Chapter 1

INTRODUCTION TO ACCOUNTING
 LEARNING OBJECTIVES
After completing this chapter, you should be able to:
• Define what is accounting
• Distinguish between different forms of business organisation
• Differentiate between accounting and bookkeeping
• Elaborate the scope of accounting
• Identify the users of accounting information
• Explain the accounting process
 INTRODUCTION
• Accounting is generally known as the Language of Business.
• Accounting can be defined as a systematic process of
identifying, recording, measuring, classifying, verifying,
summarising, interpreting and communicating financial
information to the users for decision-making purposes.
 FORMS OF BUSINESS ORGANISATIONS
• Sole Proprietorship
• Partnership
• Company
• Limited Liability Partnership (LLP)
• Cooperative
 FORMS OF BUSINESS ORGANISATIONS
Sole Proprietorship
• a business owned by only one person.
• easy to set-up and is the least costly among all forms of ownership.
• govern under the Registration of Businesses Act 1956 (ROBA 1956)
& ROBA Rules 1957.
• The owner has unlimited liability which means that in the case the
owner of the business is unable to pay their creditor, the creditor
can go after the personal assets of the owner to recover the
amount of debt
 FORMS OF BUSINESS ORGANISATIONS
Partnership
• a business owned by two or more people but not exceeding 20
people.
• Govern under Partnership Act 1961.
• The partners share the profits and bear the risks of the business
among themselves.
• In general partnerships, all partners have unlimited liability, which
is similar with sole proprietorship where the creditor can go after
the personal assets of the partners in the event of financial
defaults.
 FORMS OF BUSINESS ORGANISATIONS
Company
• a business organisation that has a separate legal personality from its owners
• Incorporate and govern under the Companies Act 2016.
• The ownership in the company is represented by the number of shares; the
owners are known as shareholders and a company must have at least two
shareholders.
• Normally, shareholders have limited involvement in the company's operations
where they would vote and elect a group of shareholders or any third party as
members of the board of directors.
• The board of director is headed by the Chairman, which manages and controls
the business activities. The shareholders enjoy limited liability on the amount
invested in the company.
 FORMS OF BUSINESS ORGANISATIONS
Limited Liability Partnership (LLP)
• A hybrid form of business that has characteristics of both a
company and a partnership regulated under the Limited Liability
Partnerships Act 2012.
• LLP combines the characteristics of a company and a conventional
partnership commonly used by professionals (such as Lawyers,
Chartered Accountants, and Company Secretaries), small and
medium business, and joint venture.
• Amongst others, LLP is featured with the protection of limited
liability to its partners similar to the limited liability enjoyed by
shareholders of a company.
 FORMS OF BUSINESS ORGANISATIONS
Cooperative
• A business owned by a group of individuals and is operated for their
mutual benefit.
• The person who contributes to the capital is called a member and has a
voting right irrespective of the amount of capital contributed.
• All cooperative organisations must be registered with Suruhanjaya Koperasi
Malaysia and governed under the Cooperative Act 1993 (Ammended
2007).
• Examples of popular cooperative organisations in Malaysia are Koperasi
Bank Rakyat and CO-OPBANK Persatuan Malaysia Berhad. Every year, the
members will appoint their representative on the board to run the
cooperative.
 BOOKKEEPING VERSUS ACCOUNTING
• Bookkeeping refers to recording all transactions on a day-to-
day basis, such as recording of financial transactions (e.g
payments to suppliers, loan payments, and recording sales and
expenses), posting debits and credits, producing documents
(e.g. invoices), and maintaining subsidiaries and general
ledgers.
• Bookkeeping is more transactional, concerned with recording
financial transactions and ensures records for each transaction
are correct, up-to-date and comprehensive.
 BOOKKEEPING VERSUS ACCOUNTING
• Accounting, on the other hand, is a high-level process that uses financial
information prepared by the bookkeeper to produce various reports and
documentation for decision-making.
• Hence the process of accounting is more subjective than bookkeeping.
Accounting turns the information from the ledger into statements that reveal the
bigger picture of the business, and the path the company is progressing on.
• Business owners will often look to accountants for help with financial planning,
tax planning, and tax filing.
• Among the accounting activities involved, in addition to bookkeeping, are
preparing the adjusting entries, preparing financial statements, analysing costs
of operations, completing income tax returns and advising the management in
evaluating the impact of financial decisions.
 ACCOUNTING INFORMATION
Financial statements as the principal source of information summarise the
results of operations and the financial position of the business. Four main
statements that are commonly prepared by publicly-traded companies are as
follows:
1. Statement of Profit or Loss
• reports the profitability of a business during a specific accounting period such
as a month, a quarter or a year.
• essential for users to compare results for the business over similar periods of
time or with their competitors.
• presents all revenues and expenses, which are then matched to calculate the
net income (profit) or loss.
• A business’ profit or loss is the main interest of financial statements’ users.
 ACCOUNTING INFORMATION
2. Statement of Financial Position
• formerly known as Balance Sheet.
• reports on the business financial position, specifically the business's assets, liabilities
and equity.
3. Statement of Cash Flows
• summarises the amount of inflow and outflow of cash and cash equivalents.
• main components are cash from operating activities, cash from investing activities
and cash from financing activities.
• indicates how well a business manages its cash position, specifically how well the
business generates cash to pay its debt obligations and fund its operating expenses.
 ACCOUNTING INFORMATION
4. Statement of Changes in Equity
• presents the change in owners' equity over an accounting period by
presenting the movement in reserves comprising the shareholders' equity.
• several elements such as net profit or loss during the accounting period,
increase or decrease in share capital reserves, dividend payments to
shareholders, gains and losses recognised directly in equity and others. The
statement helps users of financial statement to identify the factors that cause
a change in the owners' equity over the accounting periods.
 USERS OF ACCOUNTING INFORMATION
1. Owners or shareholders
• need to understand the performance of their investment.
• to track the performance of the business and help in making investments decisions such as
expanding their businesses or closing the unprofitable segment.
• to make decisions whether to hold, sell or buy more shares.
2. Prospective investors
• assess the profitability and solvency of a business.
• to know the track record of the business so that they would reduce the risk.
3. Management
• make proper operating decisions.
• Corrective action can be taken if the business fails to achieve its target.
 USERS OF ACCOUNTING INFORMATION
4. Lenders
• interested in the businesses’ ability to pay the debt.
• Use the financial statements to estimate the ability of the borrower to pay back all loans and related
interest charges.
5. Trade creditors or suppliers
• interested in the business ability to pay obligations when they become due.
• particularly information on the business liquidity in order to decide whether it is safe to extend credit
to a business.
6. Government
• The government agency, especially the tax authority and customs department such as the Inland
Revenue Board of Malaysia (IRBM) and Royal Malaysian Customs Department (RMC), would refer to
financial statements in order to determine whether the business paid the appropriate amount of
taxes.
 USERS OF ACCOUNTING INFORMATION
7. Employees and unions
• assess the ability of their employer to pay salaries, provide employee benefits, possible business
expansion and career development opportunities.
8. Customers
• ascertain the financial ability of a supplier to remain in business as to maintain the stability of
operations. This is critical for a customer who is considering a long-term involvement or contract
with the supplier.
9. Competitors
• to evaluate its financial condition. The knowledge they gain could alter their competitive
strategies.
10.Rating agencies and investment analysts
• to give a credit rating to the business as a whole or to its securities
• evaluate the financial statements in order to decide which business they should recommend to
their clients for investment purposes.
 AREAS OF ACCOUNTING
 Financial Accounting
Financial accounting is a process of recording business transactions and summarising them into financial
statements, which are supplied internally within the organisation and externally to various users such as
investors, creditors and government agencies.
 Management Accounting
Management accounting put emphasis on the preparation and analysis of accounting information within the
organisation. Among others, it includes preparing and evaluating business processes, costing, budgeting and
forecasting. It also involves implementing and monitoring internal activities and resources.
 Tax Accounting
Tax accountants help entities to minimise their tax payments. Within the corporation, they will also assist
financial accountants in relation to accounting for income taxes for financial reporting purposes. In the
Malaysian context, IRBM and RMC are the bodies governing and collecting the corporate tax and sales and
service tax respectively.
 AREAS OF ACCOUNTING
 Auditing
Auditing is a process of examining and verifying business accounts and the firm’s system of internal control. Auditing is usually
performed by both external and internal auditors. The external auditors are independent firms that inspect the accounts and
financial statements of an entity and render an opinion on whether the statements present fairly the financial position of the
business and the results of operations. The internal auditors evaluate the risks the organisation faces and ensure effective and
efficient operations, reliable financial and operational information and compliance with laws, regulations and contracts.
 Forensic Accounting
Forensic accounting is a process of investigating and analysing financial evidence followed by giving expert advice in legal
matters, including bankruptcy, falsifications and manipulations of accounts or inventories, insurance claims, negligence claims,
fraud, anti-money laundering, royalty audits, and even family and marital law. The forensic accountants play critical roles in the
investigation of fraud, and normally being called in if any red flags are detected by a business’s internal financial group or as a
result of a routine audit.
 Public Sector Accounting
For government entities, public sector accounting is used to ensure proper allocation and segregation of resources to
government departments. In practice, an organisation normally distinguish between a general fund and special purpose funds,
in which the general fund is used for day-to-day operations, while special funds are established for specific objectives.
 ACCOUNTING PROCESS
1. Source
2. Journal 3. Ledgers
Documents

5. Balance Day
4. Trial Balance 6. Closing Entries
Adjustment

7. Financial 8. Reversing
Statements Entries
 ACCOUNTING PROCESS
Specifically, the steps involved are:
1) Identify the transaction from various source documents such as invoices, purchase orders, bank
statements, cash bills and etc.
2) Record the transaction into the appropriate journal. The journals comprise of sales journal,
purchases journal, return inward journal, return outward journal, cash receipts journal, cash
payments journal and general journal. Some automated accounting system skips this step where
they record directly to the accounts in ledgers.
3) Post the entry in the individual accounts in ledgers. Traditionally known as T-accounts, with debits
on the left side and credits on the right side. Another format of presenting ledger is a three column
ledger account.
4) Prepare a preliminary trial balance which stated the balances, either debit or credit, for all the
accounts at the end of the reporting period such at the end of the month, quarter or year. The
debit and credit balance must be equal.
 ACCOUNTING PROCESS
5) Make adjusting entries for periodically recorded transactions that not derived from specific source
documents such as depreciation and other provisions.
6) Prepare an adjusted trial balance of the accounts, which is after considering all the adjustments.
7) Prepare the financial statements such as the Statement of Financial Position, the Statement of
Profit or Loss, and the Statement of Cash Flows.
8) Perform reversing entries to start fresh in the new period (month or year).
SELF ASSESSMENT QUESTIONS
 MULTIPLE CHOICE QUESTIONS
1. Accounting is best explained as ___________.
A. describing relationship with one another in society
B. describing production systems
C. keeping accounts of goods purchase and sales
D. recording, classifying and explaining all financial transactions
 MULTIPLE CHOICE QUESTIONS
2. The type or branch of accounting that generates reports for the use of
external parties such as account payables, investors, and government
agencies is known as ___________.
A. financial accounting
B. managerial accounting
C. tax accounting
D. forensic accounting
 MULTIPLE CHOICE QUESTIONS
3. What is the main objective of preparing the financial statement?
A. To show the value of the shares in the company.
B. To provide information on financial performance and financial position of a
business.
C. To help management hiring additional workforces.
D. To show managers the results of their departments.
 MULTIPLE CHOICE QUESTIONS
4. Which one of the following is not an external user of accounting
information?
A. Investor
B. Creditor
C. Manager
D. Customer
 MULTIPLE CHOICE QUESTIONS
5. Which one of the following is a characteristic of a valid business
transaction?
A. It is an event measurable in terms of money.
B. It affects the financial position of the business.
C. It should be supported by a source document.
D. All of the above.
 MULTIPLE CHOICE QUESTIONS
6. From the accounting point of view, which type of business organisation
has no separate legal entity from its owner, that is, the owner(s) is/are
personally liable for the debts of the business?
A. Limited company and partnership.
B. Partnership and sole-proprietorship.
C. Sole-proprietorship and limited company.
D. None of the above.
 MULTIPLE CHOICE QUESTIONS
7. The accounting process involves all of the following EXCEPT
___________.
A. identifying economic transactions that are relevant to the business
B. communicating financial information to users by preparing financial reports
C. recording non-quantifiable economic events
D. analysing and interpreting financial reports
 MULTIPLE CHOICE QUESTIONS
8. The following steps in the accounting cycle have not been listed in the correct order. Re-
arrange the following steps to show the correct steps in the accounting cycle.
a) Adjusted Trial Balance
b) Ledger
c) Trial Balance
d) Journal
e) Source Document
f) Financial Statement
g) Adjustment entries

A. e, b, c, d, e, a, f
B. e, d, b, g, a, c, f
C. e, d, b, c, g, a, f
D. e, g, b, c, d, a, f
 MULTIPLE CHOICE QUESTIONS
9. Which of the following refers to a partnership business?
A. Unlimited liability.
B. Capital contributed by way of ordinary shares.
C. Income from business is not subject to tax.
D. Profit or loss is divided among owners and members.
 MULTIPLE CHOICE QUESTIONS
10. A business that is owned by only one person is called as a
__________.
A. company
B. sole-proprietorship
C. cooperative
D. partnership
THE END