ACCOUNTING

Topic
ENVIRONMENT

1
 Learning
Learning Objectives
Objectives
After studying this chapter, you should be able to:
1. Describe what is accounting.
2. State the users of the accounting information.
3. Describe the profession of accounting and
accounting professional bodies.
4. State the characteristics of the qualitative
accounting information.
5. Describe the assumptions, principles and
constraints related to the practice of accounting.
6. Describe the element of financial statements.
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.

 Importance
Importance of
of Accounting
Accounting
is a
Accounting
Accounting Identifies
Identifies
system that

Records
Records

information
Relevant
Relevant Communicates
Communicates
that is

Reliable
Reliable
to
tohelp
helpusers
usersmake
make
Comparable better
betterdecisions.
decisions.
Comparable
 Users
Users of
of Accounting
Accounting Information
Information

External Users Internal Users

•Lenders •Consumer Groups •Managers •Sales Staff

•Shareholders •External Auditors •Officers •Budget Officers
•Governments •Customers •Internal Auditors •Controllers
 Users
Users of
of Accounting
Accounting Information
Information

External Users
Internal Users

Financial accounting provides

Managerial accounting provides
external users with financial
information needs for internal
statements.
decision makers.
 Differences
Differences Between
Between Financial
Financial Accounting
Accounting
and
and Management
Management Accounting
Accounting
 FINANCIAL ACC.  MANAGEMENT ACC.
- Measure and report -Provides management
economic events with information about
- In accounting period overall planning and
- To determine control of the business.
results and overall - Focus on preparation
financial position and interpretation of
- Prepare a financial accounting information
statements for management
purposes.
 Profession
Profession of
of Accounting
Accounting
 Private Accounting
• Frequently called management accountant.
• As industrial or cost accountant if they are
employed by manufacturer.
• The chief accountant in a business may be called
the controller.
 Public Accounting
• An accountant may practice as an individual or as
a member of a public accounting firm.
• Public accountants who have met a state’s
education, experience, and examination
requirements may become Certified Public
Accountants (CPAs)
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 Not For Profit Accounting
• Reporting and control for government units,
foundations, hospitals, labor unions,
colleges/universities, and charities.
 Organizations
Organizations Affecting
Affecting Financial
Financial Reporting
Reporting and
and
Audits
Audits
 Generally, there are four related parties involved
in the financial reporting process and practice of
public accounting in Malaysia:
• Malaysian Accounting Standard Board (MASB)
• Malaysian Institute of Accountants (MIA)
• Companies Commission of Malaysia (CCM)
• Securities Commission (SEC) and Bursa
Malaysia
 Other related professional acc. body in Malaysia is The
Malaysian Institute of Certified Publics Accountants
(MICPA) – to advance the theory and practice of
accountancy, and to provide education, training and
examination leading to the CPA qualification.
 Custodians
Custodians of
of Accounting
Accounting Standards
Standards in
in
Malaysia
Malaysia
 Financial Reporting Act 1997 established the
Financial Reporting Foundation with oversight
responsibility for the Malaysian Accounting
Standards Board.
 This structure preserves the integrity and proper
functioning of the financial reporting regime in
Malaysia.
 The Financial Reporting Act 1997 empowers the
Malaysian Accounting Standards Board to issue
approved accounting standards for use by entities
in Malaysia.
Characteristics
Characteristics of
of the
the Qualitative
Qualitative Accounting
Accounting
Information
Information
 Primary qualities that make accounting
information useful for decision making are:
• Relevance – it is capable of making a difference in
a decision and helps users make predictions about
ultimate outcome of past, present and future
events.
• Reliability – accounting information must posses
three key characteristics; (a) verifiable, (b)
representational faithfulness and (c) neutrality
 The secondary qualities identified are
comparability and consistency.
 Generally
Generally Accepted
Accepted Accounting
Accounting
Principles
Principles
Financial
Financial accounting
accountingpractice
practiceisisgoverned
governedby
by
concepts
conceptsand
andrules
rulesknown
knownas as generally
generallyaccepted
accepted
accounting
accountingprinciples
principles(GAAP).
(GAAP).

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

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

Comparable
Comparable Is
Ishelpful
helpfulin
incontrasting
contrasting
Information
Information organizations.
organizations.
 Setting
Setting Accounting
Accounting Principles
Principles

Financial
Financial Accounting
Accounting
Standards
StandardsBoard
Board is
isthe
theprivate
private
group
groupthat
thatsets
setsboth
bothbroad
broadand
and
specific
specificprinciples.
principles.

The
TheSecurities
Securitiesand
andExchange
ExchangeCommission
Commission isis
the
thegovernment
governmentgroup
groupthat
thatestablishes
establishes
reporting
reportingrequirements
requirementsforforcompanies
companiesthat
that
issue
issuestock
stockto
tothe
thepublic.
public.
 Principles
Principles of
of Accounting
Accounting
 There are at least five main accounting
principles, which provide guidance in
accounting practice:
• Historical cost principle (Cost principle)
• Objectivity principle
• Revenue recognition principle
• Matching principle
• Full disclosure principle
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Objectivity Principle
Historical Cost Principle
Accounting information is
Accounting information is
supported by independent,
based on actual cost.
unbiased evidence.

Revenue Recognition Principle

1. Recognize revenue when it is earned.
2. Proceeds need not be in cash.
3. Measure revenue by cash received plus
cash value of items received.
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 Matching principle – to report expenses

incurred in the same period as of the revenue
is actually earned as a result of these
expenses
 Full disclosure principle – requires the
business to disclose sufficient information for
the users in helping them of making
reasonable decision making (business should
report relevant, reliable and comparable
information about the business activities)
 Accounting
Accounting Assumptions
Assumptions
 Four main accounting assumptions are:
• Separate business entity
• Going concern
• Monetary unit
• Time period
 Separate business entity – the business is
viewed as an separate entity from its owners,
creditors or stakeholders.
 Going concern – the preparation of company’s
financial reports should consider assumption
that the operation shall continue in foreseeable
future without being closed or sold.
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 Monetary unit – we should report all the
business transactions or events in monetary
units such as RM (Ringgit Malaysia)
 Time period – business activities can be
divided into specific period such as a month, a
quarter and a year.
 Accounting
Accounting Constraints
Constraints
 There are two constraints involved in
accounting:
• Conservatism
• Materiality
 Conservatism – no gain or profit but to
recognize possible loss
 Materiality – requires business to account only
for the items that are deemed significant for a
given size of operation (if the misreporting of
that items give effect to users decision making)
 Financial
Financial Statements
Statements
Financial Statements consist of four elements,
there are:

1. Income Statement
2. Statement of Owner’s Equity
3. Balance Sheet
4. Statement of Cash Flows
 Net income is the
difference between
Revenues and
Expenses.

The income statement describes a

company’s revenues and expenses
along with the resulting net income or
loss over a period of time due to
earnings activities.
 The net income
of $2,200
increases
Scott’s capital
by $2,200.

The Statement of
Owner’s Equity
explains changes
in equity from net
income (or net
loss) and from
owner investments
and withdrawals for
a period of time.
The
The Balance
Balance Sheet
Sheet
describes
describes aa
company’s
company’s
financial
financial position
position
at
at aa point
point in
in time.
time.
 The Statement of Cash Flows identifies cash
inflows and cash outflows over a period of time.
End of Topic 1