TOPIC 1 INTRODUCTION TO ACCOUNTING

TYPES OF BUSINESS ORGANISATION i) Sole Trader / proprietorship ii) Partnership iii) Company CHARACTERISTICS OF VARIOUS TYPES OF BUSINESS ORGANISATIONS i) Source of capital ii) Ownership iii) Existence iv) Liability v) Management and control vi) Profit sharing vii) Books and Accounts

DEFINITIONS OF ACCOUNTING TERMS i) Accounting ii) Book keeping iii) Accounting cycle/process iv) Business / accounting transaction v) Accounting period
ACCOUNTING CONCEPTS a) Historical Cost b) Going concern c) Matching d) Prudence/Conservatism e) Consistency f) Monetary/Money Measurement g) Materiality h) Accrual i) Entity j) Duality k) Periodicity

1.1 BUSINESS ORGANISATIONS

Must prepare FINANCIAL STATEMENT
INCOME STATEMENT@ STATEMENT OF COMPREHENSIVE INCOME AND EXPENSES - to know the financial performance (profit/Loss) of a business BALANCE SHEET @ STATEMENT OF FINANCIAL POSITION - to know the financial position (ability to pay debts) of a business

Communicate to INTERESTED USERS

EXTERNAL a) Current/ Potentials shareholders - for investment purposes b) Suppliers/Creditors/Bankers - to know the ability of business to settle debts. c) Customers/consumer of products -interested in getting discounted price from the business.

INTERNAL a) Employees - for job security, bonus, etc. b) Owners - to know financial stability and growth of the business. c) Management team - For planning and controlling purposes

d) Government - to know the ability of business to pay tax

1.2 CHARACTERISTICS OF BUSINESS ORGANISATIONS

CHARACTERISTICS

SOLE TRADER Owners savings/owners properties brought in the business

PARTNERSHIP

COMPANY

Source of capital

Contributed by partners according to The agreement Owned by 2-20 partners (ordinary) 2-50 partners (Professionals) Not a separate entity

Contributed by shareholders through buying of shares Owned by 2-50 s/holders (Sdn Bhd) 2-

Ownership

Owned by 1 person

s/holders (Bhd)

Existence

Not a separate entity

Separate entity

Liability

Unlimited liability

Unlimited liability

Limited liability Manage and control by the Board of Directors appointed by S/holders Profit will be paid to s/holders in a form of dividends Required to keep proper books of accounts and submit annual accounts to Registrar of Company

Management and control Profit Sharing

Manage and control by the partners Manage and control by the owner with or by a Board which consist of a the help from his family and workers few partners Profit belongs to the owner and losses Profit and losses will be shared will also be borne by the owner by partners based on Partnership Agreement Not required to keep proper books of accounts Not required to keep proper books of accounts

Books and Accounts

1.3 BOOKKEEPING AND ACCOUNTING

Is Bookkeeping and Accounting the same? The answer is NO
BOOKKEEPING
-Is part of accounting process and done in accordance with certain principle or rules. -Person responsible to handle the bookkeeping process is a Bookkeeper that has less qualification and skills ACCOUNTING Is the whole process of classifying, recording and summarising the business transactions in monetary terms and interpreting the result to the interested users. -Person responsible to handle the accounting process is an Accountant that posses a certain standard qualification and working experience recognised by the accounting regulatory body.

VS

1.4

ACCOUNTING CYCLE/PROCESS

1.5

BUSINESS / ACCOUNTING TRANSACTIONS

-Refer to financial events/activities which affect an organisation
CASH TRANSACTION -Any business transaction with immediate payment CREDIT TRANSACTION

vs

-Any business transaction which payment is postponed to a future date

1.6

ACCOUNTING PERIOD
-Refer to a specific period of time for an organisation for a purpose of preparing a financial report.
E.g 1: A business starts on 1 January 2000 and closes its account on 31 December every year. therefore, Accounting period = 1 January 2000 until 31 December 2000.

E.g 2: A business starts on 1 July 2000 and closes its account on 30 June every year. therefore, Accounting period = 1 July 2000 until 30 June 2001.

E.g 3: A business starts on 1 April 2001 and closes its account on 31 March every year. therefore, Accounting period =

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E.g 4: A business closes its account on 31 August every year. therefore, Accounting period =

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1.8 ACCOUNTING EQUATION

To start the business Assets = Capital

When the capital is not enough Assets = Capital + Liabilities

When the business starts expanding Assets = Capital + Liabilities + Revenues Drawings Expenses Rearrange the Expanded Accounting Equation Assets + Drawings + Expenses = Capital + Liabilities + Revenues

Double Entry Rules Assets + Drawings + Expenses = Capital + Liabilities + Revenues

DEBIT (DR) CREDIT (CR) CREDIT (CR) DEBIT (DR)

DEBIT A,D,E C,L,R

T account
A,D,E C,L,R

CREDIT

1.9 ACCOUNTING CLASSIFICATION

ASSETS
-Resources owned by the business

NON CURRENT ASSETS Characteristics: i) useful life > 1 year ii) not for resale iii) used in running the daily business operation

CURRENT ASSETS Characteristics: i) Useful life < 1 year ii) Easily converted into cash iii) Easily changing form Stock

Bank/ Cash

Debtors

Investment Intangible Fixed Assets It exist but cannot be seen and cannot be touched. e.g: Franchise, Brand Trademark,Copyright, Goodwill,Patent Amount of money put in long term project or Acquire ordinary shares in another company to get a long term return. e,.g: Fixed deposit in Maybank, Unit trust (ASB, ASN, ASK, ASD,ASS) Shares acquired from Telekom Bhd to get dividend

Tangible Fixed Assets Its physical existence can be seen and can be touched. e.g: Motor vehicles, Building, Furniture and fittings, Office equipment, Computer equipments, land, Premise, Machinery,

CAPITAL
Resources supplied by the owner to the business for the acquisition of assets. e.g: Owner brought in motor vehicle amounting RM 50,000 into the business. Owner transferred RM5,000 from his saving account into the business bank account.

LIABILITIES
Resources borrowed by the business from other party. (Debts/ obligation of a business)

LONG TERM LIABILITIES

Amount borrowed which is not expected to be paid within 1 year.

CURRENT LIABILITIES
Amount borrowed which is expected to be paid within 1 year.

e.g: Mortgage on premises, Debenture, Long term loan

e.g: Accounts payable, Bank overdraft, Short term loan

DRAWING
Cash or goods taken by the owner from the business for personal used. e.g: owner took cash RM 200 from the business to buy a birthday gift for his daughter.

REVENUES
Inflow of cash or assets from the sales of goods or services e.g: Sales of goods or services, Commission received, Interest received, Rental received, Discount received, Dividend received.

EXPENSES
Outflow of cash or cost of assets consumed /services used in the process of earning revenues.
e.g: Purchases of goods, Salary, Interest expense,Rental expense,Bills, Discount allowed etc.