CHAPTER

After completing this chapter, you should be able to understand:

1.1 History of accounting and its definition. 1.2 Functions, objectives and uses of accounting information 1.3 Main users of financial statements 1.4 Difference between book-keeping and accounting 1.5 Types and forms of business entities
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Objective 1

1.1.1 A brief history of accounting 1.1.2 Explain what is accounting.

Evidence of accounting records can be found in the Babylonian Empire (4500 B.C.), in pharaohs' Egypt and in the Code of Hammurabi (2250 B.C.). Fra Luca is the father of accounting. His book Summa (1494) was one of the first published books that became the "textbook" for the next 500 years. His system included most of today's accounting routines.

Accounting

is a system that

Identifies

Records information Relevant that is Communicates

Reliable to help users make better decisions.

Comparable

Accounting is the process of identifying, recording, summarizing and reporting economic information to decision makers in the form of financial statements.

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Objective 2

1.2 Functions and uses of financial statements

To provide information about the financial position, performance and cash flow of an enterprise that is useful to a wide range of users in making economic decisions. To provide information about the assets, liabilities, equity, income and expenses (including gains and losses) of an enterprise. To provide information on the stewardship of management i.e. the accountability of management to the resources entrusted to them
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Financial Position (Balance Sheet) -shows the economic resources (assets) it controls, its financial structure, liquidity, solvency and its ability to adapt to changes in the environment at a point in time. Financial Performance (Income Statement) -provides information about the income generated and the expenses incurred by the enterprise for the period.

Changes in Financial Position (Cash flow statement) Show the changes to the cash and cash equivalent between two periods. Also shows cash received and used from its activities of operation, investment and financing.

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Internal users eg. marketing managers, production supervisors, finance directors, and company officers. they need detailed information like financial comparison of operating alternatives, projection of income from new sales, and forecasts of cash needs for the coming year on a timely basis in running the business.

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External users Investors to make decisions whether to buy, hold, or sell their share in the company. Tax authority check for companys tax compliance. E.g. LHDN Security Commission (SC) to make sure that the company is operating within the prescribed rules. Customers observe whether company continues to maintain product quality and warranty and then decide whether to continue supporting its products.

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External users Labour union want to know whether the company can afford to give pay raises or benefits. Economic planners to forecast economic activities.

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Book-keeping: Is the basis of accounting Confines itself to recording posting balancing and preparation of trial balance. It is done by junior staff because the nature is clerical. It records transactions in a significant and orderly manner. It covers journalizing, posting and extracting of balances. Accounting: Includes book-keeping. Extends to preparation of final accounts after incorporating year end adjustments. It is done by senior staff because the nature of the job requires imagination, skill and analytical ability. It classifies, summarizes and provides information. It covers preparation of final accounts and balance sheet.

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Objective 5 Describe the types of business and forms of business organization

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Sole-Proprietorship
owned by one individual,

more than 70% of business organizations in Malaysia are organized by proprietorships,

easy and low cost of organizing, financial resources are limited to the owners resources, and

commonly used by small businesses such as hardware stores, laundries, restaurants, and grocery shop.
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Partnership
owned by two or more individuals, about 10% of business organizations in Malaysia are organized by partnerships,

combine the skills and resources of more than one person, and
like proprietorships, small local businesses such as automotive repair shops, music stores, beauty salons, and clothing stores may be organized as partnerships.

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Limited liability company (LLC)

combines attributes of a partnership and a corporation in that it is organized as a corporation. can elect to be taxed as a partnership a popular alternative to a partnership

has tax and liability advantages to the owners.

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Service Business
Les Copaque Malaysia Airlines System (MAS) Maybank Corporation Seri Malaysia PWC

Service
Entertainment Transportation Financial services Hospitality and lodging Auditing

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Merchandising Business
Giant Amazon.com Toy R Us Pensonic Cheetah

Product
General merchandise Internet books, music, video Toys Consumer electronics Apparel

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Manufacturing Business
General Motors Corporation Nokia Acer Adidas F & N Company Samsung

Product
Cars, trucks, vans Cell phones Personal computers Athletic shoes and apparel Beverages Stereos and televisions

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Malaysian Institute of Accountants (MIA)

Malaysian Institute of Certified Public Accountants (MICPA)

Accounting Professional bodies in Malaysia

Malaysian Accounting Standards Board (MASB)

Financial Reporting Foundation (FRF)

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