Chapter 1 :

Introduction to
Accounting

NATURE OF FINANCIAL ACCOUNTING

1. Definition of accounting
2. Roles of an accountant
3. Users of accounting information
4. Importance of financial accounting
5. Conceptual framework of financial reporting

Definition of accounting
Accounting is a process of recording, classifying,
summarising and interprating the economic events
of an organization (business or non-business) to
interested users of the information.
RECORDING

CLASSIFYING

INTERPRATING

SUMMARISING

RECORDING

CLASSIFYING

It is concerned with the recording of financial

transactions in an orderly manner, soon after their
occurrence in the proper books of accounts.

It is concerned with the systematic analysis of the

recorded data so as to accumulate the transactions of
similar type at one place. This function is performed by
maintaining the ledger in which different accounts are
opened to which related transactions are posted.

SUMMARISING

It is concerned with the preparation and presentation of

the classified data in a manner useful to the users. This
function involves the preparation of financial statements

INTERPRATING

interpreting the statements in a manner useful to

action ( giving meaning of the financial report)

Roles of an accountant
The primary task of accountants, which extends to all the
others, is to prepare and examine financial records. They
make sure that records are accurate and that taxes are
paid properly and on time. Accountants and auditors
perform overviews of the financial operations of a
business in order to help it run efficiently. They also
provide the same services to individuals, helping them
create plans of action for improved financial well-being.

On the job, accountants:

Examine statements to ensure accuracy
Ensure that statements and records comply with laws and
regulations
Compute taxes owed, prepare tax returns, ensure prompt
payment
Inspect account books and accounting systems to keep up to
date
Organize and maintain financial records
Improve businesses efficiency where money is concerned
Make best-practices recommendations to management
Suggest ways to reduce costs, enhance revenues and improve
profits
Provide auditing services for businesses and individuals

The four main types of accountants

are:

Public accountants: Their clients include corporations, governments and

individuals. They fulfill a broad range of accounting, auditing, tax and
consulting duties.

Management accountants: Also called cost, managerial, corporate or private

accountants. They record and analyze the financial information of the clients
they work for, and provide it for internal use by managers, not the public.

Government accountants: Maintain and examine records of government

agencies, audit private businesses and individuals whose activities are subject
to government regulations or taxations.

Internal auditors: They check for risk management of an organization or

businesses' funds. They then identify ways to improve the process for finding
and eliminating waste and fraud.

Users of Accounting Information

Before we identify the users of accounting
information, we should understand the types
of the business which are :
Proprietorship or Sole Trader
Partnership
Company

TYPES OF THE BUSINESS

Sole
Proprietor
Owned by a
Ownershi
single person.
p
Managed by
Managem
the owner of
ent
business
Unlimited
liability
Owner is
personally
Liability
liable for all
debts of

Partnership
Owned by two or
more persons or
entities.
Managed by
partners.
Unlimited
liability
Partners are
jointly and
severely liable
for all debts of

Company
Owned by
unlimited number
of shareholders.
Managed by the
companys Board
of Directors.
Limited liability
Shareholders
liability is limited
to their
investment in the
company.

Users of Accounting Information

External Users
Investors
Creditors
Members of Nongovernmental
Organisations
Government
Consumers
Research Scholars.

Internal Users
Owners
Management
Employees
Internal auditors

OBJECTIVES OF ACCOUNTING
a) To keep systematic records
b) To protect business properties
c) To ascertain the operational profit or loss
d) To ascertain the financial position of the business
e) To facilitate rational decision making
f) Information System

Accounting ???
The main purpose of accounting is ;
- to ascertain profit or loss during a specified period,
- to show financial condition of the business on a
particular date ;and
- to have control over the firm's property.

BRANCHES OF ACCOUNITNG

FINANCIAL
ACCOUNTING

COST
ACCOUNTING

TAXATION

MANAGEMENT
ACCOUNTING

AUDITING

FORENSIC
ACCOUNTING

Revision
Book-keeping: It is the art of recording in the books of
accounts the monetary aspect of commercial or
financial transactions.
Accounting: It is the means of collecting, summarising
and reporting in monetary terms, information about the
business.

Revision
1. The accounting process does not include:
a. interpreting
b. reporting
c. purchasing
d. observing
e. classifying

2. External users of financial accounting information

include:
a. lenders
b. prospective owners
c. customers
d. labor unions
e. all of the above

3. Which of the following is the internal user of

accounting information:
a. Suppliers
b. Management
c. Employee Unions
d. Banks

 Jamal Pintar (JP) is the owner of his own business. On December 31,
JPs assets, liabilities, revenues and expenses were:
Insurance Expenses RM3,000
Miscellaneous Expenses RM900
RM5,000

Accounts Payable RM4,000

Accounts Receivable

Rent Expenses RM2,500

Cash RM14,000

Salaries Expense RM19,000

Equipment RM11,000

Supplies Expense RM1,200

Notes Payable RM4,600

Services Performed RM45,000

Supplies on hand RM700

3. On December 31, total assets are equal to:

a. RM25,700
b. RM19,700
c. RM22,100
d. RM30,700
e. none of the above

 Jamal Pintar (JP) is the owner of his own business. On December 31, JPs
assets, liabilities, revenues and expenses were:

Insurance Expenses RM3,000

Accounts Payable RM4,000

Miscellaneous Expenses RM900

Accounts Receivable RM5,000

Rent Expenses RM2,500

Cash RM14,000

Salaries Expense RM19,000

Equipment RM11,000

Supplies Expense RM1,200

Notes Payable RM4,600

Services Performed RM45,000

Supplies on hand RM700

4. On December 31, net income is equal to:

a. RM18,400
b. RM45,000
c. RM25,000
d. RM17,400
e. none of the above

Conceptual framework
The Conceptual Framework describes the objective of,
and the concepts for, general purpose financial reporting.
It is a practical tool that:
a) assists the IASB to develop Standards that are based
on consistent concepts;
b) assists preparers to develop consistent accounting
policies when no Standard applies to a particular
transaction or event, or when a Standard allows a
choice of accounting policy; and
c) assists others to understand and interpret the
Standards.

Conceptual framework
The objective of the Conceptual Framework is to
improve financial reporting by providing a more
complete, clear and updated set of concepts
A conceptual framework must consider the theoretical
and conceptual issues surrounding financial reporting
and for m a coherent and consistent foundation that will
underpin the development of accounting standards

Conceptual framework
a conceptual framework can be seen as a statement of
generally accepted accounting principles (GAAP) that
form a frame of reference for the evaluation of existing
practices and the development of new ones
As the purpose of financial reporting is to provide useful
information as a basis for economic decision making, a
conceptual framework will form a theoretical basis for
determining how transactions should be measured
(historical value or current value) and reported ie how
they are presented or communicated to users.

The content of the Framework can be summarised as follows:

Identifying the objective of financial statements
The reporting entity (to be issued)
Identifying the parties that use financial statements
The qualitative characteristics that make financial statements useful
The remaining text of the old Framework dealing with elements of
financial statements: assets, liabilities equity income and expenses
and when they should be recognised and a discussion of
measurement issues (for example, historic cost, current cost) and the
related concept of capital maintenance.

Accounting Concepts
Accounting concepts is rules of accounting that should be
followed in preparation of all accounts and
financial statements.

Basic accounting concepts

The four fundamental concepts are
Accruals concept: revenue and expenses are recorded when they occur and not when the cash is
received or paid out;
Consistency concept: once an accounting method has been chosen, that method should be used
unless there is a sound reason to do otherwise;
Going concern: the business entity for which accounts are being prepared is in good condition and
will continue to be in business in the foreseeable future;
Prudence concept (also conservation concept): revenue and profits are included in the
balance sheet only when they are realized (or there is reasonable 'certainty' of realizing them) but
liabilities are included when there is reasonable 'possibility' of incurring them

Basic accounting concepts

Other concepts include;
The historical cost concept stipulates that all assets must be recorded at the original cost and not
the assets current market value. Historical cost refers to the price or the actual cost we paid for in the
first place. Asset value recorded in the account books should be the actual cost paid, and not the
asset's current market value;

Matching (or "Accruals") - Income should be properly "matched" with the expenses of a given
accounting period. Transactions affecting both revenues and expenses should be recognized in the
same accounting period;

Materiality - An item is said to be material if it is sufficiently important to affect our judgment of the
true position of the firm. In other words, any misstatement which affects the decision of a reasonable
user of the statements is deemed to be material. Minor events may be ignored, but the major ones
should be fully disclosed;

Business entity concepts / separate entity concepts: accounting records reflect the
financial activities of a specific business or organization, not of its owners or employees;
Objectivity: financial statements should be based only on verifiable evidence, including
an audit trail;
Money measurement: the accounting process records only activities that can be
expressed in monetary terms (with some exceptions);
Accounting equation: total assets equal total liabilities plus owners' equity;

Accounting period: financial records pertaining only to a

specific period are to be considered in preparing
accounts for that period;
Full disclosure: financial statements and their notes
should contain all relevant data;
Lower of cost or market value: inventory is valued either
at cost or the market value (whichever is lower);

Realization: any change in the market value of an asset

or liability is not recognized as a profit or loss until the
asset is sold or the liability is paid off;
Unit of measurement: financial data should be recorded
with a common unit of measure (ringgit, pound sterling,
yen, etc.).