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Definition of Accounting Role of Accounting Brief History & Development of Accounting Introduction to Financial Statements Accounting Profession & Professional Bodies Assumptions, Principles and Qualitative Characteristics of Accounting Information Accounting Standards and Accounting Policy
Definition of Accounting
provide information which is potentially useful for making economic decisions and which if provided will enhance social welfare.
(AAA, 1975)
Definition of Accounting
Accounting: a process of identifying, recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the result thereof (AICPA, 1961)
Accounting vs Bookkeeping
Bookkeeping: only involves activities of collecting and recording financial data Mechanical and repetitive process A small aspect of accounting
Definition of Accounting
provide information which is potentially useful for making economic decisions and which if provided will enhance social welfare.
(AAA, 1975)
Role of Accounting
Means of communication
As language of business Information conveyed to various parties within organisation as well as external parties Form of communication depends on information do be conveyed and types of users
Role of Accounting
Role of Accounting
Examples of reports:
Budgets Cost analyses Performance reports
Examples of reports:
Balance sheet Income statement Statement of cash flows Other regulatory reports
Reason for interest in financial information To assess the performance of the management in their role as stewards of the company To use the information to make decisions on whether or not to sell the investment in the shares of the company or perhaps to buy more shares in the company To make decisions on whether to invest or not to invest in the shares of the company
Potential shareholders
Investment analysts To assess the performance of the company in order to be able to advise their clients on investment strategy
To assess the ability of the business to make repayments to meet the regular interest payments
To assess the viability of the business and the extent to which it is likely to be able to (a) continue to offer employment (b)
suppliers
Where suppliers offer credit terms, they need to be able to assess the likelihood of being paid promptly
In the case of an environmental activist group, for example: to assess the extent to which the company has set aside fund for environmental clean up operations
To obtain information about a company activities and profitability which will be of interest of the journalists readers
Customers
To assess the likelihood of the business continuing in existence and to continue to supply the goods or services required by the customers
Anyone not covered by any of the categories above who has interest in the activities of the company
Existence of Accounting during civilisation of Egyptians, Greeks and Romans In earliest form performed stewardship function (protection of owners interest by collection of business facts and figures) Pacioli published the first printed work on mathematics (include a section on double entry bookkeeping)
First known use of double entry bookkeeping in Genoa Commune Accounts of 1340 Industrial Revolution and change in business form Emergence of cost/management accounting
Development of accounting continually affected by changes in technology, law, economic condition, influence of pressure groups
Financial statement is a structured financial representation of the financial position of an enterprise and the transaction undertaken by an enterprise
Financial Statements
The objective of financial statements is to provide information about the financial position, performance and change in financial position of an enterprise that is useful to a wide range of users in making economic decisions.
International Accounting Standards Committee (2000)
Provide information about the financial position, performance and cash flow of an enterprise Show the results of managements stewardship of the resources entrusted to it Assists users in predicting the enterprises future cash flow and the timing and certainty of the generation of cash and cash equivalents.
Balance Sheet
Statement of financial position Reports the resources of a firm (assets) and what is owed (liabilities and owners equity) at a particular date Reports a firms assets, liabilities and owners equity at a particular date
Assets
Cash, inventory, accounts receivable, buildings
Liabilities
Accounts payable, taxes payable, bank loan
Owners Equity
Paid-in capital, retained earnings
Reports the performance of the firm for a particular period Reports the amount of net income earned by a firm during a period Net income = Revenue - Expenses
Revenues
Increase in a companys resources from the sale of goods or services.
Expenses
Costs incurred in the normal course of business to generate revenues.
Limited to information which can be expressed in quantitative terms. Largely confined to an analysis of past events. Accounting is not an exact science. Most information expressed in monetary units
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Securities Commission Financial Reporting Foundation Malaysian Accounting Standards Board Malaysian Institute of Accountants Bursa Malaysia Professional Accounting Bodies
MICPA
MASB
Bursa Malaysia
MIA
Accounting World
Security Commission (SC) Inland Revenue Board of Malaysia
MICPA
Separate Entity Going concern Accounting Period Matching Principle Consistency Conservatism/Prudence Realisation Principle
The assumption that the activities of the entity are to be separated from those of the individual owners
Going concern
The assumption that the an accounting entity will have a continuing existence for the foreseeable future Allows the use of historical cost in the preparation of financial statement
Periodicity Principle
The life of the business is divided into arbitrary time periods Accounting period is generally one year for reporting to external parties but can be varied for internal reporting
Monetary Measurement
Record only those activities of economic entities that can be measured in monetary terms Transactions that cannot be quantified in financial terms are not recorded in the main accounting records
Cost principle
Assumes that all transactions are recorded in terms of their cost at the time the transaction occurred. Provides objective verifiable evidence of a transaction rather than a subjective opinion liable to distortion
Consistency Principle
Required the reporting entity to use the accounting methods over consecutive time periods (i.e no changes from year to year) All item must be treated similarly from year to year. Does not mean that accounting method cannot be changed (refer to MASB 1)
Matching Principle
Under the matching concept, revenues for a period are matched with the expenses incurred in generating the revenue. Expenses of the business entity is recognised when the revenue related to the said expense is recognised
Conservatism/Prudence
Ensuring that profit is not shown as being too high or that assets are shown too high a value and that the financial statements are neutral i.e. that neither gain nor losses are understated or overstated
Comparability
Information can be compared with :
Information produced in the previous year Information produced by other businesses
Understandability
Users should be able to understand and can make good decision from such information
Relevance
Information is relevant if it influence a decision Information has predictive value (helps users to make decisions about the future) Has confirmatory value (helps users to evaluate their past decisions)
Reliability
Information can be depended on Complete information and free from significant error and bias
Accounting Standards
Accounting standard can be defined as a guide-line for practice in accounting, It is procedures and rules that should be followed by an accountant in collecting, preparing and reporting transactions occurred in business activities to public knowledge.
Accounting Standards
To ensure that the information reported in financial statements is complete, reliable, understandable and can be comparable by the user. also used for standardization in preparing financial statement so that it can be comparable with other statement produced by other organization.
Accounting Policies
Accounting policies are the specific principles, bases, conventions, rules and practices adopted by the enterprise in preparing and presenting financial statements.