TOPIC 1 INTRODUCTION TO ACCOUNTING What is Bookkeeping? • The process of recording transactions accurately and systematically in accordance with certain principles of rules. • Is a part of accounting. SO 1 Explain what accounting is. What is Accounting? • Accounting is the process of classifying, recording and summarizing of financial transactions and interpreting the results to users of financial statements to enable them to make decision. SO 1 Explain what accounting is. What is Accounting? • Accounting involve the process of: • Identifying • Measuring • Recording • Communicating SO 1 Explain what accounting is. Accounting vs Bookkeeping Accounting vs Bookkeeping Accounting vs Bookkeeping Accounting vs Bookkeeping Accounting vs Bookkeeping Accounting vs Bookkeeping Accounting vs Bookkeeping SO 1 Explain what accounting is. Accountant • A qualified person who is trained in bookkeeping and in the preparation, auditing and analysis of accounts. • Accountant prepare annual reports and financial statements for planning and decision making and provide advice on tax laws and investment opportunities. SO 1 Explain what accounting is. What is Accounting? Who Uses Accounting Data Internal Users Human Resources External Users Taxing Authorities Labor Unions Finance Management Customers Creditors Marketing Regulatory Agencies Investors SO 2 Identify the users and uses of accounting. Branches of Accounting • • • • • • Financial Accounting Cost Accounting Management Accounting Auditing Taxation Forensic Accounting SO 1 Explain what accounting is. Types of Business Entities Broadly, there are 5 main types of business entities in Malaysia which are: • • • • • Sole Proprietorship Partnership Limited Liability Partnership, also known as LLP Private Limited Company, commonly known as Sendirian Berhad or Sdn Bhd Public Limited Company, locally known as Berhad SO 1 Explain what accounting is. Types of Business Entities Sole Proprietorship • • • • This type of entity is owned solely by only one individual. His or her liability is unlimited. This means that when a business or is declared bankrupt, creditors will be able to sue the sole proprietor’s owner for all the debts owned to respective merchants. Personal income, personal assets as well as employment income are all liable in this context. Only Malaysian citizens or permanent residents are permitted to register under this business entity. SO 1 Explain what accounting is. Types of Business Entities Partnership • • • Partnership is similar to sole proprietorship except there are more than 1 owner. In other words, it is like an extended version of sole proprietorship. Partnership comprises of a joint-entity holder with 2 or more people and a maximum of 20 members. This type of business set ups is most suitable for professional firms such as auditors and lawyers. The partners in a partnership business entity are also bounded by unlimited liability. SO 1 Explain what accounting is. Types of Business Entities Limited Liability Partnership (LLP) • LLP is a hybrid between a partnership and private limited company. It is similar to the conventional partnership but with the advantages of a private limited company. Below are some of the features of LLP: • It is a body corporate and a separate legal entity from its partners. • LLP has perpetual successions • The LLP is capable of suing and being sued, acquiring, owning, holding and developing or disposing of property. • LLP has fewer compliance requirements and is a much more affordable business vehicle. SO 1 Explain what accounting is. Types of Business Entities Private Limited Company (Sdn Bhd) • • A private limited company by shareholding is known as Sdn Bhd Company. This type of company is a separate legal entity from its owners, which means this company is considered as a legal ‘person’ that can buy or sell property, present into legal contracts, sue or get sued in courts of law. SO 1 Explain what accounting is. Types of Business Entities Public Limited Company • • • A public limited company or Berhad (Bhd) is rather similar to private limited companies except that its shares can be offered to the public for fixed periods and any other forms of subscription. Public limited companies are required to have a minimum of 2 shareholders and has more than 50 members and maximum number of members is unlimited. This type of business entity usually involves the company being listed and is governed by the Securities Commission of Malaysia. Public listed companies are usually the preferred business model for large businesses. SO 1 Explain what accounting is. Basic Accounting Concept Historical Cost • • • Historical cost is a term used instead of the term cost. Cost and historical cost usually mean the original cost at the time of a transaction. The term historical cost distinguishes an asset's cost from its replacement cost, current cost, or inflation-adjusted cost. Generally, the cost principle or historical cost principle requires that an asset should be reported at its cash or cash equivalent amount at the time of the transaction and should include all costs necessary to get the asset in place and ready for use. SO 1 Explain what accounting is. Basic Accounting Concept Prudence • • Prudence concept is a concept that has been put in place to ensure that the person who is making the financial statements makes sure that the assets and income are not overstated so as to make sure the company is not overvalued and the expenses are not understated so as to make sure that the company is not rightly valued. The prudence principle in accounting is many times described using the phrase “Do not anticipate profits, but provide for all possible losses.” SO 1 Explain what accounting is. Basic Accounting Concept Consistency • • The concept of consistency means that accounting methods once adopted must be applied consistently in future. ... If for any valid reasons the accounting policy is changed, a business must disclose the nature of change, the reasons for the change and its effects on the items of financial statements. SO 1 Explain what accounting is. Basic Accounting Concept Matching • • The matching concept is an accounting practice whereby firms recognize revenues and their related expenses in the same accounting period. Firms report "revenues," that is, along with the "expenses" that brought them. The purpose of the matching concept is to avoid misstating earnings for a period. SO 1 Explain what accounting is. Basic Accounting Concept Accrual • Accrual Concept. Accrual concept is the most fundamental principle of accounting which requires recording revenues when they are earned and not when they are received in cash, and recording expenses when they are incurred and not when they are paid. SO 1 Explain what accounting is. Basic Accounting Concept Materiality • • • In accounting, materiality refers to the impact of an omission or misstatement of information in a company's financial statements on the user of those statements. If it is probable that users of the financial statements would have altered their actions if the information had not been omitted or misstated, then the item is considered to be material. If users would not have altered their actions, then the omission or misstatement is said to be immaterial. SO 1 Explain what accounting is. Basic Accounting Concept Business Entity • • • The business entity concept states that the transactions associated with a business must be separately recorded from those of its owners or other businesses. Doing so requires the use of separate accounting records for the organization that completely exclude the assets and liabilities of any other entity or the owner. Without this concept, the records of multiple entities would be intermingled, making it quite difficult to discern the financial or taxable results of a single business. SO 1 Explain what accounting is. Basic Accounting Concept Going Concern • • • The going concern principle is the assumption that an entity will remain in business for the foreseeable future. Conversely, this means the entity will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices. By making this assumption, the accountant is justified in deferring the recognition of certain expenses until a later period, when the entity will presumably still be in business and using its assets in the most effective manner possible. SO 1 Explain what accounting is. Basic Accounting Concept Objectivity • • The objectivity principle is the concept that the financial statements of an organization be based on solid evidence. The intent behind this principle is to keep the management and the accounting department of an entity from producing financial statements that are slanted by their opinions and biases. SO 1 Explain what accounting is. Basic Accounting Concept Money Measurement • Money Measurement Concept in accounting, also known as Measurability Concept, means that only transactions and events that are capable of being measured in monetary terms are recognized in the financial statements. SO 1 Explain what accounting is. Basic Accounting Concept Periodicity (Time Period) • In accounting, periodicity means that accountants will assume that a company's complex and ongoing activities can be divided up and reported in annual, quarterly and monthly financial statements. SO 1 Explain what accounting is. TOPIC 2 CONCEPT OF COST ACCOUNTING Definition of Cost Accounting • Cost accounting is a form of managerial accounting that aims to capture a company's total cost of production by assessing the variable costs of each step of production as well as fixed costs, such as a lease expense. SO 1 Explain what accounting is. Definition of Cost Accounting • Cost accounting is a form of managerial accounting that aims to capture a company's total cost of production by assessing the variable costs of each step of production as well as fixed costs, such as a lease expense. • Used internally by management in order to make fully informed business decisions. • Unlike financial accounting, which provides information to external financial statement users, cost accounting is not required to adhere to set standards and can be flexible to meet the needs of management. • Cost accounting considers all input costs associated with production, including both variable and fixed costs. • Types of cost accounting include standard costing and activity-based costing. SO 1 Explain what accounting is. Cost vs Financial Accounting • • • • While cost accounting is often used by management within a company to aid in decision making, financial accounting is what outside investors or creditors typically see. Financial accounting presents a company's financial position and performance to external sources through financial statements, which include information about its revenues, expenses, assets, and liabilities. Cost accounting can be most beneficial as a tool for management in budgeting and in setting up cost control programs, which can improve net margins for the company in the future. One key difference between cost accounting and financial accounting is that, while in financial accounting the cost is classified depending on the type of transaction, cost accounting classifies costs according to information needs of the management. SO 1 Explain what accounting is. Cost vs Financial Accounting • Cost accounting, because it is used as an internal tool by management, does not have to meet any specific standard such as generally accepted accounting principles (GAAP) and, as a result, varies in use from company to company or department to department. SO 1 Explain what accounting is. Classification of Cost • • Fixed costs are costs that don't vary depending on the level of production. These are usually things like the mortgage or lease payment on a building or a piece of equipment that is depreciated at a fixed monthly rate. An increase or decrease in production levels would cause no change in these costs. Variable costs are costs tied to a company's level of production. For example, a floral shop ramping up their floral arrangement inventory for Valentine's Day will incur higher costs when it purchases an increased number of flowers from the local nursery or garden center. SO 1 Explain what accounting is. Classification of Cost • • • Operating costs are costs associated with the day-to-day operations of a business. These costs can be either fixed or variable depending on the unique situation. Variable costs are costs tied to a company's level of production. For example, a floral shop ramping up their floral arrangement inventory for Valentine's Day will incur higher costs when it purchases an increased number of flowers from the local nursery or garden center. Operating costs are costs associated with the day-to-day operations of a business. These costs can be either fixed or variable depending on the unique situation. SO 1 Explain what accounting is. Classification of Cost • • Direct costs are costs specifically related to producing a product. If a coffee roaster spends five hours roasting coffee, the direct costs of the finished product include the labor hours of the roaster and the cost of the coffee beans. Indirect costs are costs that cannot be directly linked to a product. In the coffee roaster example, the energy cost to heat the roaster would be indirect because it is inexact and difficult to trace to individual products SO 1 Explain what accounting is.
