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WEEK 1 LEARNING OBJECTIVES

WEEK 1 LEARNING OBJECTIVES. After studying this lesson, you should be able to understand: Brief history of accounting development Element and the brief idea of financial statements Definition of accounting Role of accounting Accounting profession and accounting bodies

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WEEK 1 LEARNING OBJECTIVES

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  1. WEEK 1LEARNING OBJECTIVES After studying this lesson, you should be able to understand: • Brief history of accounting development • Element and the brief idea of financial statements • Definition of accounting • Role of accounting • Accounting profession and accounting bodies • Fundamental concepts and assumptions in accounting

  2. How Has Accounting Developed? Mesopotamians record tax receipts on clay tablets. 3000 B.C.

  3. How Has Accounting Developed? Luca Pacioli published first textbook describing a comprehensive double-entry bookkeeping system. 3000 B.C. 1494

  4. How Has Accounting Developed? The industrial revolution of the 19th century generated the need for large amounts of capital to finance the enterprises that supplanted individual craftsmen. 3000 B.C. 1494 1800’s This need resulted in the corporate form of organization and the need to provide investors with reports showing the financial position and the results of operations.

  5. How Has Accounting Developed? Accounting professionals in this country organized themselves in the early 1900’s and worked hard to establish certification laws, standardized audit procedures, and other attributes of a profession. 3000 B.C. 1494 1800’s 1900’s

  6. How Has Accounting Developed? Between 1932 to 1934 the American Institute Accountants and the New York Stock Exchange agreed on five broad principles of accounting. 3000 B.C. 1494 1800’s 1900’s 1932to1934 1933&1934 The Securities Act of 1933 and the Securities Exchange Act of 1934 gave the Securities and Exchange Commission (SEC) the authority to establish accounting principles for companies whose securities had to be registered with the SEC.

  7. How Has Accounting Developed? Although the SEC has the authority to establish accounting principles, the standard-setting process has been delegated to other organizations over the years. 3000 B.C. 1494 1800’s 1900’s 1932to1934 1939to1959 1933&1934 The Committee on Accounting Procedure of the American Institute of Accountants issued 51 Accounting Research Bulletins that dealt with accounting principles.

  8. How Has Accounting Developed? In 1959, the Accounting Principles Board (APB) replaced the Committee on Accounting Procedure as the standard-setting body. 3000 B.C. 1494 1800’s 1900’s 1932to1934 1939to1959 1959 1933&1934 The APB ultimately issued 39 Opinions on serious accounting issues, but it failed to develop a conceptual underpinning for accounting.

  9. How Has Accounting Developed? The Financial Accounting Foundation (FAF) was created and established the Financial Accounting Standards Board (FASB) as the authoritative standard-setting body within the accounting profession. 3000 B.C. 1494 1800’s 1900’s 1932to1934 1939to1959 1959 1973 1933&1934 The FASB has issued 145 Statements of Financial Accounting Standards that have established standards of accounting and reporting for particular issues.

  10. How Has Accounting Developed? The Sarbanes-Oxley Act of 2002 creates a five-member Public Company Accounting Oversight Board (PCAOB) which has the authority to set and enforce auditing, attestation, quality control, and ethics standards for public companies. 3000 B.C. 1494 1800’s 1900’s 1932to1934 1939to1959 1959 1973 1933&1934 2002

  11. The Development of Accounting in Malaysia MACPA was the first accounting body formed under the Companies Ordinance 1958 1958. The Malaysian Association of Certified Public Accountants (MACPA)

  12. The Development of Accounting in Malaysia Audit practices in Malaysia are governed by the Companies Act 1965, which adapted from Australian Uniform Companies Act 1961, which in turn was based on the UK Companies Act 1948 1958 1965

  13. The Development of Accounting in Malaysia The MACPA continued to play its role as the body that provided accounting education, training and rule setting in Malaysia until 1967 1958 1965 1967 Recognizing the importance of the accounting profession and its role in sustaining economic and business development, Malaysian government enacted the Accountants Act 1967 under which the Malaysian Institute of Accountants (MIA) was established

  14. The Development of Accounting in Malaysia Between 1983 to 1993 the government influences accounting and reporting practices through statutory regulations for example Ninth Schedule of the Companies Act, Security Industry Act 1983, the Islamic Banking Act 1983, Banking and Financial Institution Act 1989 and Security Commission Act 1993. 1958 1965 1967 1983 to1993 The Securities Commission Act of 1993 gave the Securities and Exchange Commission (SEC) the authority to establish accounting principles for companies whose wish to be quoted on Kuala Lumpur Stock Exchange (KLSE).

  15. The Development of Accounting in Malaysia The Malaysian Accounting Standards Board (MASB) is established under the Financial Reporting Act 1997 (the Act) as an independent authority to develop and issue accounting and financial reporting standards in Malaysia. The Malaysian Association of Certified Public Accountants (MACPA) became"The “Malaysian Institute of Certified Public Accountants" (MICPA) on January 29, 2002. 1958 1965 1967 1983 to1993 1997 to 2002 • The Principal Objects of the Institute as set out in the Memorandum and Articles of Association are as follows : • To advance the theory and practice of accountancy in all its aspects. • To recruit, educate, train and assess by means of examination or otherwise a body of members skilled in these areas. • To maintain high standards of practice and professional conduct by all its members. • To do all such things as may advance the profession of accountancy in relation to public practice, industry, commerce, education and the public service.

  16. The Development of Accounting in Malaysia The MASB had announced the effort to bring Malaysia to be in full convergence with the International Financial Reporting Standards (IFRS) by 2012. 1958 1965 1967 1983 to 1993 1997 to2002 2012

  17. What is accounting? The language of business. A means to communicate financial information. A way to convey information about a business to users.

  18. Identifying Measuring Communicating Economic information about an entity For decisions and informed judgments > What is Accounting? Accounting is the process of:

  19. Accounting divisions Accounting has two main divisions: • Financial accounting • Primarily prepared for users external to the company. • Revenues, earnings, assets, etc. • Management accounting • Primarily for internal purposes • Costing, budgeting, net present value, etc. • This lecture will focus only on financial accounting. Introduction to Accounting

  20. Financial Accounting Financial accounting generally refers to the process that results in the preparation and reporting of financial statements for an entity. Financial accounting is primarily externally oriented and concerned with the historical results of an entity’s performance.

  21. Users and Uses of Accounting Information

  22. Role of Accounting • Means of communication • As “ language of business” • Information conveyed to various parties within organisation as well as external parties • Form of communication depends on information do be conveyed and types of users • provide information for decision making

  23. Role of Accounting • Means of establishing accountability • Accountability: held responsible to a higher authority for actions carried out • Employees accountable to management, management accountable to owners, organization accountable to government and society • Accounting provides information to enable assessment of performance to be made, as a result accountability can be established

  24. Role of Accounting • Planning and control tool • Planning includes determining objectives to be achieve and ways of achieving the objectives • Control involves comparison of actual performance and expected performance • Aid to users of accounting information/interested parties

  25. Business Stakeholders A business stakeholderis a person orentity having an interest in the economic performance of the business.

  26. STAKEHOLDERS External: Customers, creditors, government Internal: Owners, managers, employees Identify stake-holders. 1 Assess stakeholders’ informational needs. 2 The Process of Providing Information

  27. Design the accounting information system to meet stakeholders’ needs. Record economic data about business activities and events. 3 4 The Process of Providing Information Accounting Information System

  28. STAKEHOLDERS Internal: Owners, managers, employees External: Customers, creditors, government Prepare accounting reports for stakeholders. 5 The Process of Providing Information Accounting Information System

  29. Accounting reports, called financial statements, provide summarized information to the owner.

  30. Financial statement – the financial information tool Income statement • The business performance for the year/ evaluation period • Revenue • Expenses • Profit or loss Balance sheet • The financial position of the business as at the year end • Asset = liabilities + Owner’s Equity

  31. Financial statement – the financial information tool Statement of Changes in Equity • The equity position of the company as at the year end • Owner’ Equity (beginning) • Owner’ Equity (ending) Cash Flow Statement • The cash flow of the company for the year • Cash in flow • Cash out flow

  32. NetSolutions Income Statement For the Month Ended November 30, 2005 Fees earned $7 500 00 Operating expenses: Wages expense $2 125 00 Rent expense 800 00 Supplies expense 800 00 Utilities expense 450 00 Miscellaneous expense 275 00 Total operating expenses 1 135 00 To the statement of owner’s equity Net income $3 050 00

  33. Investment on November 1 $25 000 00 Net income for November 3 050 00 $28 050 00 NetSolutions Statement of Owner’s Equity For the Month Ended November 30, 2005 Chris Clark, capital, November 1, 2005 $ 0 From the income statement Less withdrawals 2 000 00 Increase in owner’s equity 26 050 00 Chris Clark, capital, November 30, 2005 $26 050 00 To the balance sheet

  34. NetSolutions Balance Sheet November 30, 2005 From the statement of owner’s equity Assets Liabilities Cash $ 5 900 00 Accounts Payable $ 400 00 Supplies 550 00 Owner’s Equity Land 20 000 00 Chris Clark, cap. 26 050 00 Total liabilities and Total assets $26 450 00 owner’s equity $26 450 00 This balance sheet presented using the accountform

  35. NetSolutions Statement of Cash Flows For the Month Ended November 30, 2005 Cash flows from operating activities: Cash received from customers $ 7 500 00 Deduct cash payments for expenses and payments to creditors 4 600 00 Net cash flow from operating activities 2 900 00 Cash flows from investing activities: Cash payment for acquisition of land (20 000 00 Cash flows from financing activities: Cash received as owner’s investment $25 000 00 Deduct cash withdrawal by owner 2 000 00 Net cash flow from financing activities 23 000 00 Net cash flow and Nov. 30, 2005 cash bal. $ 5 900 00 ) Should match Cash on the balance sheet

  36. Fundamental concepts Financial accounting categorizes all transactions and events based on their substance. • It is very important that the substance of a transaction be accurately reflected by financial accounting because the users of the information are using it with the assumption that these categorizations are being made accurately. • If money invested by owners was reported as revenue, this would be counter to the fundamental definition of revenue (i.e. that it results from the operations of the company). • The separation of income and capital is a fundamental concept of financial accounting. Introduction to Accounting

  37. Notes to Financial Statements • Summary of significant accounting policies. 2. Additional information about the summary totals found in the financial statements. 3. Disclosure of important information that is not recognized in the financial statements. 4. Supplementary information required by the Malaysian Accounting Standards Board (MASB) or the Securities Commission (SC).

  38. Limitations of Financial Statements • Limited to information which can be expressed in quantitative terms. • Largely confined to an analysis of past events. • Accounting is not an exact science. • Most information expressed in monetary units

  39. Fundamental concepts • Entity concept • Going concern • Unit of measure • Periodic reporting Introduction to Accounting

  40. Qualitative characteristics of Financial Information • Comparability • Information can be compared with : • Information produced in the previous year • Information produced by other businesses • Understandability • Users should be able to understand and can make good decision from such information

  41. Qualitative characteristics of Financial Information • Relevance • Information is relevant if it influence a decision • Information has predictive value (helps users to make decisions about the future) • Has confirmatory value (helps users to evaluate their past decisions)

  42. Qualitative characteristics of Financial Information • Reliability • Information can be depended on • Complete information and • free from significant error and bias

  43. Accounting Assumptions and Principles • Separate Entity • Going concern • Money Measurement • Accounting Period • Matching Principle • Consistency • Conservatism/Prudence • Realisation Principle

  44. Fundamental concepts Entity concept • There are three basic structures of business • Sole proprietorship • Partnership • Corporation • A sole proprietorship is not a legal entity separate from its owner • A partnership is not a legal entity separate from its owners • These are both sub-components of their owners/partners for legal purposes • A corporation is a separate legal entity Introduction to Accounting

  45. Fundamental concepts Going concern • It is assumed that an entity will complete its current plans, use its existing assets, and meet its obligations in the normal course of business. Introduction to Accounting

  46. Fundamental concepts Unit of measure • In order for accounting to present information that is useful, it must be able to express things in a common unit of measure. • The unit of measure in Malaysia is usually the RM (Ringgit Malaysia) Introduction to Accounting

  47. Fundamental concepts Periodic reporting • Meaningful financial information about an entity can be provided for periods of time that are shorter than the life of an entity. Introduction to Accounting

  48. Conservatism/Prudence • Ensuring that profit is not shown as being too high or that assets are shown too high a value and that the financial statements are neutral i.e. that neither gain nor losses are understated or overstated

  49. Matching Principle • Under the matching concept, revenues for a period are matched with the expenses incurred in generating the revenue. • Expenses of the business entity is recognised when the revenue related to the said expense is recognised

  50. Consistency Principle • Required the reporting entity to use the accounting methods over consecutive time periods (i.e no changes from year to year) • All item must be treated similarly from year to year. • Does not mean that accounting method cannot be changed (refer to MASB 1)

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