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TOPIC 1

ACCOUNTING
AND
FINANCE

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 Accounting Vs Finance
What is Accounting? What is Finance?
 Accounting is the  Finance is defined as the
recording of financial management of money
transactions plus storing, and includes activities
sorting, retrieving, like investing, borrowing,
summarizing, and lending, budgeting,
presenting the information saving, and forecasting.
in various reports and  There are three main
analyses. types of finance: (1)
 Accounting is also a personal, (2) corporate,
profession consisting of and
individuals having the (3) public/government.
formal education to carry
out these tasks.
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LEARNING Identify the activities and users
OBJECTIVE associated with accounting.

Accounting consists of three basic activities—it

 identifies,

 records, and

 communicates

the economic events of an organization to interested users.

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 Three Activities
Illustration 1-1
The activities of the accounting process

The accounting process includes

the bookkeeping function.

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 Who Uses Accounting Data

INTERNAL
USERS

Illustration 1-2
Questions that internal
users ask

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 Who Uses Accounting Data

EXTERNAL
USERS

Illustration 1-3
Questions that external
users ask
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LEARNING
OBJECTIVE
Identify the role of accounting in business

Role of accounting

• As business language
• As an information system
• As a decision making tool
• As a planning and control tool

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 Accounting role in business

As business language
• use accounting knowledge to interpret accounting
number
• to understand financial information of a business

As an information system
•Acctg. gather information and communicate them to
the user
•Business transaction will be processed and analyzed to
make it useful to the user
•From raw data to financial statement

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 Accounting role in business
As a decision making tool
•We use accounting information to make decision.
•Each user will have different decision and will
used different type of accounting information.

As a planning and control tool

•Manager are important users of financial
information
•Accounting help them to plan and control business
activities

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LEARNING
OBJECTIVE
Identify the types of accounting

Types of accounting
**Financial Accounting

**Management Accounting

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 Financial & Management
Accounting
Financial Accounting Management Accounting
 Provision of financial  Internal needs of
information on a business
business’s recent  Unlike financial
financial performance accounting, not
targeted at external required by law
users such as  Management
shareholders accounting can be split
 Backward-looking into cost accounting
 Double-entry and decision-making
bookkeeping
 Profit and loss account,
balance sheet and cash
flow statement
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 Overview of Financial and Management
Accounts

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 Major objectives of financial
accounting

1. To report the financial condition of a

business at a point in time.

2. To report changes in the financial

condition of a business over a period of
time.

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 Major objective of
Management accounting

1. To produce a report for management on

the cost of running the business

2. To make a planning and control like

budgeting and standard costing.

3. To make a decision for the survival of the

business: short term and long term
decision making

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 DO IT! 1 Basic Concepts

Indicate whether the following statements are true or false.

1. The three steps in the accounting process are identification,

recording, and communication.

2. Bookkeeping encompasses all steps in the accounting process.

3. Accountants prepare, but do not interpret, financial reports.

4. The two most common types of external users are investors and
company officers.

5. Managerial accounting activities focus on reports for internal users.

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 Generally Accepted Accounting Principles

Financial Statements
Various users  Balance Sheet
need financial  Income Statement
 Statement of Owner's Equity
information  Statement of Cash Flows
 Note Disclosure

The accounting profession

has developed standards Generally Accepted
that are generally accepted
Accounting Principles
(GAAP)
and universally practiced.

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LEARNING Understanding the principle sand assumptions
OBJECTIVE in accounting

Accounting
Principles and
Assumptions

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 BASIC ACCOUNTING POLICIES/CONCEPTS
UNDERLYING FINANCIAL REPORTING.

Accounting policies are specific

principles, bases, conventions, rules and
practices adopted by the enterprise in
preparing and presenting financial
statement

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 Measurement Principles

HISTORICAL COST PRINCIPLE (or cost principle) dictates

that companies record assets at their cost.

FAIR VALUE PRINCIPLE states that assets and liabilities

should be reported at fair value (the price received to sell an asset
or settle a liability).

Selection of which principle to follow

generally relates to trade-offs
between relevance and faithful
representation.

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C4 Measurement Principles

Revenue Recognition Principle

1. Recognize revenue when it is earned. Cost Principle
2. Proceeds need not be in cash. Accounting information is based on
3. Measure revenue by cash received actual cost. Actual cost is
plus cash value of items received. considered objective.

Full Disclosure Principle

Matching Principle
A company is required to report
A company must record its expenses
the details behind financial
incurred to generate the revenue
statements that would impact
reported.
users’ decisions.
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 The historical cost concept determines the
amount initially entered into the accounting
records when the transaction happen

Example: if a building which was bought for RM150,000

five years ago has now increase in value to RM160,000.
The historic cost concept requires that the building
should continue to be shown on the BS at its original
cost of RM150,000

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 accrual basis of accounting, revenue is
recorded as it is earned and an expense
is recorded when incurred.

Matching; revenues for a period are matched

with the expenses incurred in generating the
revenue.
Realisation; recognition of revenue must be
done as its is earned although cash has not yet
received.

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 Assumptions

MONETARY UNIT ASSUMPTION requires that companies

include in the accounting records only transaction data that can be
expressed in terms of money.

ECONOMIC/Business ENTITY ASSUMPTION requires that

activities of the entity be kept separate and distinct from the
activities of its owner and all other economic entities.

 Proprietorship
Forms of Business
 Partnership
Ownership
 Corporation

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 Forms of Business Ownership

Proprietorship Partnership Corporation

 Owned by one  Owned by two or  Ownership

person more persons divided into
Owner is often shares of stock
  Often retail and
manager/operator service-type  Separate legal
 Owner receives businesses entity organized
any profits, suffers under state
 Generally
any losses, and is corporation law
unlimited
personally liable personal liability  Limited liability
for all debts
 Partnership
agreement

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C4 Accounting Assumptions
Now Future
Going-Concern Assumption
Reflects assumption that the
business will continue operating
instead of being closed or sold.
Business Entity Assumption
A business is accounted for
separately from other business
entities, including its owner.
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Monetary Unit Assumption
Express transactions and
events in monetary, or money,
units.
Time Period Assumption
Presumes that the life of a company
can be divided into time periods,
such as months and years.
 Other Concepts

 consistency concept.
 materiality and Aggregation concept
 prudence concept
 objectivity concept
 Double entry
 Substance over form

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 All item must be treated similarly from year to year.
This is known as the consistency concept.

The materiality and Aggregation concept requires that

each material item should be presented separately in the
FS.
• Immaterial item should be aggregated with amounts of
a similar nature and need not be presented separately
in FS
• Factors in determining the materiality are size and the
nature of the item

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 The prudence concept introduced an element of caution
into accounting. Only record income and profits when they
are certain cash inflow; and record liability and losses as
soon as they are recognized

The objectivity concept requires that entries in the

accounting records and the data reported on financial
statements be based on objective evidence.

Double entry
Every business transaction must have two effects on the
financial position of the business concerned.

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 Substance Over Form
This principal states that the accounting treatment of an
item should reflect its economic substance rather than
its legal form

For example, If a business buy a motor vehicle on hire

purchase term. Legal position is that the business does not
become the owner of the vehicle until the last installment
has been paid.
The substance (subject) of the transaction is that the
business owns the asset from the beginning and this is the
way that the transaction will be represented in the FS of the
business.
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 Assumptions

Question
Combining the activities of Kellogg and General Mills
would violate the

a. cost principle.

b. economic entity assumption.

c. monetary unit assumption.

d. ethics principle.

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 DO IT! Building Blocks of Accounting

Indicate whether each of the following statements presented

below is true or false.

1. The historical cost principle dictates that companies

record assets at their cost. In later periods, however,
the fair value of the asset must be used if fair value is
higher than its cost.

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 DO IT! Building Blocks of Accounting

Indicate whether each of the following statements presented

below is true or false.

4. Relevance means that financial information matches

what really happened; the information is factual.

5. A business owner’s personal expenses must be

separated from expenses of the business to comply
with accounting’s economic entity assumption.

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LEARNING Describe the four financial statements
OBJECTIVE and how they are prepared.

Companies prepare four financial statements :

Owner’s Statement
Income Balance
Equity of Cash
Statement Sheet
Statement Flows

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 Net income is needed to determine the
Financial Statements ending balance in owner’s equity.

SOFTBYTE
Income Statement
For the Month Ended September 30, 2017

Illustration 1-9
Financial statements and
their interrelationships

SOFTBYTE
Owner’s Equity Statement
For the Month Ended September 30, 2017

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 SOFTBYTE
Owner’s Equity Statement
For the Month Ended September 30, 2017

Illustration 1-9
The ending
balance in SOFTBYTE
owner’s equity Balance Sheet
is needed in September 30, 2017
preparing the
balance sheet.

Illustration 1-9
Financial statements
and their
interrelationships

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 SOFTBYTE
Financial Balance Sheet
September 30, 2017

Statements

Balance sheet and

income statement
are needed to
prepare statement of
cash flows.
SOFTBYTE
Statement of Cash Flows
For the Month Ended September 30, 2017

Illustration 1-9
Financial statements
and their
interrelationships

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 Income Statement

 Reports the revenues and expenses for a specific period

of time.

 Lists revenues first, followed by expenses.

 Shows net income (or net loss).

 Does not include
investment and
withdrawal transactions
between the owner and
the business in
measuring net income.

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 Owner’s Equity Statement

 Reports the changes in owner’s equity for a specific

period of time.

 The time period is the same as that covered by the

income statement.

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 Balance Sheet

 Reports the assets, liabilities, and owner's equity at a

specific date.

 Lists assets at the top, followed by liabilities and owner’s

equity.

 Total assets must equal total liabilities and owner's

equity.

 Is a snapshot of the company’s financial condition at a

specific moment in time (usually the month-end or year-
end).

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 Statement of Cash Flows

 Information on the cash receipts and payments for a

specific period of time.

 Answers the following:

► Where did cash come from?

► What was cash used for?

► What was the change in the

cash balance?

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 DO IT! 5 Financial Statement Items

Presented below is selected information related to Flanagan Company

at December 31, 2017. Flanagan reports financial information monthly.
Equipment $10,000 Utilities Expense $ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Owner’s Drawings 5,000
(a) Determine the total assets of at December 31, 2017.
(b) Determine the net income reported for December 2017.
(c) Determine the owner’s equity at December 31, 2017.

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 DO IT! Financial Statement Items

Presented below is selected information related to Flanagan Company

at December 31, 2017. Flanagan reports financial information monthly.
Equipment $10,000 Utilities Expense $ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Owner’s Drawings 5,000
(a) Determine the total assets of at December 31, 2017.

The total assets are $27,000, comprised of

• Cash $8,000,
• Accounts Receivable $9,000, and
• Equipment $10,000.

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 DO IT! Financial Statement Items

Presented below is selected information related to Flanagan Company

at December 31, 2017. Flanagan reports financial information monthly.
Equipment $10,000 Utilities Expense $ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Owner’s Drawings 5,000
(b) Determine the net income reported for December 2017.

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 DO IT! Financial Statement Items

Presented below is selected information related to Flanagan Company

at December 31, 2017. Flanagan reports financial information monthly.
Equipment $10,000 Utilities Expense $ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Owner’s Drawings 5,000
(c) Determine the owner’s equity at December 31, 2017.

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LEARNING APPENDIX 1A: Explain the career opportunities
OBJECTIVE in accounting.

Public Accounting Private Accounting

Careers in auditing, taxation, Careers in industry working in
and management consulting cost accounting, budgeting,
serving the general public. accounting information systems,
and taxation.

Governmental Accounting Forensic Accounting

Careers with the IRS, the SEC, Uses accounting, auditing, and
public colleges and universities, investigative skills to conduct
and in state and local investigations into theft and
governments. fraud.

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