LECTURE 1- ACC 407/406

TYPES &
CHARACTERISTICS
OF BUSINESS
ORGANIZATIONS

INTRODUCTION TO
3
ACCOUNTING

1
ACCOUNTING DEFINITION
CONCEPTS &
OBJECTIVES
 DEFINITION & OBJECTIVES
What is Accounting?
• Accounting can be defined as “the
process of identifying, measuring
and communicating economic
information to permit informed
judgements and decisions by users
of the information”.
• Accounting also can be defined as the
art of classifying, recording and
summarising of transactions and
business events in monetary terms and
interpreting the results to interested
parties to enable them to make
decisions.
The Objectives of Accounting
To let people & organisations know:
• If they are making a profit or a loss.
• What their business is worth.
• What a transaction was worth to them
• How much cash they have
• How wealthy they are
• How much they are owed
• How much they owe to someone else
• Enough information so that they can
keep a financial check on the things
they do.
 BUSINESS ORGANISATIONS

Must prepare
FINANCIAL STATEMENTS
• BALANCE SHEET
• INCOME STATEMENT
- to know the financial position (ability to pay debts)
- to know the financial performance (profit/Loss) of a of a business
business

Communicate to
INTERESTED USERS

INTERNAL EXTERNAL
a) Employees a) Current/ Potentials shareholders
- for job security, bonus, etc. - for investment purposes
b) Suppliers/Creditors/Bankers
b) Owner - to know the ability of business to
- to know financial stability and settle debts.
growth of the business. c) Customers/consumer of products
-interested in getting discounted
c) Management team price from the business.
- For planning and controlling d) Government
purposes - to know the ability of business to
pay tax
 CHARACTERISTICS OF BUSINESS ORGANISATIONS
CHARACTERISTICS SOLE TRADER PARTNERSHIP COMPANY

Source of capital Owner’s savings / Contributed by partners Contributed by shareholders

owner’s properties according to the agreement through buying of shares
brought in the business

Ownership Owned by 1 person Owned by 2-20 partners (ord) Owned by 2-50 s/holders (Sdn
2-50 partners (Professionals) Bhd) & 2-∞ s/holders (Bhd)

Existence Not a separate entity Not a separate entity Separate entity

Liability Unlimited liability Unlimited liability Limited liability

Management Manage and control by Manage and control by the Manage and control by the
and control the owner with the help partners or by a Board which Board of Directors appointed
from his family and consist of a few partners by S/holders
workers

Profit Sharing Profit belongs to the Profit and losses will be Profit will be paid to s/holders
owner and losses will shared by partners based on in a form of dividends
also be borne by the Partnership Agreement
owner

Books and Accounts Not required to keep Not required to keep proper Required to keep proper books
proper books of accounts books of accounts of accounts and submit annual
accounts to Registrar of
Company
 BOOKKEEPING AND ACCOUNTING

Is Bookkeeping and Accounting the same? The answer is NO

BOOKKEEPING
Is part of accounting process
( classifying, recording
and summarising
the business transactions )
and done in accordance
with certain principle or rules.
VS
Person responsible to handle
the bookkeeping process is a
Bookkeeper
that has less qualification and skills
ACCOUNTING
Is the whole process of classifying,
recording and summarising the business
transactions in monetary terms and
interpreting the result to the interested
users.
-Person responsible to handle the
accounting process is an Accountant that
posses a certain standard qualification and
working experience recognised by the
accounting regulatory body.
 ACCOUNTING CYCLE / PROCESS

Transactions

Source
Documents
Journalizing

Journals
Posting

Ledgers

Trial balance

YES

Adjustments

NO

Financial
Statements
BUSINESS / ACCOUNTING TRANSACTIONS

-Refer to financial events/activities which affect an organisation

CASH TRANSACTION CREDIT TRANSACTION

-Any business transaction vs -Any business transaction which payment

with immediate payment is postponed to a future date

ACCOUNTING PERIOD

-Refer to a specific period of time for an organisation for a purpose of

preparing a financial report.

E.g 1: A business starts on 1 January 2000 and closes its account on 31 December every year.

therefore,
Accounting period = 1 January 2000 until 31 December 2000.

E.g 2: A business starts on 1 July 2000 and closes its account on 30 June every year.

therefore,
Accounting period = 1 July 2000 until 30 June 2001.

E.g 3: A business starts on 1 April 2001 and closes its account on 31 March every year.

therefore,
Accounting period = _________________________________
 ACCOUNTING CONCEPTS

Realisation
Historical
Periodicity
Cost

12 Going
Duality 11 1
Concern
10
2

Economic 9 Accounting 3
Accrual
Entity Concepts
4
8

5
Monetary 7
Matching
6

Materiality Prudence
Consistency
 Historical Cost

All business transactions must be

recorded at cost and not at its market
value.
 Going Concern

The business will continue to operate in the

foreseeable future without any intention to
liquidate.
 Accrual

Revenue is recognised when it is earned and

not when the money has been received.

Expenses is recognised when it is incurred

and not when the money has been paid.
 Matching

Match the revenue earned for the period

against the expenses incurred in order to
get real net profit.
 Prudence / Conservatism

Record profit only when the business is

certain in earning it
&
Record any foreseeable losses even though
the business is uncertain in incurring it.
 Consistency

Constantly use one chosen method of

accounting treatment for years unless there
is a valid reason to change it.
 Materiality

Report the items that may affect the financial

performance (has significant impact) of a
business.
 Monetary / Money
Measurement

Assumed that the accounting is only

concerned with those that can be measured
in monetary terms and the money value of
transaction is agreeable to most people.
 Economic Entity
• i. Separate Legal entity – a business is distinct from its
owner ( 2 different person).
Business (artificial person) VS Owner (real person)

ii. Separate Business entity – one business unit is

distinct from another business unit.

iii. Separate Accounting entity – the business has its

owned accounting record and the owner has his own
accounting record.
 Duality / Dual Aspect
(Debit & credit

For every transaction

two aspect of accounting is involved,
one represented by assets and
the other by the claim against the assets.
 Periodicity

It implies that the business activities can be

divided into regular time period. For reporting
purposes, financial statements are normally
prepared on yearly basis.
 Realization (not in silibus)

Profit is considered earned or realized at the

time when goods or services are passed to
the customer and not when the order for the
goods or services is received; and the
customer incurs liability for them.