting business. At the end of its accounting period, December
31, 2014, You’re A Star has assets of RM800,000 and liabilities of
RM350,000.Using the accounting equation, determine the following
amounts:
a. Owner’s equity, as of December 31, 2014.

b. Owner’s equity, as of December 31, 2015, assuming that
assets increased by RM130,000 and liabilities decreased by
RM25,000 during 2015.
Follow My Example
a. A = L + OE
RM800,000 = RM350,000 + OE
OE = RM450,000
b. A = L + OE
RM930000 = RM325000 +
OE OE =
RM605000
Transaction Analysis
A business transaction is an economic event or
condition that directly changes an entity’s financial
condition or directly affects its results of operations.
It is a business event (activity) which can be
measured in monetary unit. It must be recorded in
business book (or system) of account.
J. Scott, the owner, contributed

RM20,000 cash to start the business.
The accounts involved are:

(1) Cash (asset)
(2) J. Scott, Capital equity
J. Scott, the owner, contributed
RM20,000 cash to start the business.
Purchased supplies paying RM1,000
cash.

(1) Cash (asset)
(2) Supplies (asset)
Purchased supplies paying $1,000
cash.
Purchased equipment for RM15,000
cash.

(1) Cash (asset)
(2) Equipment (asset)
Purchased equipment for RM15,000
cash.
Purchased Supplies of RM200 and
Equipment of RM1,000 on account.
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)
Purchased Supplies of RM200 and
Equipment of RM1,000 on account.
Borrowed RM 4,000 from 1st
American Bank.

(1)Cash (asset)
(2) Notes payable (liability)
Borrowed $4,000 from 1st American
Bank.
The balances so far appear below. Note that the
Balance Sheet Equation is still in balance.
Now let’s look at transactions involving

revenue, expenses and withdrawals. © The McGraw-Hill Companies, Inc., 2007
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana
Expanded Accounting Equation
Owner _ Owner _
Capital Withdrawals + Revenues Expenses
Transaction D (slide 2 of 2)
• Revenue from providing services is recorded as fees

earned.
• Revenue from the sale of merchandise is recorded as
sales.
• Other examples of revenue include rent, which is
recorded as rent revenue, and interest, which is
recorded as interest revenue.
• An account receivable is a claim against a customer,
which is an asset.
Rendered consulting services
receiving RM3,000 cash.

(1)Cash (asset)
(1) Revenues (equity)
Rendered consulting services
receiving $3,000 cash.
Paid salaries of RM800 to employees.
(1)Cash (asset)
(1) salaries expense (equity)
Remember that the balance in the salaries

expense account actually increases.
But, equity actually decreases because expenses
reduce equity.
Paid salaries of $800 to employees.
Remember that expenses decrease equity.

J. Scott withdrew RM 500 from the
business for personal use.
(1)Cash (asset)
(1) J.Scott, Withdrawals (equity)
Remember that the balance in the J. Scott,

Withdrawals account actually increases.
But, equity actually decreases because
withdrawals reduce equity.
J. Scott withdrew $500 from the
business for personal use.
Remember that withdrawals decrease equity.

Owner’s Equity
Increased by Decreased by
Owner’s Owner’s
investments withdrawals
Revenues Expenses
Example Exercise
Salyo Delivery Service is owned and operated by Jo Salyo.
The following selected transactions were completed by
Salyo Delivery Service during February:
1. Received cash from owner as additional investment,
RM35,000.
2. Paid creditors on account, RM1,800.
3. Billed customers for delivery services on account,
RM11,250.
4. Received cash from customers on account, RM6,740.
5. Paid cash to owners for personal use, RM1,000.
Example Exercise
Indicate the effect of each transaction on the accounting
equation elements (Assets, Liabilities, Owner’s Equity,
Drawing, Revenue, and Expense) by listing the numbers
identifying the transactions, (1) through (5). Also, indicate
the specific item within the accounting equation element
that is affected. To illustrate, the answer to (1) is shown
below.
(1) Asset (Cash) increases by RM 35,000; Owner’s Equity

(Jo Salyo, Capital) increases by RM35,000.
Follow My Example
(2) Asset (Cash) decreases by RM1,800; Liability

(Accounts Payable) decreases by RM1,800.
(3) Asset (Accounts Receivable) increases by RM11,250;

Revenue (Delivery Service Fees) increases by
RM11,250.
(4) Asset (Cash) increases by RM6,740; Asset (Accounts
Receivable) decreases by RM6,740.
(5) Asset (Cash) decreases by RM1,000; Owner’s Equity
(Jo Salyo, Drawing) increases by RM1,000.
Financial Statements
 What are they?
 A set of statements that explained about the
profitability, equity or ownership, financial
position or status, and cash operations of an
entity.
 It consists of four main statements.
Financial Statements
Let’s prepare the Financial Statements
reflecting the transactions we have recorded.
1. Income Statement
2. Statement of Owner’s Equity
3. Balance Sheet
4. Statement of Cash Flows
Profit is the
difference
between
Revenues and
Expenses.
The income statement describes a

company’s revenues and expenses
along with the resulting profit or loss
over a period of time due to earnings
activities.
The profit of
$2,200
increases
Scott’s capital
by $2,200.
The Statement of
Owner’s Equity
explains changes in
equity from profit (or
loss) and from owner
investments and
withdrawals for a
period of time.
The Balance
Sheet
describes a
company’s
financial
position at a
point in time.
Owner’s Equity in Balance Sheet
From Statement of Owner’s Equity
The balance sheet reports the amounts of a firm’s assets,
liabilities, and owner’s equity at the end of a specific period.
 The account form of balance sheet lists the assets on the

left and the liabilities and owner’s equity on the right—similar
to design of an account.
The report form of balance sheet presents the liabilities and

owner’s equity sections below the assets section.
The Statement of Cash Flows identifies cash inflows and cash outflows over a
period of time.
 The cash flows from operating activities section reports a
summary of cash receipts and cash payments from operations.
 The cash flows from investing activities section reports the
cash transactions for the acquisition and sale of relatively
permanent assets.
 The cash flows from financing activities section reports
the cash transactions related to cash investments by the owner,
borrowings, and cash withdrawals by the owner.
Interrelationships Among Financial Statements
 Net income or net loss appears on both statements

 The owner’s capital at the end of the period on the
statement of owner’s equity also appears on the
balance sheet as owner’s capital.
 The cash on the balance sheet also appears as the
end-of-period cash on the statement of cash flows.
Example Exercise Statement of Profit or Loss (slide 2 of 2)
The revenues and expenses of Chickadee Travel Service for the year
ended April 30, 2018, follow:
Prepare the statement of profit or loss for the year ended April
30, 2018.
Example Exercise Statement of Owner’s Equity (slide 2 of 2)
Using the statement of profit and loss for Chickadee Travel

Service, prepare a statement of owner’s equity for the year
ended April 30, 2018. Adam Che Lini, the owner, invested an
additional RM50,000 in the business and withdrew cash of
RM30,000 for personal use during the year. The capital of Adam
Che Lini was RM80,000 on May 1, 2017.
Example Exercise Statement of Financial Position
(slide 2 of 2)
Using the following data for Chickadee Travel Service as

well as the statement of owner’s equity, prepare a
statement of financial position as of April 30, 2018.
Example Exercise Statement of Cash Flows
(slide 1 of 2)
A summary of cash flows for Chickadee Travel Service for

the year ended April 30, 2018, follows:
The cash balance as of May 1, 2017, was RM72,050.

Prepare a statement of cash flows for Chickadee Travel
Service for the year ended April 30, 2018.
Example Exercise Statement of Cash Flows
(slide 2 of 2)
End of Chapter 2

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Chapter Accounting

 Explain the Accounting Principles, assumptions, constrains.

 Define and interpret the accounting equation and each of its

 Analyze business transactions using the accounting equation

 Identify and prepare basic financial statements and explain

• Financial accountants follow generally accepted accounting

• Accounting principles and concepts are developed from research,

o the standard framework of guidelines for financial

Principles Assumptions Constraints

Historical cost Objectivity

• Historical cost principle

• Under the cost concept, amounts are initially

Under the cost concept, Harun Publishers records the purchase

The other amounts listed above have no effect on the accounting

• The cost concept also involves the objectivity and

• financial and accounting

• Expenses have to be matched

• companies may not record

• It requires that all material

• a business that functions

Time period • a firm's operating cycle is

On August 25, Mamat Repair Service extended an offer

 It is the basis upon which the double entry

Assets = Liabilities + Equity

Assets = Liabilities + Equity

a. Owner’s equity, as of December 31, 2014.

J. Scott, the owner, contributed

The accounts involved are:

The accounts involved are:

The accounts involved are:

The accounts involved are:

(2) Notes payable (liability)

Now let’s look at transactions involving

Assets = Liabilities + Equity

• Revenue from providing services is recorded as fees

The accounts involved are:

(1) Revenues (equity)

(1) salaries expense (equity)

Remember that the balance in the salaries

Remember that expenses decrease equity.

(1) J.Scott, Withdrawals (equity)

Remember that the balance in the J. Scott,

Remember that withdrawals decrease equity.

(1) Asset (Cash) increases by RM 35,000; Owner’s Equity

(2) Asset (Cash) decreases by RM1,800; Liability

(3) Asset (Accounts Receivable) increases by RM11,250;

 It consists of four main statements.

The income statement describes a

Owner’s Equity in Balance Sheet

 The account form of balance sheet lists the assets on the

The report form of balance sheet presents the liabilities and

 Net income or net loss appears on both statements

Using the statement of profit and loss for Chickadee Travel

Using the following data for Chickadee Travel Service as

A summary of cash flows for Chickadee Travel Service for

The cash balance as of May 1, 2017, was RM72,050.

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