Principles of Accounting

BPA 11403
Prepared by:
Nur Aniza Quantaniah binti Jusoh
Fakulti Pengurusan Teknologi dan Perniagaan
Universiti Tun Hussein Onn Malaysia
Room:J701-13
Tel : 07-4533930
E-mail: nuraniza@uthm.edu.my
Nur Aniza Q.Jusoh

LEARNING OBJECTIVES
At the end of this class, you should be
able to:
1. Define accounting
2. Identify business goals and activities
3. Describe the role of accounting in
making informed decisions.
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LEARNING OBJECTIVES
(cont)
4. Identify the various users of accounting
information in society and the
characteristics of such information
necessary to meet their objectives
5. Describe the three forms of business
organization.
6. Understand the accounting principles,
concepts and ethics
7. Identify the financial statements
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Introduction to Accounting
History of Accounting
Business & Accounting
Users of Accounting Information
Types of Business Organizations
Accounting Bodies
Accounting Concepts and Principles
Types of Financial Statements
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Accounting as a Business
Language
What is Accounting?
Accounting is ..
The art of identifying, measuring,
recording, interpreting and
communicating the results of economic
activities

The language of business used by

investors, managers and decision makers.

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Activities in Accounting
Identification
Select economic events relevant to business
(transactions)

Recording
Keeping a systematic, chronological diary of
events (double entries, ledger & journals)
Communication
Preparation of accounting reports
Analyzing and interpreting for users
Nur Aniza Q.Jusohratio analysis)
(Financial statements,

The Purpose of Accounting

to provide decision makers with
information useful in making economic
decisions concerning the allocation and
use of scarce economic resources.

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The Purpose of Accounting

Internal users

Collects and
process
financial
information

Reports
information
to decision maker

External users
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Fields of Accounting
Accounting is usually divided into two
main categories:
1. Management accounting.
2. Financial accounting.
The two may be distinguished by the
principal users and focus of their
information.
Other categories are :Auditing,
Taxation, Financial
Management
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Financial Accounting versus

Management Accounting
(Users)
Accounting
Financial
Accounting

Management
Accounting

Users
External

Internal
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Financial Accounting versus

Management Accounting
(Focus)
Financial
accounting

Focus

Management
accounting

Focus

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Profitability
Solvency
Liquidity

Efficiency
Productivity
Quality
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History of Accounting
3500 B.C-Babylonian & Sumerian
civilization
Agricultural & small industries
Transaction recorded on clay boards
Earliest banks, gold & silver, credit facilities

Egyptian civilization
Taxation matters
Papyrus documents
Internal inspection by government treasury

600 B.C- Greek civilization

Coins introduced
Improvised banking system-saving accounts,
monetary exchange, loans, cash transfer
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History of Accounting
Roman civilization
Statement of assets and liabilities
Cash books for record of expenses
Yearly budget for coordination of income
and expenses

7th to 11th century

Numeral system developed by Indians
Simplifications of business computation

12th-15th century
Bookeeping based on double entry
system commenced in Italy
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The Double Entry Onset

Luca Pacioli(14th century)Summa de Arithmetica
Geometrica Proportioni et
Proportionalita
Book keeping and double entry
method
Double entry-Venice Method
Profit determined at end of
business period
1605 Profit determined at end
of accounting period
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The Development of the

Modern Accounting System
Industrial Revolution of
England
Ledger accounts
Production of scale, various cost
Cost accounting
Partnership, corporation
Financial accounting
Stewardship reporting
Management accounting
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Distinction between
Bookeeping and Accounting
Bookkeeping refers to the daily
activities of recording and classifying
routine transactions in an accounting
system. It is based on the double entry
method.

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Distinction between
Bookeeping and Accounting
Accounting involves the designing of
accounting and internal control
systems, identifying and measuring
transactions and events to be recorded,
interpreting and communicating
information to decision makers in a
meaningful manner, and encompasses
bookkeeping.
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Business: Whats it all

About?
A business is an economic unit that aims to sell
goods and services to customers at prices that
will provide an adequate return to its owners.

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Business: Whats it all

About?
Financial

Owners

Profit

Value

Goods &
Services

Material

Consumers

Financial
Resources
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Business Goals
Profitability.
A business must take in enough
money to pay all the costs of doing
business, with enough left over as
profit for the owners to want to stay
in business.

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Business Goals(cont)
Liquidity.
A business must have enough
funds available to pay debts
when they are due.

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Business Activities
Companies do three basic things.
They invest in assets to conduct
business.
They raise money to finance these
assets.
They use the assets and the money they
raise to operate the business.
These transactions can be classified into
one of three categories operating,
investing, and financing activities.
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Business Activities
1.Financing Activities.

2.Investing Activities.

Obtaining capital from owners and creditors.

Repaying creditors and a return to owners.
Spending the capital it receives in ways that are
productive and will help the business achieve its
objectives.
Buying and selling assets to be used in the business.

3. Operating Activities.

Selling of goods and services to customers.

Employing managers and workers, buying and producing
goods and services, and paying taxes.
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Business Goals and

Activities
Business Goals

Business Activities

Profitability
Operating

Investing

Liquidity
Financing

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Business and
Accounting
Business is about making decisions.

Accounting information plays a

significant role in decision making.

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Business and Accounting

Accountings role of assisting decision
makers are by measuring,

processing, and communicating

information.

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Business and Accounting

The users of the accounting information
is interested in the relationship
between the financial results and the
events which have created them as
this will help them to select the best
plan of action for them or their
business.

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Business and Accounting

Business Transaction
Record

Effects

Accounting Data

Effects

Reports

Internal users

External users

Decision Making

Decision Making

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Who needs accounting

information?
A) Management
B) Employees
C) Those with direct financial interest
l
l

Current or potential investors

Current or potential creditors

D) Those with an indirect financial interest

Tax Authorities
Regulatory Agencies
Economic Planners
Labor unions, financial advisors, others.

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Various users of accounting

information
INTERNAL USERS
Management and supervisory staff within
the organization
The informational needs of each person or
category of staff will differ.
Frequent and detailed information of
areas that concern them and not
necessarily of the whole business
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Various users of
accounting information
Internal
Accountants
Marketing managers
Salespersons
Production managers
Operation supervisors
Strategic planners
Company president
Company engineers
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Various users of accounting

information
EXTERNAL USERS
Individuals or groups of individual
outside the organization
Interest in the financial reports of a
business.
Purpose and financial needs differs.

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Various users of
accounting information
External
Stockholders (present and potential)
Bondholders (present and potential)
Government & Regulatory Bodies
Banks and other Lending Institutions
Suppliers
Creditors
Debtors
Customers
Competitors
Lobby groups
Public
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Forms of Business
Organizations
Proprietorships

Partnerships

Corporations
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Forms of Business
Organizations
Sole Proprietorship--a single
owner business

Partnership--a multiple-owner
business
Corporation--a business whose
ownership is divided into
"shares" and may be owned by a
large number of people
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Forms of Business
Organizations
Sole Proprietorship
individual engaged in a business or
profession on his/her own account
Smallest and simplest form of business
organization with minimal legal
requirements
total control, single main capital
contributor
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Forms of Business
Organizations
Sole Proprietorship
all the risks and benefits arising from the
business are taken by the owner
unlimited liabilities for owners
Examples-street vendors, small shops &
retail, beauty saloons, car workshops,
internet cafes and professional
business-(doctors, lawyers,
accountants, architects etc)
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Forms of Business Organizations

Sole Proprietorship
What are some advantages?
easy and inexpensive to
establish

total control
What are some disadvantages?
unlimited liability
limited access to capital
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Forms of Business
Organizations
Partnership
2 persons or the maximum of 20 persons
pool their capital and agree to carry on a
business in common with a view to profit.
Utilizations of different skills
Wider capital base, moderate size
Partner is jointly and severally liable for the
partnership's obligations.

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Forms of Business
Organizations
Partnership
Unlimited liability
Sharing of risks, profit and losses
Partnership agreements-rights, duties, and
obligations of the partners, and also provide rules
and procedures for partnership matters;
otherwise- governed by the Partnership Act 1961
Examples of partnerships are family retail
businesses, professional based services such as
lawyer, accountant, architect, engineers firms and
etc
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Forms of Business Organizations

Partnerships
What are some advantages?
easy to establish
access to more capital
What are some disadvantages?
unlimited liability

sharing of profits
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Forms of Business
Organizations
Corporation
A legal entity that is separate and
distinct/independent from its members and
shareholders
Company is formed, it is "incorporated" under
the Companies Act 1965.
Continuity of succession
Capable of owning property, making
contracts, employing people and being sued
or of suing
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Forms of Business
Organizations
Corporation
Company limited by shares- most common
structure in Malaysia.
Two categories - Public limited companies
(Berhad) and Private limited
companies(Sdn.Berhad)
Examples of limited company - banks and
financial institutions, consumer and industrial
products manufacturers, transports and
shipping companies, construction companies
and etc.
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Forms of Business Organizations

Corporations
What are some advantages?
limited liability
greater access to capital

easy transferability of ownership

What are some disadvantages?
greater tax burden
greater government regulations
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Characteristics of Different
Forms of Business
Organization
Issues in deciding between sole
proprietorship, partnership, or
corporation
Personal liability
Taxation
Transfer of ownership
Ability to raise capital
Government regulation

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ORGANIZATION INFLUENCING
ACCOUNTING PRACTICES
In the 19th century, the accounting field
had achieved a professional standard
and accounting bodies was formed :
to determine the minimum qualification
and standards for the accounting
profession;
to shape and develop the accounting
codes of ethics and;
to ensure members ethical conducts and
compliance to the codes
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ORGANIZATION INFLUENCING
ACCOUNTING PRACTICES
International Accounting Standards
Board(IASB)
1973,Sydney encourage usage of
basic standard in accounting work
amongst members
Purpose- to ensure quality and
professionalism of accounting
profession & methodical and
regulated preparation of accounts and
statements
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ORGANIZATION INFLUENCING
ACCOUNTING PRACTICES

Malaysian Accounting Standard Board

(MASB)

Established under Financial Reporting Act

1997
Independent authority to develop and issue
accounting & financial reporting standards in
Malaysia
Mission : to develop and promote high quality
accounting and reporting standards that are
consistent with international best practices for
the benefit of users, preparers, auditors and
the public in Malaysia

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ORGANIZATION INFLUENCING
ACCOUNTING PRACTICES
Malaysian Institute of Accountant
(MIA)
Established under Accounting Act 1967
Authoritative body regulating the accounting
profession
Member body of regional and international
professional bodies
Helm of MIA stewardship is the Council
represented by the Accountant General, the
Registrar and accountants in the public
practice, private sector and from the
academia.
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ORGANIZATION INFLUENCING
ACCOUNTING PRACTICES
The Malaysian Institute of Certified
Public Accountant (MICPA)
The Association of Chartered
Certified Accountant (ACCA)
Chartered Institute of Management
Accountant (CIMA)

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Accounting Concepts and

Principles
Rules in which the activities of the business
are recorded to achieve objectivity in
accounting
Focuses on the users of accounting
information.
Define the assumptions on which financial
accounts of a business are prepared.
Determine the interpretations given in
financial reports of the events and results
which they potray
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Accounting Concepts and

Principles
Accounting concepts serve two main
purposes.
Provide descriptions of existing accounting
practices which act as guidelines that help users
understanding and use of the accounting
information.
Use by the local Accounting Standards Board
when developing acceptable practices for
financial reporting in the respective countries and
improving the quality of such reporting.

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Accounting Concepts and

Principles
The basic concepts are :

The Historical Cost Concept

The Money Measurement Concept
The Going Concern or Continuity Concept
The Business Entity Concept
The Realization Concept
The Matching Concept
The Accruals Concept
The Periodicity Concepts
The Materiality Concept
The Consistency Concept

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Accounting Concepts and

Principles
Business Entity Concept
Keep Business and Personal Assets Separate

Historical Cost Concept

All business transaction is to be recorded
based on the actual value of the acquisition at
the date of purchase.

Money Measurement Concept

Accounting is only concerned with those facts
that are measurable in monetary terms with a
fair degree of objectivity
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Accounting Concepts
and Principles
Going Concern(Continuity)
Principle
A business will continue in
operation for an indefinite period or
for the foreseeable future and will
not be terminated or dissolved in a
short period

Matching principle
Expenses are recognized at the same
time that the related revenue is
recognized.
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Accounting Concepts
and Principles
Revenue Recognition Concept
Revenue is recognized when
earned
Materiality Concept
An item is "material" if its
knowledge might influence the
decisions of users of financial
statements.
Accruals Concept
Expenses are only those sums
which are due and payable.
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Accounting Concepts
and Principles
Consistency Concept
Accounting methods must remain the
same so that one periods statements
may be reasonably compared with
another.

Periodicity Concept
Results of activities are evaluated in
their related periods. Implies the
division of the endless life span of
companies into specific periods and the
determination of the results of each
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period independent
from others.

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Ethical Conduct in the

Accounting Profession
What are Ethics?
the moral principles that govern individual
behaviour
Professional Code of Ethics
basic purpose is to provide members with
guidelines for conducting themselves in a
manner consistent with the responsibilities of
the profession.
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Ethical Conduct in the

Accounting Profession
Some Key Principles
Independence or Objectivity
must not be perceived as being under
the company's influence or control, or
as having any vested interest in the
results reported in the financial
statements.

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Ethical Conduct in the

Accounting Profession
Integrity
shall not knowingly misrepresent facts

Confidentiality
does not relieve a professional accountant
from his or her professional obligation to
correctly and fully disclose facts in
financial statements or accounting
documents
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The Challenge of Adhering

to a Code of Ethics
Codes of ethics consist of broad, general
guidelines; it is not often possible to "look
up" the solution to a specific ethical
dilemma.
"Ethical conduct" means an "unswerving
commitment to honourable behaviour,
even at the sacrifice of personal
advantage."
In deciding when an ethical problem
exists, and in determining what constitutes
ethical behaviour, accountants must often
rely upon their Nur
own
professional judgment.
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Financial
Statements...
are the final
product of the
accounting process.
tell how the
business is performing
and where it stands.

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Interrelationship of Final Reports,

Useful Information and Decision Making
Communication
Documents

Types of Useful Information

External Decision
Making

Return on Investment

Risk
Financial
Reports

Buy
Hold
Sell

Financial Flexibility
Liquidity
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Operating
Capability

Extend Credit
Continue
Credit
Deny Credit
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Financial
Statements...
income statement
balance sheet
statement of owners equity or
retained earnings
statement of cash flows

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Four Basic Financial

Statements

Income Statement/Profit & Loss

Revenues - Expenses = Net Income
Balance Sheet
Assets = Liabilities + Equity
Statement of Changes in Owners Equity/Retained
earnings
Beginning equity +
Owners Contributions/Capital + Net income Distributions to owners= Ending equity
Statement of Cash Flows
Cash inflow - Cash outflow + Beginning Cash =
Net cash flow (Ending cash)

What is an Income
Statement?
Income Statement - a report of all
revenues and expenses pertaining
to a specific time period
Net income - the remainder after all
expenses (including income taxes)
have been deducted from revenue
Often seen as the bottom line
Net loss - the excess of expenses
over revenues
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What is an Income
Statement?
The income statement must always
indicate the exact period covered
(month ended, quarter ended, year
ended) because statements are
often prepared for different time
periods..
Income statement is FOR THE
PERIOD ENDING
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January 2012

67

What is an Income
Statement?
Decision makers inside and outside
the company use the income
statement to assess the companys
performance over a span of time.
By tracking net income from
period to period, decision makers
can evaluate the success of the
periods operations.
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The Income Statement

Net Income
Revenues
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Expenses
69

1. Name of
entity
2. Title of
statement
3. Specific
date
(Unlike the
balance
sheet, this
statement
covers a
specified
period of
time.)
4. Unit of
measure

MAXIDRIVE CORP.
Income Statement
For the Year Ended December 31, 2012
(in thousands of dollars)
Revenues
Sales revenue
Expenses
Cost of goods sold
$ 26,980
Selling, general and administrative
3,624
Research and development
1,982
Interest expense
450
Total expenses
Pretax income
Income tax expense
Net income

$ 37,436

33,036
$ 4,400
1,100
$ 3,300

The Income Statement reports the revenues

less expenses of the accounting period.
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What Is A Balance
Sheet?
The balance sheet shows the financial
position of a company at a particular
point in time.
The balance sheet is sometimes
referred to as the statement of
financial position or the statement of
financial condition.
The left side lists assets the right side
lists liabilities and owners equity
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What Is A Balance
Sheet?
Elements of the balance sheet:
Assets - resources of the firm that are
expected to increase or cause future cash
flows (everything the firm owns)
Liabilities - obligations of the firm to
outsiders or claims against its assets by
outsiders (debts of the firm)
Owners Equity - the residual interest in, or
remaining claims against, the firms assets
after deducting liabilities (rights of the
owners)
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Balance Sheet
Transactions
The balance sheet is affected by
every transaction that an entity
encounters.
Each transaction has
counterbalancing entries that keep
total assets equal to total liabilities
and owners equity, i.e., the balance
sheet equation and the balance
sheet must always be
balanced.
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Balance Sheet
Transactions
Transactions are recorded in
accounts, which are summary
records of the changes in
particular assets, liabilities, or
owners equity.
The account balance is the
total of all entries to the
account.
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Balance Sheet
Transactions
A balance sheet could be prepared after
every transaction, but this practice would
be awkward and unnecessary.
Therefore, balance sheets are usually
prepared monthly or on some other
periodic schedule
Balance sheet is AS OF or AS AT
a particular date, sometimes called a
snapshot in time.
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The Balance Sheet

Assets
Liabilities

Owners Equity

The balance sheet equation:

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1. Name of entity
2. Title of statement
3. Specific date
4. Unit of measure

The
Balance
Sheet
reports the
financial
position of
an entity at
a particular
point in
time.

MAXIDRIVE CORP.
Balance Sheet
At December 31, 2012
(in thousands of dollars)
Assets
Cash
Accounts receivable
Inventories
Plant and equipment
Land
Total assets
Liabilities and Stockholders' Equity
Liabilities
Accounts payable
Notes payable

$ 4,895
5,714
8,517
7,154
981
$ 27,261

$ 7,156
9,000

Total liabilities
Stockholders' Equity
Contributed capital
Retained earnings
Total stockholders' equity
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Total liabilities
and
stockholders' equity

$ 16,156
$ 2,000
9,105
11,105
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$ 27,261

Relationship Between
Income Statement and
Balance Sheet
The balance sheet provides a
snapshot of an entitys financial
position at an instant in time.
The income statement provides a
moving picture of events over a span
of time and explains the changes that
have taken place between balance
sheet dates.
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The Statement of Owners

Equity/Retained Earnings
A statement of changes in equity
summarizes the changes in a
companys equity for a period.

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The Statement of Owners

Equity/Retained Earnings
A statement of changes in equity
contains two elements:
Investments by owners are increases in
equity resulting from transfers of
something valuable to the company
from other entities in order to obtain or
increase ownership interest.
Distribution to owners are decreases in
equity of a company caused by
transferring assets, rendering services,
or incurring liabilities to owners.
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The Statement of Owners

Equity/Retained Earnings
The Statement of Owners Equity
cover a period of time, and thus are
FOR THE PERIOD ENDING

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The Statement of Owners

Equity/Retained Earnings

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1. Name of entity
2. Title of
statement
3. Specific date
4. Unit of
measure

MAXIDRIVE CORP.
Statement of Retained Earnings
For the Year Ended December 31, 2012
(in thousands of dollars)

Retained earnings, January 1, 2012

$ 6,805
Net income for 2012
3,300
Dividends for 2012
(1,000)
Retained earnings, December 31, 2012 $ 9,105

The Income Statement reports the revenues

less expenses of the accounting period.
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What is a Statement
of Cashflow?
Income does not measure an entitys
performance in generating cash,
especially if the income is measured
using the accrual basis.

In a way, accountants use both the

accrual and cash bases.
The accrual basis is used in the
income statement.
The cash basis is used in the
statement of cash flows
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What is a Statement
of Cashflow?
The statement of cash flows gives a
direct picture of where cash came from
and where cash went.
Statement of cash flows - reports the
cash receipts and cash payments of an
entity during a particular period

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What is a Statement
of Cashflow?
It summarizes activity over a period
of time, so it must be labeled with
the exact period covered.
It details the changes in the cash account,
much like the income statement which
shows changes in retained earnings.

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What is a Statement of
Cashflow?
Because
revenues reported
do not always equal
cash collected. . .

. . . and expenses
reported do not
always equal
cash paid . . .

net income is
usually not equal
to the change
in cash for
the period.
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What is a Statement
of Cashflow?
Preparation of the statement of
cash flows
List the activities that increased
(inflow) or decreased (outflow) cash.
Place each inflow or outflow into the
proper categories.

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What is a Statement of
Cashflow?
The elements of a statement of cash flows are:
o Operating cash flows are the flows of cash from
acquiring, selling, and delivering goods for sale,
as well as providing services.
o Investing cash flows are the flows of cash from
acquiring and selling investments, property, plant,
and equipment, as well as from lending money and
collecting on loans.
o Financing cash flows are the flows of cash to and
from the owners and long-term creditors include
obtaining resources and repaying amounts
borrowed

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The Statement of
Cashflow
The Statement of Cashflow cover a
period of time, and thus are FOR
THE PERIOD ENDING

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The Statement of
Cashflow

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1. Name of
entity
2. Title of
statement
3. Specific
date
4. Unit of
measure

MAXIDRIVE CORP.
Statement of Cash Flows
For the Year Ended December 31, 2012
(in thousands of dollars)
Cash flows from operating activities:
Cash collected from customers
Cash paid to suppliers and employees
Cash paid for interest
Cash paid for taxes
Net cash flow from operating activities
Cash flow from investing activities:
Cash paid to purchase equipment
Net cash flow from investing activities
Cash flow from financing activities:
Cash received from bank loan
Cash paid for dividends

33,563
(30,854)
(450)
(1,190)
$

(1,625)
(1,625)

1,400
(1,000)

Net cash flow from financing activities

Net decrease in cash during the year

400
$

Cash at beginning of the year

Cash at end of the year

1,069

(156)
5,051

4,895

The Statement of Cash Flows reports the inflows and outflows

of cash during the period
the categories of operating, 92
Nur Anizain
Q.Jusoh
investing, and financing.

Relationships Among the

Statements:
Income Statement
Revenue:
Fees earned

$8,500

Expenses:
Salary expense
Utilities and telephone expense
Equipment rental expense
Office rent expense
Net income
Nur Aniza Q.Jusoh

$1,200
400
600
1,100

3,300
$5,200
93

Relationships Among the

Statements:
Statement of Owners
Equity/Retained Earnings
G. Gillen, capital, June 1, 2012
$
0
Contribution of capital
30,000
Net income
$
5,200
Cash distributions/Dividend
2,000
G. Gillen, capital, June 30, 2012
$
33,200

Nur Aniza Q.Jusoh

94

Relationships Among
the Statements:
Balance Sheet
Assets
Cash
$19,900
Accounts receivable
2,000
Supplies
500
Land
11,000
Total assets
$33,400

Liabilities
Accounts payable $ 200
Owners equity,
G. Gillen, capital
33,200
Total liabilities and
owners equity
$33,400

Nur Aniza Q.Jusoh

95

Relationships Among the

Statements:
Statement Of Cash Flows

Cash flows from operating activities:

Cash receipts from services rendered
Cash payments:
Supplies
$ 300
Operating expenses
3,300
Net cash flows from
Operating activities
Cash flows from investing activities
Purchase and sale of land
Nur Aniza Q.Jusoh

$6,500

3,600
$2,900
($11,000)
96

Relationships Among the

Statements:
Statement Of Cash Flows
Cash Flows from Financing Activities:
Investment by Owner
Withdrawals
Net Cash Flows from
Financing Activities
Cash at Beginning of Year
Cash at End of the Year
Nur Aniza Q.Jusoh

$30,000
2,000
$28,000
0
$19,900
97