ACC 406

Introduction to Financial
Accounting
1
 Learning objectives

At the end of this chapter, you should be able to:

 Explain difference terms and basic concepts of financial
accounting
 Identify the users of accounting information

 Distinguish the different types of business organization

 Differentiate between bookkeeping and accounting

2
introduction Business???
A business can be defined as an
organization that provides goods
and services to others who want
or need them.

3
 Definition of accounting
 The process of classifying, recording and summarizing of
transactions and business events in monetary terms, and
interpreting the results to interested parties (users of financial
statements) to assist them in decision making.

4
Process of accounting

5
The purposes of accounting

6
 The users and the use of accounting information
Internal Users

7
 The users and the use of accounting information

External Users

8
Types of business organization

9
CHARACTERISTICS OF BUSINESS ORGANISATIONS
CHARACTERISTICS SOLE TRADER PARTNERSHIP COMPANY

Source of capital Owner’s savings / Contributed by partners Contributed by shareholders

owner’s properties according to the agreement through buying of shares
brought in the business

Ownership Owned by 1 person Owned by 2-20 partners (ord) Owned by 2-50 s/holders (Sdn
2-50 partners (Professionals) Bhd) & 2-∞ s/holders (Bhd)

Existence Not a separate entity Not a separate entity Separate entity

Liability Unlimited liability Unlimited liability Limited liability

Management Manage and control by Manage and control by the Manage and control by the
and control the owner with the help partners or by a Board which Board of Directors appointed
from his family and consist of a few partners by S/holders
workers

Profit Sharing Profit belongs to the Profit and losses will be Profit will be paid to s/holders
owner and losses will shared by partners based on in a form of dividends
also be borne by the Partnership Agreement
owner

Books and Accounts Not required to keep Not required to keep proper Required to keep proper books
proper books of accounts books of accounts of accounts and submit annual
accounts to Registrar of
Company
 Difference between bookkeeping and
accounting
Is Bookkeeping and Accounting the same? The
answer is NO

ACCOUNTING
BOOKKEEPING
Is the whole process of classifying, recording
Is part of accounting process and summarising the business transactions in
( classifying, recording monetary terms and interpreting the result to
and summarising the interested users.
the business transactions )
and done in accordance
with certain principle or rules. -Person responsible to handle the accounting
process is an Accountant that posses a certain
Person responsible to handle standard qualification and working experience
the bookkeeping process is a recognised by the accounting regulatory body.
Bookkeeper
that has less qualification and skills

11
ACCOUNTING CYCLE / PROCESS

Transactions

Source
Documents

Journals

Ledgers

Trial balance

Adjustments

12

Financial
Statements
 ACCOUNTINGCONCEPTS AND
CONVENTIONS

13
INTRODUCTION
 Accounting concepts are derived and developed
over years from business customs and
accounting practices

 As guides in the preparation and presentation of

financial statements

14
WHY ACCOUNTING STANDARDS EXIST?
 To have a uniform financial statements as
it serve various types of users.
 To reduce the possibilities of very large
variations in financial reporting.
 For comparability purposes.
 To show ‘true and fair view’ of an
organisation.

15
ACCOUNTING CONCEPTS
Historical
Consistency
Cost
Duality
Periodicity

Going
Economic Concern
Entity
Accounting
Concepts

Neutrality
Monetary

Prudence/
Materiality
Conservatism
Accrual Comparability
 ENTITY CONCEPT

 The business is regarded as an entity or a unit by itself.

 This entity is exists as an entity that is separate from its owner.

 The business can own assets, can have liabilities or enter into
transactions.
 The financial statements of Ali Enterprise report only
the economic activities of the business and do not
included economic activities of Ali, the owner.
 GOING CONCERN

 Thebusiness is always assumed to be a going concern, that is to

operate for an indefinite period of time.

 Thebusiness is therefore not expected to be closed in a short

period of time.
 MONEY MEASUREMENT

 The accounting information only involved the transactions or

facts that can be measured in a monetary value.

 Thisis to get a standard measurement to make comparison

between the financial position of the businesses.
 HISTORICAL COST

 All transactions of a business are recorded at the original cost at

the time the purchase was made.

 The cost is constant in the accounting records and the changes

of time will not influence the original cost.
 CONSISTENCY

 Accounting methods used to determine income and valuation of

assets must be consistently applied
 An accounting policy or method, once adopted should be
consistently followed in subsequent periods to allow comparison to
be made
 Change is only made under strict circumstances

 The straight line method used to depreciate an asset

should be used from one period to another

 Comparability
 Consistency helps to achieve comparability
Accrual

Revenue is recognised when it is earned and not when the

money has been received.

Expenses is recognised when it is incurred and not when the

money has been paid.
 NEUTRALITY

 Financial statements are NOT prepared in a way to

favour groups of users (managements, owners,
creditors, etc) over other groups.

 The information is prepared to be helpful to all

 MATERIALITY

 The accounting treatment of an item depends on its impact on the

firm’s performance and financial position
An amount is considered material if it has a
significant effect upon the income or the financial
position of a business
 Trivial matters are to be disregarded and all important matters are
to be disclosed
 The same item may be material to one firm but
immaterial to another
 The cost of an eraser is recorded as an expense rather

than an asset
 CONSERVATISM (PRUDENCE)

 In times of uncertainty,
 Revenues and assets should not be overstated
 Expenses and liabilities should not be understated

 Potential losses as a result of a lawsuit against the firm

must be reported and accounted as an expense
 Potential gains when asset value increases are not reported

until it is actually sold and gain is realized

Periodicity

It implies that the business activities can be divided into

regular time period. For reporting purposes, financial
statements are normally prepared on yearly basis.
 DUALITY

 Every transaction has a double (dual) effect on the position of the

business as recorded in the accounts.
 This concept is the foundation of the double-entry bookkeeping
system
 When an asset (car) is bought, another asset (cash or bank) is
decreased