Topic 1 - Basic Accounting

Topic 1 - Basic Accounting

• 1.
  Topic 1 1.1 Natureof Business and Accounting Business: An organization in which basic resources (inputs) are assembled and processed to provide goods or services (outputs) to customers. *basic resources (e.g. materials and labors) Customers: Individuals or a group of individuals, institutions, other business who purchase goods or services in exchange for money or other items of value. Most business is set up to maximize profits, however some business which is known as not-for-profit business operates to provide benefits to the society (for example: medical research or conservation of natural resources). *Profits: The difference between the amounts received from customers for goods or services provided and the amounts paid for the inputs used to provide the goods and services.  A business stakeholder is a person or entity having an interest in the economic performance and well-being of a business.  Capital market stakeholders provide the major financing for the business in order for the business to begin and continue its operations.  Product or service market stakeholders include customers who purchase the business’s products or services as well as the vendors who supply inputs to the business. Types Of Business Service: Provide services. E.g. Entertainment (Walt Disney), Transportation (Malaysia Airlines System (MAS), Financial (Maybank Corporation). Merchandising: Sell products they purchase from other businesses. E.g. Giant (General merchandise), Amazon.com (Internet books, music, video), Toy ‘R’ Us (Toys), Panasonic (Consumer electronics). Manufacturing: Change basic inputs into products that are sold to individual customers. E.g. Nokia (Cell phones), Dell Inc. (Personal computers), Nike (Athletic shoes and apparel), Sony Corporation (Stereos and televisions).
• 2.
   Government stakeholdershave an interest in the economic performance of a business. City, county, state, and federal governments collect taxes from businesses within their jurisdiction.  Internal stakeholders include individuals employed by the business. Managers have an incentive to maximize the economic value of the business. Employees have an interest because their jobs depend on it. Common Forms of Business Organizations Proprietorship  Owned by one individual  More than 70% of business organizations in Malaysia are organized by proprietorships  Easy and low cost of organizing  Financial resources are limited to the owner’s resources  Commonly used by small businesses such as hardware stores, laundries, restaurants, and grocery shop. Partnership  Owned by two or more individuals  About 10% of organizations in Malaysia are organized by partnerships  Combine the skills and resources of more than one person  Commonly used by small local businesses such as automotive repair shops, music stores, beauty & salons, and clothing stores. Corporation  Organized under state or federal statutes as a separate legal taxable entity  Generates 90% of the total dollars of business receipts received.  Comprises only 20% of the business organizations in Malaysia.  Ownership is divided into shares of stock sold to shareholders (stockholders)  Able to obtain large amount of resources by issuing stock.  Used only by large businesses. Limited liability company (LLC)  Combines attributes of a partnership and a corporation in that it is organized as a corporation.  Can elect to be taxed as a partnership  A popular alternative to a partnership  Have tax and liability advantages to the owners.
• 3.
  1.2 Roles ofEthics in Business Ethics: Moral principles that guide the conduct of individuals. Why do we need ethics? a) Because our actions are watched and judged as right or wrong, honest or dishonest, and fair or bias. b) Because it has impact on society and others. c) To communicate credible economic information activities. d) These judgments represent the standards of conduct known as ethics. Sound ethical principles: i) Avoiding small ethical lapses ii) Focusing on long term reputation iii) Willing to suffer adverse personal consequences for holding on to an ethical position. Ethics in Accounting:  Integrity, objectivity, independence, confidentiality, professional competence and due care, compliance with technical standards and professional behavior. 1.3 The Roles of Accounting in Business  Accounting: An information system that identifies, records and communicates to stakeholders about the economic activities and condition of a business.  Purposes:  To report companies’ activities  To provide useful information to users  To provide assistance in decision making  To measure business performance (provides information to other stakeholders)  A control medium for management (information for managers to use in operating the business)  Fields of Accounting: 1. Financial Accounting 5. Tax 2. Management Accounting 6. Public Sector Accounting 3. Auditing and Non-Profit Organization 4. Accounting Information System
• 4.
  1.4 Users andUses of Accounting Information Internal users (Managers who plan, organize and run the business)  Marketing managers, production supervisors, finance directors, and company officers  They need detailed information like financial comparison of operating alternatives, projection of income from new sales, and forecasts of cash needs for the coming year on a timely basis in running the business. External users  Investors: to make decisions whether to buy, hold, or sell their share in the company.  Tax authority: check for company’s tax compliance.  Security Commission (SC): to make sure that company is operating within the prescribed rules.  Customers: observe whether company continues to maintain product quality and warranty and then decide whether to continue supporting its products.  Labor union: want to know whether company can afford to give pay raises or benefits.  Economic planners: to forecast economic activities. The process by which accounting provides information to business stakeholders is as follows:  Identify stakeholders.  Assess stakeholders’ information needs.  Design the accounting information system to meet stakeholders’ needs.  Record economic data about business activities and events.  Prepare accounting reports for stakeholders. 1.5 The Accounting Profession 1. Financial accounting is primarily concerned with the recording and reporting of economic data and activities for a business. 2. Managerial accounting uses both financial accounting and estimated data to aid management in running day-to-day operations and in planning future operations. 3. Accountants employed by a business firm or a not-for-profit organization are said to be employed in private accounting. 4. Accountants and their staff who provide services on a fee basis are said to be employed in public accounting.
• 5.
  1.6 Generally AcceptedAccounting Principles (GAAPs)  A standard set of rules and standard system used in preparing financial statements, so that, stakeholders and investors can compare financial performance and condition of one company to another.  Accounting principles and concepts develop from research, practice, and pronouncements of authoritative bodies such as the Malaysian Accounting Standards Board (MASB). The Malaysian Accounting Standards Board (MASB)  Established under the Financial Reporting Act 1997 as the independent authority to develop and issue accounting and financial reporting standards in Malaysia.