Week 1 - Lecture Prinsip Perakaunan Principles of Accounting (Bt11003)

Sekolah Perniagaan dan EkonomiSchool of Business and Economics

Universiti Malaysia SabahSemester I, 2009/2010

PRINSIP PERAKAUNANPRINCIPLES OF ACCOUNTING

(BT11003)

WEEK 1 - LECTURE

1BT11003, SPE, UMS

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LECTURE OBJECTIVES

• To explain the meaning of accounting

• To identify users and uses of accounting

• To identify the accounting process

• To explain the meaning of generally accepted accounting principles (GAAP) and concepts

• To identify the main financial statements

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LECTURE OUTLINE

• What is accounting?

• Accounting profession & regulatory bodies

• Accounting process

• Accounting concepts and principles

• Financial statements

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WHAT IS ACCOUNTING?

“Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions” – Statement of Accounting Principles Board No.4

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TYPES OF INFORMATION

• Quantitative information: Any information, which relates to something, which can be calculated, counted or measured

• Financial information: Any information which can be calculated in monetary denomination or terms

• Accounting information: Any information which is produced through the accounting process

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ECONOMIC ENTITY (1)

• Bodies that exist separately and in varying sizes for the sole purpose of serving the needs of communities

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ECONOMIC ENTITY (2)

ECONOMIC ENTITY

LIMITED COMPANIES

PARTNERSHIPS

SOLEPROPRIETERSHIPS

NON-PROFIT BUSINESS

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ECONOMIC ENTITY (3)

ECONOMIC ENTITY

NON-PROFIT BUSINESS

SERVICE

MERCHANDISING

MANUFACTURING

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PARTIES INTERESTED IN ACCOUNTING INFORMATION (1)

• External parties: – Potential investors– Shareholders– Banks and financial institutions (creditors/lendors)– Academicians– Tax authorities– Other companies (competitors)– Public

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PARTIES INTERESTED IN ACCOUNTING INFORMATION (2)

• Internal parties:– Board of directors– Management– Employees/Union


FINANCIAL VS MANAGEMENT ACCOUNTING

• Financial Accounting: Produces financial statements for the benefit of external parties

• Management Accounting: Produces financial reports for management’s use


ACCOUNTING PROFESSION (1)

• Malaysian Institute of Accountants (MIA), formed under the Accountants Act 1967, is responsible for the accounting profession in Malaysia

• Malaysian Institute of Certified Public Accountants (MICPA), formed in 1958, is another professional body with contribution in standards formulation, publication of guides and articles and conducting professional examination



• Accountants are in various economic entities – companies, accounting firms, not-for-profit organisations, etc

• Accounting firms provide financial statements preparation, auditing and consultancy services

• Code of Ethics adopted by the professional bodies spell out the functions, quality of service and manner of conduct of accountants



• Regulatory Bodies (1)– Companies Commission of Malaysia (CCM):

Established under Companies Act 1965 and its main function is to regulate registration of companies

– Securities Commission: Established under Securities Commission Act 1993 and its main function is to control and supervise securities transactions



• Regulatory Bodies (2)– Bursa Saham Malaysia: Main function is to regulate

listing on the Malaysian bourse– Foreign Investment Committee (FIC) / Ministry Of

International Trade and Industry


THE ACCOUNTING PROCESS

MEASURING & RECORDING

IDENTIFYINGREPORTING

(COMMUNICATING)

Choose what events (transactions) are business in nature and have impact on an entity’s financial position

Placing monetary values (Ringgit and Sen) on transactions identified as business transactions

Provision of accounting and financial information to the various interested parties


BOOKKEEPING VS. ACCOUNTING

• Bookkeeping is only a part of the accounting process and covers only recording of transactions

• Other scope of accounting include accounting systems, auditing, budgeting, cost analysis, forecasting, taxation and accounting information analysis


ACCOUNTING CONCEPTS & PRINCIPLES

• Generally Accepted Accounting Principles (GAAP) are specific guidelines for the preparation of financial statements and “cover conventions, rules and procedures, which are necessary to determine the accounting practice which is acceptable at any one time” – Statement of Accounting Principles Board No.4

• GAAP change over time and are derived from experiences of practitioners in the accounting field and business to meet the needs of users and preparers of financial statements


ACCOUNTING CONVENTIONS

• Basis of accounting theory and practice• Consist of concepts and principles

– Concepts: Opinion on accounting which have wider scope i.e. covering a few situations

– Principles: Based on concepts and specific to a certain topic


ACCOUNTING CONCEPTS (1)

4 CONCEPTS• The Entity Concept:

– An assumption that an economic entity is separate from other organisations and individuals and clear boundaries must be drawn around each entity

– Confusion may arise from unclear boundaries

• The Going-Concern Concept: – A concept that accounting records are prepared with

the assumption that the entity will continue operations in the foreseeable future


ACCOUNTING CONCEPTS (2)

• The Monetary Stability Concept: – An assumption that the value of currency used is

stable and any changes in the value of the currency is insignificant

• The Accounting Period Concept: – A concept that financial reports based on accounting

records are produced within a specified time period, usually over a year


ACCOUNTING PRINCIPLES (1)

8 PRINCIPLES• Disclosure Principle:

– All material information must be disclosed or published

• Objectivity Principle: – All information disclosed must be objective i.e.

information is true and can be verified by other parties



• Cost Principle: – Assets acquired must be recorded at the price paid

for in the transaction

• Consistency Principle: – Same accounting methods are applied over

consecutive time periods– A different method may be used if the method is more

relevant and objective due to a change in circumstances



• Conservatism Principle: – In valuation of assets, the lower of cost valuation must

be opted for. – The principle also prevents overstatement of asset

values and profit/income

• Matching Principle: – Expenses of an entity must be recognised when the

revenue of the said expense is recognised.



• Realisation Principle: – Revenue can be recognised at the point of sale and

not at the point when debt is recovered.– Also known as the Accrual Principle

• Materiality Principle: – Importance is placed on material information, i.e.

those information than can affect’s one ability to make decisions

– Judgment is required to decide if information is material or not


ACCOUNTING RULE & PROCEDURES

• Apart from conventions, GAAP also consists of rules, procedures and methods

• In Malaysia, Malaysian Accounting Standards Boards (MASB), a body established under the Financial Reporting Act 1997, is responsible to issue standards and statement of principles for accounting

• MASB issued standards (FRS) are based on those issued by the International Accounting Standards Board (IFRS)


TRUE AND FAIR CONCEPT

• A requirement for all limited companies under Companies Act 1965

• Financial statements issued by an entity must reflect truth and fairness

• GAAP helps to achieve this by:– Controlling the presentation of financial statements– Enhancing comparability of the financial position and

performance between entities


FINANCIAL STATEMENTS (1)

• Financial statements for limited companies are known as financial reports and are required under for all limited companies under Companies Act 1965


FINANCIAL STATEMENTS (2)

• The four main financial statements are– Income statement: Reflects the financial performance

of a company over a period of time– Statement of Changes in Equity: Reflects the changes

of equity position of the owners of a company over a period of time

– Balance Sheet: Reflects the financial position of a company at a point in time

– Cash flow statement: Reflects the cash flow of a company over a period of time


WEEKS 1 & 2 ASSIGNMENT

• Week 1 / Chapter 1: – Questions 2, 6, 9, 12 and 15 (Do any 3)– Due date: Before tutorial starts (from 20th July 2009)

• Week 2 / Chapter 2: – Questions 1, 2 and 7 (Do any 1)– Problems 25 and 28 (Do Both)– Due date: Before tutorial starts (from 20th July 2009)

Week 1 - Lecture Prinsip Perakaunan Principles of Accounting (Bt11003)

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