ACT 2111/ACT 3110

Topic 1
Accounting and
Finance

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 Roles of accounting in business
 Differences between financial accounting
and managerial accounting
 The components of financial statement
 Accounting principles and assumptions
used in preparing financial statement
 The elements of financial statement

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 Why Is Accounting Important?

• Accounting is the information system that:

– Measures business activities
– Processes the information into reports
– Communicates the results to decision makers

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 Roles of Accounting in business

• Language of business
• Manage , Record , Analyse
– Business performance
– Non business activities / Inviduals
• Communication

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Differences between financial accounting and
managerial accounting
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Financial accounting is primarily concerned

with the recording and reporting of economic
data and activities for a business.

Managerial accounting uses both financial

accounting and estimated data to aid
management in running day-to-day
operations and in planning future operations.
 Differences between financial
accounting and managerial accounting
• Financial accounting provides information
for external decision makers, such as:
– Investors who own a portion of the business.
– Creditors to whom the business owes money.
– Taxing authorities, to whom the business owes
taxes.
• Managerial accounting provides
information to internal decision makers.

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Decision Makers: The Users of
Accounting Information

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 The Accounting Profession

• Types of accountants:
– Certified Public Accountants (CPA) serve the
general public.
– Certified Management Accountants (CMA)
specialize in accounting and financial
management knowledge and work for a single
company.
• Accounting positions:
– Public
– Private
– Governmental

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The Components of Financial
Statements

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 The Components of Financial
Statements
• Financial statements are business
documents that are used to communicate
information for decision making.

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

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 Accounting principles and assumptions
used in preparing financial statement

Objectivity Historical Costs

Identifiable events must be measurable
Eg. Talent (subjective) vs salaries of All assets recorded at cost
management (objective)

Money Measurement Going Concern

Only record facts that can be Business continue for the
measured in monetary terms (RM, foreseeable future
USD,SGD, etc…) 13
 Example 1
On August 25, Gallatin Repair Service extended an offer of $125,000 for land
that had been priced for sale at RM150,000. On September 3, Gallatin Repair
Service accepted the seller’s counteroffer of RM137,000. On October 20, the
land was assessed at a value of RM 98,000 for property tax purposes. On
December 4, Gallatin Repair Service was offered $160,000 for the land by a
national retail chain. At what value should the land be recorded in Gallatin
Repair Service’s records?

ANSWER…..

RM137,000. Under the cost concept, the land should be

recorded at the cost to Gallatin Repair Service.

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 Accounting Principles / Concepts
Business/ Separate
Entity
Business entity is seen separate from its
Owner. Eg. Owner’s house should not be
recorded as an asset in the business
book.
Dual Aspect
Resources = Sources
Assets = Liabilities + Owner’s Equity
Double entry book keeping system
Realisation
Revenue is earned/ reliased when
legal rights is given by one party to
other regardless of cash has been
received or not
Accrual
Revenue earned and expenses incurred
are recognised as revenue & expenses
at the time they take place, NOT at the
time cash received or paid
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 Accounting Principles / Concepts

Time Interval Stable Money

Accounting Period = Financial Year Assume value of RM is stable and
Fiscal Year Vs Calendar Year remains unchange overtime

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Overriding Principles/Concepts

Materiality
If we do not disclose , if will affect
accounting users decision making

Consistency
-Must choose one method of
accounting treatment & apply it
consistently in every accounting period.
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The Economic Entity Assumption

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 The elements of
financial statement

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 What is the Accounting Equation?

• The accounting equation is the basic tool of

accounting, measuring the resources of the
business and the claims to those resources.

ASSETS = LIABILITIES + OWNER’S EQUITY

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 Assets
A present economic resource** controlled
by the entity as a result of past events (IFRS
Exposure Draft 2017)

• Examples:
– Cash
– Merchandise inventory
– Furniture
– Land

**Economic Resource- a right that has

the potential to produce economic
benefits
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 Liabilities
 A present obligation of the entity to
transfer an economic resource** as a
result of past events. (Exposure Draft 2017)
• Examples:
– Accounts payable
– Notes payable
– Salaries payable

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 Owner’s Equity
• The owners’ claims to the assets of the
business are called owner’s equity.

• Increases in owner’s equity result from:

– Owner’s capital (owner contributions)
– Revenues
• Decreases in owner’s equity result from:
– Owner’s Drawings/ Withdrawals
– Expenses

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 Owner’s Equity
The accounting equation is expanded to show
the components of owner’s equity:

• Net income
Revenues > Expenses
• Net loss
Revenues < Expenses
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The income statement reports the
net income or net loss of the
business for a specific period.

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The balance sheet reports on the assets,
liabilities, and owner’s equity of the
business as of a specific date.

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END OF TOPIC 1

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