Introduction to Accounting and Principles

MAIN ELEMENTS

Purposes of Main user groups

Definition of
accounting of financial
accounting
information statements

Difference
Types and various between Accounting
forms of business bookkeeping and concept
accounting
 • What is Accounting?
• The art of classifying, recording
and summarizing transactions and
business events in monetary terms
and interpreting the results to
DEFINITION interested parties to enable them to
make decisions

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 PURPOSE OF ACCOUNTING
INFORMATION

Purpose of recording and analyzing accounting

information of an organization:
• To know the financial status of the organization
(profit/loss, any corrective actions needed)
• For easier reference
(human have limitations in memorizing large info)
• To avoid misleading financial statements
(human task is becoming more complex especially
in large organization)
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 • 2 main user groups of accounting
information:
• Internal users
• Those who work in the organization
• Owners

MAIN USER • Managers

• Employees
GROUPS OF • External users
FINANCIAL • Those who indirectly involved with the
STATEMENTS organization
• Creditors/bankers
• Investors (Current & Potential)
• Government
• Consumers

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 Focus on 3 types of business
organizations
• Sole proprietorship
• Partnership
TYPES • Limited Company
AND
VARIOUS These 3 have different
FORMS OF characteristics in terms of:
BUSINESS • Registration
• Capital Ownership
• Management & Control
• Liability
• Profit or Loss
• Books & Accounts
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 DIFFERENCE BETWEEN
BOOKKEEPING AND
ACCOUNTING
• Accounting: process of classifying, recording
and summarizing transactions and business
events in monetary terms and interpreting the
results to interested parties to enable them to
make decisions

• Bookkeeping : it is only part of accounting

• Mechanical aspects of accounting such as
classifying, recording and summarizing of
transactions systematically
• The need to record transactions
systematically leads to the development of
the double entry principles

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 Economic entity
Going concern
Money measurement
Accrual or matching
Comparability
ACCOUNTING
Consistency
CONCEPT
Neutrality
Materiality
Prudence
Historical cost

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 ECONOMIC ENTITY
• This principle treats the company as a separate entity from
its owners. Personal accounts of owners/partners should be
kept separate from profits and expenses of the company.

GOING CONCERN
 Accounting assumes that an entity will continue to
operate indefinitely. This concept implies that financial
statements do not represent a company’s worth if its
assets were to be liquidated, but rather that the assets
will be used in future operations. This concept also
allows businesses to spread (amortize) the cost of an
asset over its expected useful life.
MONEY MEASUREMENT
• For an accounting record to be made it must be able to be expressed
in monetary terms. For this reason, financial statements show only a
limited picture of the business. This concept assumes that the
purchasing power or the unit of measure used in accounting i.e. $ or
RM, does not change. This is done because money is the common
denominator, and monetary unit provides an appropriate basis for
accounting measurement and analysis

ACCRUAL OR MATCHING
 Expenses for the accounting period incurred must be recorded
irrespective of whether they have been paid or not; likewise, revenues
for the accounting period must be recorded when they are earned
irrespective of whether money has been received or not. Following
this, expenses are then matched with revenues that they help to
generate. As a result, net income is the difference between revenues
earned and the expenses incurred in earning the revenues.
COMPARABILITY
• The accounting principle that financial information for a
company should be comparable with financial
information for other similar companies. The
comparability concept suggests that the financial reports
or statements must be prepared under same accounting
principles and methods each year. If any transactions
require subjectivity, then such transactions must be dealt
with same consistent manner every year.

CONSISTENCY
 According to this principle, the accountants should use the
same methods and functions for different periods of time.
NEUTRALITY
• Information contained in the financial statements must be
free from bias. It should reflect a balanced view of the
affairs of the company without attempting to present them
in a favored light. Information may be deliberately biased
or systematically biased

MATERIALITY
 The recording of assets and liabilities does necessarily
require a strict adherence to any accounting principles if it
is difficult and expensive as long as it does not materially
or significantly affect the reported net income of the
business. In other words, recording of trivial items in a
special way is allowed.
PRUDENCE
• Any foreseeable losses should be recorded in the current year,
whereas profit will only be recorded when it is really realized.
It means better show lower profit, if we know there will be a
loss to the business. Also better to show higher liabilities.

HISTORICAL COST
 This concept requires that assets and services plus any
resulting liabilities be taken into the accounting records at
cost. Cost is used since it is definite and determinable that
accountants can provide objective and verifiable data in
their reports.