TOPIC 5

UNDERSTANDING
ACCOUNTING
SYSTEM
INTRODUCTION TO BUSINESS OMT115
PREPARED FOR:
MADAM ROZZANA BINTI ABD LATEH
PREPARED BY:
ZUN NURAINI BINTI SANUSI(2009170459)
NOORLIYANA BINTI MOHAMAD
LOKEMAN(2009775679)
 DEFINITION
 Comprehensive system for collecting, analyzing and
communicating financial information.
 It measures business performance and translates the
findings into information for management decision.
 To perform these functions they keep records or
such transactions as taxes paid, income received
and expenses incurred and they assess the effects of
these transaction on business activities.
 By storing and analysing thousands of transactions,
accountants can determine how well a business is
being managed and how financially strong it is.
 ACCOUNTING-DEFINITION
 Bookkeeping
-recording of accounting transaction
 Accounting itself is much more comprehensive than
merely recording information.
 Accounting System

-An organized procedure for identifying, measuring,

recording and retaining financial information.
-This information can be used in accounting statement
and management report.
-It included all the people, report, computers,
procedures and resources for compiling financial
transactions.
 Financial Accounting
 is concern with external information users
consumers groups, unions, stockholders, and
government financial reports published for
shareholders and the public.
 All these documents focus on the activities of
the company as a whole rather than on
individual departments or division.
 Managerial Accounting
 Serves internal users of a company’s financial
information.
 Managers at all levels need information to
make departmental decisions, monitor
projects, and plan future activities.
 USER OF ACCOUNTING
INFORMATION SYSTEM
 Business Managers
 Used accounting information to set goals, develop
plans, set budgets and evaluate future prospects.
 Employee and Unions
 Use a accounting information to get paid and to
plan for and receive such benefits as health care,
insurance, vacation time and retirement pay.
 Investors and Creditors

- Use accounting to estimate returns to

stockholders, determine a company’s growth
prospects and determine whether it is a good
credit risk before investing or lending.
 Tax Authorities
 Use accounting information to plan for tax
inflow, determine the tax liabilities of
individual and business and ensure those
correct amounts are paid on time.
 Government Regulatory Agencies

- Rely on accounting information to fulfil their

duties.
 ACCOUNTING TERMS
 CERTIFIED PUBLIC ACCOUNTANTS(CPAs)
 Is accountant licensed by the state and offer
accounting services to the public.
 They are licensed by the state after passing
an exam prepared by the American Institute
of Certified Public Accountant (AICPA),
which also provide technical support and
dicipline in matters of ethics.
 It provides service such as auditing, tax and
management service.
 AUDITING
 Is a systematic examination of a company’s
accounting system to determine whether its
financial reports fairly present its operations.
 Organizations must provide audit reports
when applying for loans or selling stock or
when going through a major restructing.
 The auditor must ensure that the client’s
accounting principles (GAAP) – rule and
procedures governing the context and form
of financial reports.
 TAX SERVICES
 Tax services thus include assistance not only
with tax return preparation but also with tax
planning
 A CAP’S advice can help a business structure
operations and investment and perhaps save
millions of dollar in taxes.
 Staying abreast of tax law changes is no
simple matter.
 MANAGEMENT ADVISORY SERVICES
 Specialized accounting services to help
managers resolve a variety of business problem.
 As consultants, accounting firms provide
management advisory services ranging from
personal planning corporate mergers.
 Other services include production scheduling,
computer feasibility studies, and AIS design.
 Some firms even assist in executive recruitment.
 On the staff of the largest CPA firms are
engineers, architects, mathematicians, and
psychologies, who are available for consulting.
TOOLS OF ACCOUNTING TRADE
 All accounts rely on record keeping, either
manual or electronic, to enter and track
business transactions.
 Underlying all record-keeping procedures
are the two key concepts of accounting: the
accounting equations and double-entry
accounting.
TOOLS OF ACCOUNTING TRADE
 The Accounting Equation
Assets=Liabilities + Owners’ equity
 Assets is any economic resource expected to
benefit a firm or individual who owns it e.g
land, building due to company (account
receivable)
 Liabilities are debt owned by a firms to an
outside organisation or individual.
 Owners’ Equity is the amount of money that
owners would receive if they sold all of a
company’s asset and paid all of its liabilities.
TOOLS OF ACCOUNTING TRADE
Assets- Liabilities= Owners’ Equity
 If company assets exceed its liabilities,
owner equity is positive.
 If company goes out of business, the owners
will receive some cash after selling assets
and playing of liabilities.
 If a liabilities outweigh assets, owners’
equity is negative. This shows that the assets
are insufficient to pay of all debt.
TOOLS OF ACCOUNTING TRADE
Owner Equity consists of two source of capital
I. The amount that the owners originally invested
II. Profit earned by a reinvested in the company

 When company operate profitable, its assets increase

faster than its liabilities.
 Owner equity can also increase if owners invest more of
their own money to increase assets.
 Owner equity therefore will increase if profit is
retained in the business instead of paid out as dividend
to stockholders.
 However owners’ equity can shrink if the company
operates at a loss or if the owners withdraw assets.
TOOLS OF ACCOUNTING TRADE
 Double-Entry Accounting
 Double entry accounting system is a
bookkeeping system that balances the
accounting equation by recording the dual
effects of every financial transaction.
 Among the important reports are financial
statements (Any of several types of reports,
summarizing a company’s financial status and
measuring its financial healthy), which fall into
three broad categories- balance sheets, income
statement and statements of cash flow.
 FINANCIAL STATEMENT
 Any of several types of reports summarizing
a company’s financial status and measuring
its financial health.
 Among the most important reports are
financial statements, which fall into three
broad categories- balance sheet, income
statement of cash flow.
 FINANCIAL STATEMENT-
BALANCE SHEET
 Balance sheet (Financial statement detailing a
firm’s assets, liabilities, and owner’ equity.)
 They also show a firm’s financial position at one
point in time; they are sometimes called statements
of financial position.
 Current Assets- is an asset that can or will be
converted into cash within the following year.
 Fixed Assets – is an assets with long-term use or
value, such as land, building, and equipment.
 Intangible Assets- is non-physical assets, such as a
patent or trademark that has economic value in the
form of expected benefit, E.g patents, trademarks,
copyrights, and franchise fees.
FINANCIAL STATEMENT-INCOME
STATEMENTS
Income Statements
 It sometimes called a profit and loss statement
because its descriptions of revenue & expenses
result in a figure showing the firm’s annual
profit or loss. In the words:-
Revenue – Expenses = Profit(or Loss)
 Popularly known as “profit or lost is probably
the important figure in any business entreprise.
 Like the balance sheet, the income statement
is divided into 3 major categories; Revenue,
Cost of goods sold and Operating expenses.
 FINANCIAL STATEMENT –
INCOME STATEMENTS
 Revenue
 Funds that flow into a business from the sale of
goods or services.
 Cost of good sold
 Total cost of obtaining materials for making the
product sold by a firm during a year.
 Gross profit(or gross margin)
 Revenue obtained from goods sold minus cost of
good sold.
 If company has a high gross margin, it probably
has low cost of goods sold but high selling &
administration expenses.
FINANCIAL STATEMENT- INCOME
STATEMENTS
Operating Expenses
 Costs, other than the cost of goods sold, incurred in
producing a good or services.
 In addition to costs directly related to acquiring
goods, every company has general expenses ranging
from erasers to the CEO’s salary.
 Selling expenses result from activities related to
selling goods or services, such as sales force salaries
and advertising expenses.
 General and administrative expenses, such as
management salaries and maintenance costs, are
related to the general management of the company.