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ACC 106
Chapter 1
INTRODUCTION TO ACCOUNTING
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CHAPTER’S OVERVIEW

Definition, history Difference between

and development of book keeping and
accounting accounting

Purposes and uses of

Accounting cycle
financial statements

Main user groups of Types and various

financial statements forms of business
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Definition of Accounting

Frank Wood

• The process of identifying, measuring and communicating

economic information to permit informed judgements and
decisions by users of information

Andrew Leong & Wong Sei Van

• The process by which economic information about business

enterprises is being initially recorded and then communicated
to those who have to make financial decisions
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Definition of Accounting

Identifying
The art of BUSINESS TRANSACTIONS
Data needed is indentified

Recording
Transactions are recorded in Interpreting & Communicating
the books of the business
Financial data are analyzed and
communicate the result to the
Classifying interested parties
Sorting out the mass of accounting
data into orderly categories

Summarizing DECISION MAKING

The accounting data are
summarized periodically
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Difference Between
Accounting & Book Keeping

Book keeping is different from accounting as it is only a part of accounting

(Andrew Leong & Wong Sei Van, Business Accounting, 2 Edition).

Bookkeeping involves the process of identifying, recording business

transactions which tasks are carried out by bookkeepers

Accounting involves not only the process of identifying and recording

(classifying and summarizing) but also communicating (analyzing and
interpreting) the financial statements where tasks are carried out by
accountants who are professionals.
The History and Development 6
of Accounting
Present Century
Existing laws were
19th Century refined and new
laws were
Rapid technological
introduced to
advances led to the
regulate the
formation of
17th Century companies and
conduct of more
modern and
Refined versions of gave rise to more
complex business
Pacioli’s work were specialized aspects
produced to of book keeping
formulate rules for and accounting These new laws
15th Century double-entry book required detailed
keeping and the financial
The first preparation of The need for
published work statements to be
financial statements efficient managerial
on double-entry periodically
control over the
book keeping presented to
business’ resources
was produced by shareholders
led to cost
Luca Pacioli in accounting
1494
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Financial Statements

Components of Financial Statement:

1. Statement of Profit or Loss (consist of Trading account and profit and

loss account) - Shows whether the entity obtains profits or losses during
a particular period
2. Statement of Financial Position - Shows the financial position of the
entity at a point of time that is the assets, liabilities and owner’s equity
3. Statement of Cash Flows - Shows the cash situation of the entity
4. Statement of Changes in Equity – Shows the change in an owner's or
shareholder's equity throughout an accounting period.
5. Notes to the Accounts - Accounting policies and explanatory notes
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Objectives of Financial
Statements

To identify the assets/resources and the claim to those assets

To evaluate the progress and performance over a period of

time

To assess the future cash flow (liquidity)

To identify the business strengths and weaknesses

To make decisions: investment and credit decisions

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The Purposes of Accounting
Information
1

3
To know the If the transactions Human task is
financial status of were being becoming more
the organization, recorded, it would and more
whether the be easier to refer. complex
business is This is because especially in large
making profit or our memory is organizations. If
running at a loss limited there are no
and what are the proper records,
corrective actions the financial
to be taken statements would
be misleading
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The Accounting Cycle

Business Journal Post to

transactions entries ledgers

Adjusted trial Adjusting

Trial balance
balance entries

Financial Closing
statements entries
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The Main User Groups of
Financial Statements

INTERNAL USERS EXTERNAL USERS

Those who work in the Those who are indirectly
organization involved with the organization

Owners Creditors

Managers Potential investors

Employees Government

Public
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The Main User Groups of
Financial Statements

USERS USES
Internal Owners • To evaluate the financial status of the business
• To be able to evaluate their interest in the
business
Managers • To evaluate the financial status of the business
• To have the information necessary to make
sound business decisions
Employees • To evaluate the firm’s ability to pay wages
• To get an idea of their employment prospects
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The Main User Groups of
Financial Statements

USERS USES
External Creditors • To determine the firm’s ability to repay
loans
Investors • To evaluate the financial position of the
business
• To evaluate whether the business is a good
investment
Government • To determine the taxable income of a
business
• To make better financial decisions for the
economy
Public • For academic purposes
• For planning of projects
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Types and Various Forms of
Business

SOLE
PARTNERSHIP
PROPRIETOR

COMPANY
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Types and Various Forms of
Business
SOLE PROPRIETOR PARTNERSHIP COMPANIES
Ownership Owned by one Owned by 2-20 A private company
person partners. must have a minimum
of 2 and a maximum of
For professional 50 shareholders.
partnership, it is A public company must
owned by 2-50 have a minimum of 2
partners and the maximum
amount must not
exceed the authorized
capital
Registration Registered with Registered with the Registered with the
the business business registrar Commissioner of
registrar Companies
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Types and Various Forms of
Business
SOLE
PARTNERSHIP COMPANIES
PROPRIETOR
Capital Contributed by Contributed by Contributed by
the owner partners according to shareholders through
agreement buying of shares
Books and No legal No legal obligation to Proper books of
Accounts obligation to keep keep the books and account must be kept
the books and prepare accounts and annual accounts
prepare accounts must be sent to the
Commissioner
Management Managed and Managed and Managed and
and Control controlled by the controlled by partners controlled by a board of
owner or by a board which directors appointed by
consists of a few the shareholders
partners
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Types and Various Forms of
Business
SOLE PROPRIETOR PARTNERSHIP COMPANIES
Liability Unlimited liability. Unlimited liability. Limited liability.
If the business fails If the business fails and If the business fails and
and the assets are the assets are not the assets are not
not enough to enough to cover the enough to cover the
cover the debt, the debt, the creditors debt, the creditors do not
creditors have a have a right against the have a right against the
right against the partner’s personal shareholder’s personal
owner’s personal properties properties
properties
Profit or Loss Profit will belong to Profit or loss will be Profits will be paid to the
the owner any shared by partners shareholders in the form
losses incurred will according to their profit of dividend
be borne by the sharing ratio as stated
owner in agreement
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Differences Between Private
and Public Limited Company
Private company
• maximum 50 members
• transfer of shares must be authorized by other shareholders
• shares cannot be issued to the public
• usually controlled by a family
• name ends with "Sendirian Berhad" or abbreviation "Sdn. Bhd.”

Public company
• no limit for no. of members
• no authorization is needed for transfer of shares (traded in the open market)
• shares can be issued to the public
• controlled by the majority shareholder
• name ends with "Berhad" or abbreviation "Bhd”