ACC 106

Chapter 1

INTRODUCTION TO
ACCOUNTING
 Learning outcomes (CLO)
At the end of this chapter, students
should be able to :

◦ Explain definition and purpose of accounting

◦ Explain the users of financial statements
◦ Explain the various types of business
◦ Differentiate between book keeping and
accounting

2
Chapter’s Overview

3
Definition of Accounting

4
Definition of Accounting

5
The Purpose of Accounting
Information

ACC106 adz2011 6
 Accounting Cycle

Transaction
Financial
Statements
Source
documents NO

YES Adjustments
Journals

Ledgers Trial Balance

ACC106 adz2011 7
 Financial Statements
Components of Financial Statements:

1. Statement of Profit & Loss

Shows whether the entity obtains profits or losses during a
particular period
2. Statement of Financial Position
Shows the financial position of the entity at a point of time
that is the assets, liabilities and owner’s equity
3. Statement of cash flow
Shows the cash situation of the entity
4. Notes to the accounts
Accounting policies and explanatory notes

ACC106 adz2011 8
Objectives of Financial Statements

9
The Main User Groups of
Accounting Information

10
Why they need information ??…
USERS USES

Internal Owners • To evaluate the financial stability of the business

• Interested in the profits earned
Managers • For planning, organising and controlling the business
• To have the information necessary to make sound
business decisions
Employees • To evaluate the firm’s stability and ability to progress.
• To get an idea of their employment prospects, earning
capacity, and other benefits.
External Creditors • To determine the firm’s ability to repay loans

Investors • To evaluate the financial position/earning capacity of the

business
• To evaluate whether the business is a good investment
Government • To determine the taxable income of a business
• To make better financial decisions for the economy
Public/ • For academic purposes,
Consumers • To know how the business manage and control the
product costs and product pricing. 11
Types & Various Forms of Business

SOLE
PARTNERSHIP
PROPRIETOR

COMPANY

ACC106 adz2011 12
 SOLE PARTNERSHIP COMPANIES
PROPRIETOR
Registration Registered with Registered with the Registered with the
the business CCM CCM
registrar
Capital Contributed by Contributed by Contributed by
the owner partners according shareholders through
to agreement buying of shares
Ownership Owned by one Owned by 2-20 A private company must
person partners. have a minimum of 2
e.g : Ali & Abu and a maximum of 50
Enterprise shareholders.

For professional A public company must

partnership, it is have a minimum of 2
owned by 2-50 and the maximum
partners amount must not
e.g : Klinik Azhar & exceed the authorized
Rakan-Rakan capital
ACC106 adz2011 13
 SOLE PROPRIETOR PARTNERSHIP COMPANIES
Management Managed and Managed and Managed and
and Control controlled by the controlled by controlled by a
owner partners or by a board of directors
board which appointed by the
consists of a few shareholders
partners
Liability Unlimited liability. Unlimited liability. Limited liability.
If the business fails If the business fails If the business fails
and the assets are and the assets are and the assets are
not enough to not enough to cover not enough to cover
cover the debt, the the debt, the the debt, the
creditors have a creditors have a creditors do not
right against the right against the have a right against
owner’s personal partner’s personal the shareholder’s
properties properties personal properties

ACC106 adz2011 14
 SOLE PARTNERSHIP COMPANIES
PROPRIETOR
Books and No legal No legal Proper books of
Accounts obligation to obligation to keep account must be
keep the books the books and kept and annual
and prepare prepare accounts accounts must be
accounts sent to the CCM

Profit or Profit belongs to Profit or loss will Profits will be paid

Loss the owner any be shared by to the
losses incurred partners shareholders in
will be borne by according to their the form of
the owner profit sharing dividend
ratio as stated in
agreement

ACC106 adz2011 15
Differences between Private and
Public limited company.

ACC106 adz2011 16
Differences between Accounting
& Bookkeeping

ACC106 adz2011 17
 SUMMARY:
1.Students are able to understand
definition of accounting and
differences between bookkeeping.
2. They also know types of users
and organisations.

ACC106 adz2011 18