INTRODUCTION

INTRODUCTION
THE
THE BASIC
BASIC FRAMEWORK
FRAMEWORK
TOPIC
TOPIC 11

Assoc.
Assoc.Prof.
Prof.Dr.
Dr.Noor
NoorLela
LelabtbtAhmad
Ahmad
Department of Accounting and Finance
Department of Accounting and Finance
Faculty
FacultyofofManagement
Managementand andEconomic
Economic
UPSI
UPSI
WHAT
WHAT IS
IS ACCOUNTING
ACCOUNTING

PEOPLE AND BUSINESS

i. Accounting is something that effect
people in their personal lives just as it
affects business.

RECORDING ACCOUNTING DATA

ii. They cannot keep all the details in
their minds so they have to keep record
of its.
-organization record cash received and
paid, record goods bought and sold.
CLASSIFYING AND SUMMARISING
iii. Data being organized so as to be most useful to
the business.
-so as it will be possible to work out how much profit
or loss has been made by the business.
- possible to show what resources are owned, what
resources are owned by the business.

COMMUNICATING INFORMATION
iv. Be able to tell whether or not the business is
performing well financially
-able to ascertain the strengths and weaknesses of
the business.
What
What is
is Accounting?
Accounting?
Illustration 1-1
Three Activities Accounting process

The accounting process includes

the bookkeeping function.

LO 1 Explain what accounting is.

 WHAT IS BOOKKEEPING

Bookkeeping is a part of accounting

that is concerned with recording data.

Bookkeeping is the process of

recording data relating to accounting
transactions in the accounting books.
 Users of Accounting Information

External Users Internal Users

•Lenders •Consumer Groups •Managers •Sales Staff

•Shareholders •External Auditors •Officers/Directors •Budget Officers

•Governments •Customers •Internal Auditors •Controllers

 Users of Accounting Information

External Users Internal Users

Financial accounting provides Managerial accounting provides

external users with financial information needs for internal
statements. decision makers.
 Generally Accepted Accounting
Principles
Financial
Financial accounting
accountingpractice
practiceisisgoverned
governedby
by
concepts
conceptsandandrules
rulesknown
knownas as generally
generallyaccepted
accepted
accounting
accountingprinciples
principles(GAAP).
(GAAP).

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

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

Comparable
Comparable Used
Usedin
incomparisons
comparisons
Information across
acrossyears
years&&companies.
companies.
Information
 Who
Who Uses
Uses Accounting
Accounting Data?
Data?
Internal Users
Management IRS
Human Investors
Resources

Labor
Unions
Finance Common Questions

Creditors
Marketing
Customers SEC
External
Users
LO 2 Identify the users and uses of accounting.
 Who
Who Uses
Uses Accounting
Accounting Data?
Data?
Common Questions Asked User
1.Can we afford to give our Human Resources
employees a pay raise?
2. Did the company earn a
satisfactory income? Investors

3. Do we need to borrow in
the near future? Management
4. Is cash sufficient to pay
dividends to the stockholders? Finance

5. What price for our product

will maximize net income? Marketing

6. Will the company be able to

pay its short-term debts? Creditors

LO 2 Identify the users and uses of accounting.

 Business Entity Forms

Sole
Sole Partnership
Partnership Corporation
Corporation
Proprietorship
Proprietorship
 Characteristics of Businesses

Characteristic
Characteristic 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
Proprietorshipsandandpartnerships
partnershipsthat
thatare
areset
setup
upas
as
limited
limitedliability
liabilitycorporations
corporations(LLC)
(LLC)provide
providelimited
limitedliability.
liability.
THE
THE ACCOUNTING
ACCOUNTING EQUATION
EQUATION

i. The whole of financial accounting based upon

this simple idea which known as accounting
equation.

ii. Resources supplied by owner = capital

Actual resources that are in the business = assets
that is: CAPITAL = ASSETS
Liabilities

iii. If people other than the owner have supplied

asset we call it as liabilities.

Means liabilities is the amount business owe

for these assets.
The
The Basic
Basic Accounting
Accounting Equation
Equation
Owners’
Assets = Liabilities +
Equity

Provides the underlying framework for recording and

summarizing economic events.

Assets are claimed by either creditors or owners.

Claims of creditors must be paid before ownership

claims.

LO 6 State the accounting equation, and define

assets, liabilities, and owner’s equity.
The
The Basic
Basic Accounting
Accounting Equation
Equation
Owners’
Assets = Liabilities +
Equity

Provides the underlying framework for recording and

summarizing economic events.
Assets
Resources a business owns.
Provide future services or benefits.
Cash, Supplies, Equipment, etc.
LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.
 Assets

Cash
Cash
Accounts
Accounts Notes
Notes
Receivable
Receivable Receivable
Receivable
Resources
Resources
owned
owned oror
Vehicles
Vehicles
controlled
controlled Land
Land
by
by aa
company
company
Store
Store
Buildings
Buildings
Supplies
Supplies
Equipment
Equipment
The
The Basic
Basic Accounting
Accounting Equation
Equation
Owners’
Assets = Liabilities +
Equity

Provides the underlying framework for recording and

summarizing economic events.

Liabilities
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.
 Liabilities

Accounts
Accounts Notes
Notes
Payable
Payable Payable
Payable

Creditors’
Creditors’
claims
claims on
on
assets
assets
Taxes
Taxes Wages
Wages
Payable
Payable Payable
Payable
The
The Basic
Basic Accounting
Accounting Equation
Equation
Owners’
Assets = Liabilities +
Equity

Provides the underlying framework for recording and

summarizing economic events.

Owners’ Equity
Ownership claim on total assets.
Referred to as residual equity.
Capital, Drawings, etc. (Proprietorship or
Partnership).
LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.
Owners’
Owners’ Equity
Equity
Illustration 1-6

Revenues result from business activities entered into for

the purpose of earning income.
Common sources of revenue are: sales, fees, services,
commissions, interest, dividends, royalties, and rent.
LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.
Owners’
Owners’ Equity
Equity
Illustration 1-6

Expenses are the cost of assets consumed or services

used in the process of earning revenue.
Common expenses are: salaries expense, rent expense,
utilities expense, tax expense, etc.
LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.
 Equity

Contributed
Contributed Retained
Retained
Capital
Capital Earnings
Earnings

Owner’s
Owner’s
claim
claim on
on
assets
assets

Dividends
Dividends
EQUALITY
EQUALITY OF
OF THE
THE ACCOUNTING
ACCOUNTING EQUATION
EQUATION

Every transaction has effected two items.

Sometimes it changed the assets side and the capital

side.

Sometimes it has changed two assets by reducing

one and and increasing the other.
 EQUALITY
EQUALITY OF
OF THE
THE ACCOUNTING
ACCOUNTING EQUATION
EQUATION

Number of Assets Capital and Effects on balance sheet totals

transaction as liabilities
above

1 + + Each side added equally.

2 + A plus and a minus both on the assets
- side cancelling out each other.
3 + + Each side has equal additions.
4 - Each side has equal deductions.
-
5 + A plus and a minus both on the capital
- and liabilities side cancelling out each
other.
 Example of transaction Effect Effect
1. Owner pays capital into the Increase asset Increase capital
bank (bank)
2. Buy goods by cheque. Decrease asset Increase asset
(bank) (stock of goods)
3.Buy goods on credit Increase asset Increase liability
(stock of goods) (creditor)
4. Sale of goods on credits Decrease asset Increase asset
(stock of goods) (debtors)
5.Sale of goods for cash Decrease asset Increase asset
(cheque)
(stock of goods) (bank)
Decrease asset Decrease liability
6. Pay creditor
(bank) (creditor)
Increase asset Decrease asset
7.Debtors pays money oeing by
(bank) (debtors)
cheque.
 TODAY’S
TODAY’S INSPIRATION
INSPIRATION

THE MOST IMPORTANT

THINGS IN LIFE IS FREE
End – Topic 1