TOPIC 1: AN INTRODUCTION TO ACCOUNTING IN PRINCIPLE OF ACCOUNTING

TOPIC 1: AN INTRODUCTION TO ACCOUNTING IN PRINCIPLE OF ACCOUNTING

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  CHAPTER 1 AN INTRODUCTION TOACCOUNTING Learning Outcomes: • Tell about history of accounting • Explain objectives of accounting • Define main users of financial statements • Differentiate between accounting and book-keeping • Differentiate forms and types of business
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  1.1 THE HISTORYOF ACCOUNTING Accounting began because people needed to: • Record business transactions • Know how much they owned and how much they owed • The accountant of the Middle Ages was someone who knew how to enter data relating to financial transactions into the accounting books. 1.2 OBJECTIVES OF ACCOUNTING • if they are making a profit or loss • what their business is worth • what transaction was worth to them • how much cash they have • how wealthy they are • how much they are owed • however, the primary objective of the accounting is to provide information for decision-making
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  1.3 MAIN USERSOF FINANCIAL STATEMENT Internal Users •Owners: As the owners, they are interested in the profits earned from their investments and the financial stability and growth of their business. • Managers : Management needs information as a guidance in planning, organising and controlling the organisation and analysing the operations of the business and make a decision of company. • Employees : Employees are interested in the business ability to progress and expand. They look for steady employment, earning capacity and other monetary benefits that are to be gained from a financially stable business. External Users • Account payables / Bankers : Creditors or bankers are interested to know the ability of the business in repaying the amount owing to them. • Current and potential investors : Investors require information regarding the solvency and financial strength of the business, its present and future earning capacity and the ability of the management. • Government : The government is interested in the financial statements and reports of a business for tax purposes. • Consumers of products / services : Consumers are interested in the establishment of good accounting controls as a means of reducing cost of production, selling and distribution; and hence the reduction of the prices of the goods they purchase.
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  1.4 DIFFERENCES BETWEENACCOUNTING AND BOOK KEEPING Book Keeping •Bookkeeping is different from accountingas it is only a part of accounting. •It refers to the mechanical aspects of accounting such as classifying, recording, and summarising transactions systematically. • The need to record transactions systematically leads to the development of the double entry principles. Accounting •Accounting can be defined as the art of classifying, recording and summarising transactions and business events in monetary terms and interpreting resluts to interested parties to enable them make decisions. •It involves four stages: classifying, recording, summarising, and interpreting. •Classifying means sorting accounting data into orderly manner and meaningful catgories , for example, receipts, payments, purchases, sales and etc.
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  1.5 FORM OFBUSINESS Sole Proprietorship Partnership Limited Companies Registration Registered with the business registrar under the Business Registration Act 1957. Registered with the Companies Commission of Malaysia under the Business Registration Act 1956 & 1957 Registered with the Companies Commission of Malaysia under the Companies Act 1965 Capital Contributed by the owner Contributed by partners according to agreement Contributed by shareholders through purchase of shares Ownership Owned by one person Owned by 2-20 partners. However, for professional partnership, is it owned by 2-50 partners A private company must have a minimum of 2 and a maximum 50 shareholders. A public company must have a minimum of 2 shareholders and the maximum number depends on the amount of its authorised capital Management & Control Managed and controlled by the owner Managed and controlled by partners or by a board which consists of a few partners Managed and controlled by a board of directors appointed by the shareholders Liability Unlimited liability - if the business fails and the assets are not enough to cover the debt, the account payables have a right against the owner's personal properties Unlimited liability - if the business fails and the assets are not enough to cover the debt, the account payables have a right against the partners personal properties Limited liability - if the business fails and the company's assets are not enough to cover the debt, the account payables do not have a right against the shareholder’s personal properties
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  Profit or LossProfit belongs to the owner and any losses incurred will be borne by the owner Profit or loss will be shared by partners according to their profit-sharing ratio as stated in the Partnership Agreement Profit will be paid to the shareholders in the form of dividend Books and Accounts No legal obligation to keep the books and prepare accounts No legal obligation to keep the books and prepare accounts Proper books of accounts must be kept and annual accounts must be sent to the Companies Commission of Malaysia
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  1.6 TYPES OFBUSINESS Service Business • Les Copaque - Entertainment • Malaysia Airlines System (MAS) - Transportation • Maybank Corporation - Financial Services • Seri Malaysia - Hospitality and Lodging • PWC - Auditing Marchandising Business • Giant - General Marchandise • Amazon.com - Internet books, music, videos • Toys R Us - Toys • Pensonic - Consumer Electronics • Cheetah - Apparel Manufacturing Business • General Motor Corporation - Cars, trukcs, vans • Nokia - Cell Phone • Acer - Personal computers • Adidas - Athletics shoes and apparel • F & N company - Beverages • Samsung - Stereos and televisions
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  TUTORIAL PART A 1. Whichof the following groups rely on accounting information for decision making? A. B. C. D. Managers Investors Creditors All the above 2. Below are the characteristics of one form of business: - Owned by one individual - Easy and low cost of organizing - Financial resources are limited to the owner’s resources - Profit belongs to the owner and any losses incurred will be borne by the owner A. B. C. D. Company Sole Proprietorship Partnership None of the above 3. Bookkeeping mainly involves A. B. C. D. Indentifying. measurement interpreting recording 4. Below are the characteristics of one form of business: - Managed and controlled by the Board of Directors
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  - Limited liability -Profit will be distributed to shareholders via dividends - Required to keep proper books and account Which form of business do the characteristics refer to? A. B. C. D. Company Sole proprietorship Partnership None of the above