AA015_Accounting 1

CHAPTER 1 : INTRODUCTION TO ACCOUNTING

LEARNING OUTCOME
At the end of the learning, student should be able to:

1.1 Explain the definition of accounting

a) Explain the term of accounting

1.2
Users of accounting information
a) Explain about the users of accounting information : internal users and external users.

1.3 Differences between bookkeeping and accounting.

a) Explain the differences between bookkeeping and accounting.

1.4 Branches of accounting

a) Identify branches of accounting such as financial accounting, management accounting, cost
accounting, auditing, public sector accounting, taxation and forensic accounting.

1.5 Types of business ownerships

a) Identify the characteristics of three types of business ownerships: sole proprietorship,
partnership and company.

1.6 Types of business activities

a) Describe types of business activities: services, manufacturing and merchandising.

1.7 Types of financial statements

a) Identify the elements of Financial Statement.
i. Statement of Comprehensive Income and Statement of Profit or Loss (Including tax);
ii. Statement of Changes in Equity;
iii. Statement of Financial Position; and
iv. Statement of Cash Flows

b) Explain types of financial statements: Statement of Comprehensive Income / Statement of Profit

or Loss, Statement of Changes in Equity, Statement of Financial Position and Statement of Cash
Flows.

1.8 Professional accounting bodies in Malaysia:

a) Explain the functions of three professional accounting bodies in Malaysia:
Malaysian Accounting Standards Board (MASB), Malaysian Institute of Accountants (MIA)
and Malaysian Institute of Certified Public Accountants (MICPA).

1.9 Professional ethic in Accounting

a) Describe the principle of ethics in accounting profession such as integrity, objectivity,
professional competency and due care, confidentiality and professional behaviour.

1.9 Potential career in accounting

a) Identify potential career in accounting.

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INTRODUCTION

This topic covers definition of accounting, users of accounting information, differences between
bookkeeping and accounting, branches of accounting, types of business ownerships, types of business
activities, types of financial statements, professional accounting bodies in Malaysia and potential career
in accounting.

1.1 DEFINITION OF ACCOUNTING

• Process of identifying, recording, classifying, summarising, communicating and interpreting the
results of business or economic transactions to users in order for them to make better decisions.

1.2 USER OF ACCOUNTING INFORMATION

Internal Users

Manager/Management Making routine decisions and needs information in planning, organizing,

and controlling operations.
Board of Director / owner As owner, they are interest in the profits earned form their investment,
financial stability and growth of their business.

Internal Auditor To verify that management system and the financial system of a company
complying with accounting standards and to provide recommendations to
the management based on analyses and assessments of accounting
information.

External Users
Existing/current investor Deciding as to whether to buy more shares or dispose the shares.

Potential investors Assessing the company’s profitability and the amount of dividends paid
out to shareholders.

Creditors Supplier
Assessing the ability of a business to pay account payable.
Bankers
Assessing the ability of a business to repay loan.
Government agencies Determining the amount of tax to be collected.
● Lembaga Hasil
Dalam Negeri
Customers Interested in whether continue to support its product lines.

Labour unions Want to know whether the owners have the ability to pay increased
● Malaysian Trades wages and benefits.
Union Congress

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1.3 DIFFERENCES BETWEEN BOOKKEEPING AND ACCOUNTING

Bookkeeping Accounting

Definition ⮚ Bookkeeping is a part of ⮚ Accounting is an information system.

accounting. ⮚ Process of recording, classifying,
⮚ Process of recording, in summarizing, reporting, analyzing
chronological order, the daily and interpreting the financial
transactions of a business entity. condition and performance of a
business.

Scope ⮚ The process involved is ⮚ Accounting is more extensive and

preliminary work in the thorough work beyond bookkeeping.
accounting.

Person in ⮚ Accounting Clerk ⮚ Accountant

charge

1.4 BRANCHES OF ACCOUNTING

Branches of accounting such as financial accounting, management accounting, cost accounting,
auditing, public sector accounting, taxation and forensic accounting.

Branches of accounting Explaination

Financial Accounting Financial accounting is the field of accounting that

provides economic and financial for external users.
Management Accounting Managerial accounting provides economic and financial
for internal users.
Cost Accounting The process of operating cost information which will help
manager in identifying, measuring and controlling
expenditure.
Auditing The activity of examining the accounts to ensure that they
are accurate and fair as follow under Companies’ Act
1965.
Public Sector Accounting The process of accounting for public assets and money.
Preparing accounting information is mandatory.

Taxation Tax accountant are responsible for calculating individual

or business tax for the purpose of tax assessments.
Forensic Accounting Latest branch of accounting for investigation purpose
when misdeeds and illegal act relating to accounting,
either directly or indirectly occur.

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1.5 TYPES OF BUSINESS OWNERSHIP

Differences Sole Partnership Company

Proprietorship
1. Number of owner 1 2 – 20 2 – unlimited
2. Capital source Proprietor Partners Shareholders
3. Life of Limited Limited Indefinite
organization
4. Liabilities Unlimited Unlimited Limited
5. Laws of Businesses Act 1956 Partnership Act 1961 Companies Act
Regulation 1965
6. Distribution of Wholly owned by Among partners Allocated
profits/losses proprietor according to
shares of capital/
equity ratio

1.6 TYPES OF BUSINESS ACTIVITIES

Services Manufacturing Merchandising

⮚ Provide services rather ⮚ Change basic inputs into ⮚ Purchase inventories

than products to products that are sold to from other businesses
customers. individual customers. (such as
⮚ Example: MAS, ⮚ Example: Gardenia, Intel manufacturers) and
Maraliner, Keretapi resell the inventories
Tanah Melayu. to individual
customers.
⮚ Example: Giant,
Tesco, Econsave.

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1.7 TYPES OF FINANCIAL STATEMENTS

The components of financial statements as stated in MFRS 101 are as follows:

⮚ Statement of Comprehensive Income and Statement of Profit or Loss (including tax) for the
period.
⮚ Statement of Changes in Equity for the period.
⮚ Statement of Financial Position as at the end of the period.
⮚ Statement of Cash Flows for the period.

1.7.1 Statement of Comprehensive Income and Statement of Profit or Loss (including tax)

⮚ Reports the financial performance of an entity over a specific accounting period.

⮚ Contains information on revenues and expenses including the net profit or loss of the business
entity.
⮚ There are several formats in reporting the revenue and expenses depending on the nature of
business run by the entity.

1.7.2 Statement of Changes in Equity

⮚ Reports how the owner’s equity has changed over the reporting period.
⮚ It reports how opening capital has increased through net income, and how it decreased through
net losses and drawings.

1.7.3 Statement of Financial Position

⮚ Also known as the balance sheet reports the financial position of a business entity.
⮚ It contains of three main components:
1) Assets
2) Liabilities
3) Owner’s equity
1.7.4 Statement of Cash Flows

⮚ Also known as cash flow statement, presents the movement in cash flows over the period.
⮚ It shows the in-flow and out-flows of cash of an organisation according to three main activities
which are operating, investing and financing.

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1.8 PROFESSIONAL ACCOUNTING BODIES IN MALAYSIA

A.Malaysian Accounting Standards Board (MASB)

⮚ Established under the Financial Reporting Act 1997
⮚ The main functions and authority:
1) Issue new accounting standards [Financial Reporting Standards (FRS)
2) Review, revise or adopt existing accounting standards.
3) Issue statements of principles for financial reporting.
4) Sponsor or undertake development of possible accounting standards.
5) Develop a conceptual framework for the purpose of evaluating proposed accounting
standards.

B.Malaysian Institute of Accountants (MIA)

⮚ Established under the Accountants Act (1967)
⮚ The main functions of MIA are to:
1) Determine the qualifications for members.
2) Provide training and continuing professional education to existing and potential
practitioners.
3) Control the accounting practice in Malaysia.
C.Malaysian Institute of Certified Public Accountants (MICPA)
⮚ The Malaysian Institute of Certified Public Accountants (MICPA) was formed as a professional
body in 1958.
⮚ The main functions of MICPA are to:
1) Advance the theory and practice of accountancy in all its aspects.
2) Recruit, educate, train and assess a body of members skilled in these areas.
3) Maintain high standards of practice and professional conduct by all its members.
4) Develop the accounting profession.

1.9 PROFESSIONAL ETHIC IN ACCOUNTING

Fundamental Principle of Professional ethics

1. Integrity
Accountants must not have any conflict of interest, which can influence their actions and honest.

2. Objectivity
Not allowing a conflict of interest or prejudice to influence an auditor’s judgement

3. Professional competence and due care

The requirement to attain and maintain knowledge and skill at a level required to perform service. Also
the need to act diligently and make decisions with thought and care.

4. Confidentiality
Not disclosing sensitive financial information or trade secrets for personal gain or for the gain of others.

5. Professional Behaviour
Complying with the rules and maintaining the professionalism of the audit firm.

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1.10 POTENTIAL CAREER IN ACCOUNTING

1. Public Accounting
Career in auditing, taxation, and management consulting serving the general public

2. Private Accounting
Careers in industry working in cost accounting, budgeting, accounting information systems and
taxation

3. Governmental Accounting
Careers with the IRS (Internal Revenue Service), the FBI, the SEC, public colleges and
universities and in state and local governments.

4. Forensic Accounting
Uses accounting, auditing and investigative skills to conduct investigations into theft and fraud

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TUTORIAL QUESTIONS

Question 1

Give the definition of general accounting.

Question 2

Complete the information in the table below:

Internal/External Type of Purpose of

No. Information User
user information information
1 Manager
2 Employee
3 Lembaga Hasil Dalam Negeri
4 Financial Institution
5 Current investor
6 Potential investor
7 Supplier

Question 3

Haikal started a motorcycle repair business in his housing area. Three years later, one of Haikal’s friend is
interested to contribute capital, man power and expertise to run the business. Haikal agreed to accept his friend to
join the business. State three (3) benefits and three (3) weaknesses of the business formed by Haikal and his
friend.

Question 4

Kamal owns a housing development business. His business has shown growth and progress. Kamal plans to
change his business type from sole proprietorship to private limited. Discuss two(2) advantages if Kamal forms a
private limited company.

Question 5

List three(3) accounting bodies in Malaysia and state their main roles.

Question 6

Accounting Standard is important in the financial report of a business. In your opinion, why does accounting
standard important?

Question 7

Differentiate sole proprietorship, partnership and company in term of capital and liability of members.

Question 8

Differentiate between accounting and bookkeeping.