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Chapter INTRODUCTION

TO

1 ACCOUNTING

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Learning
Learning Objectives
Objectives
Discuss the roles and
Explain the functions of
functions of an accountant
financial accounting
Define accounting and book-
Discuss the usage and the
keeping
importance of accounting
Explain accounting information
principles, assumptions &
accounting conventions

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Accounting
Accounting Defined
Defined
is a
Accounting
Accounting Identifies
Identifies
system that

Records
Records

information
Relevant
Relevant Communicates
Communicates
that is

Reliable
Reliable
to
tohelp
helpusers
usersmake
make
Comparable better
betterdecisions.
decisions.
Comparable
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Definition of Accounting (continues..)
Summarising
Classifying Recording Accounting
Reports

Prepare
accounting
reports
Sorting out Transactions SOFTBYTE
accounting are recorded Annual Report
transactions into in the books
orderly and of business
meaningful
categories

Analyze and
interpret
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The McGraw-Hill Companies, Inc., 2005
Bookkeeping
Bookkeeping Definition
Definition

Classifying Recording
Bookkeeping is
the process of
Summarising

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Users
Users of
of Accounting
Accounting Information
Information

External Users
Internal Users

Financial accounting provides


external users with financial Managerial accounting provides
statements. information needs for internal
decision makers.

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Users of Financial Information
Inside The Business Outside The Business

i a l
a nc ts
Fin epor
R

Emplo
yees

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Generally Accepted
Accounting Principles

(GAAP) are accounting standards developed and


applied by professional accountants.

Publicly owned companies must follow GAAP.

Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2005


Generally
Generally Accepted
Accepted Accounting
Accounting
Principles
Principles
Financial
Financialaccounting
accounting practice
practiceis
isgoverned
governedbyby
concepts
conceptsand
andrules
rules known
known asas Generally
GenerallyAccepted
Accepted
Accounting
AccountingPrinciples
Principles(GAAP).
(GAAP).

Relevant
Relevant Affects
Affectsthethedecision
decisionof
of
Information
Information its
itsusers.
users.

Reliable
Reliable Information
Information Is
Istrusted
trustedby
by
users.
users.

Comparable
Comparable Is
Ishelpful
helpfulin
incontrasting
contrasting
Information
Information organizations.
organizations.
Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2005
Setting
Setting Accounting
Accounting Principles
Principles

Financial
FinancialAccounting
Accounting
Standards
StandardsBoard
Board is
isthe
the private
private
group
groupthat
that sets
setsboth
bothbroad
broad and
and
specific
specific principles.
principles.

The
TheSecurities
Securities Commission
Commission is isthe
the government
government
group
groupthat
thatestablishes
establishesreporting
reporting requirements
requirements
for
forcompanies
companies that
thatissue
issueshare
sharetotothe
thepublic.
public.

Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2005


THE
THE OPERATING
OPERATING GUIDELINES
GUIDELINES OF
OF
ACCOUNTING
ACCOUNTING
Operating guidelines are classified as assumptions,
principles, and constraints.
Assumptions provide a foundation for the accounting
process.
Principles indicate how transactions and other economic
events should be recorded.
Constraints on the accounting process allow for a
relaxation of the principles under certain circumstances.

Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2005


The
The Operating
Operating Guidelines
Guidelines of
of Accounting
Accounting

ASSUMPTIONS PRINCIPLES CONSTRAINTS


Separate entity Historical costs Conservatism

Monetary unit Objectivity Materiality

Going concern Matching of revenue Benefit and Cost


and expenses

Accounting period Full disclosure

Consistency

Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2005


Accounting
Accounting Assumptions
Assumptions

Now Future
Separate Entity Going-Concern Principle
The business is accounted for Reflects assumption that the
separately from other business business will continue operating
entities, including its owner instead of being closed or sold

Monetary Unit Principle Accounting Period


Express transactions and events in The economic life of business can be
monetary, or money, units divided into artificial time period for
the purpose of financial reporting

Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2005


Accounting
Accounting Principles
Principles

Objectivity
Each transaction must be recorded
Historical Cost
based on objective evidence or
Accounting information is based
verified and unbiased information
on actual cost.

Full Disclosure
Matching of Revenue & Expenses
Report enough information for
All expenses incurred to generate
users to make knowledgeable
revenue must be reported within
decisions about the company
the period in which the revenue is
reported
Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2005
Accounting
Accounting Principles
Principles

Consistency
The same accounting period will be used from one accounting
period to another accounting period.
Example : Depreciation

Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2005


Accounting
Accounting Constraints
Constraints

Materiality
Conservatism
Accountants are required to
Income and assets be reported at
accurately account for significant
their lowest reasonable amounts (i.e.
items and transactions
minimizing the assets and
understating the income)

Benefit and Cost


The cost of preparing accounting information must not exceed the
value or benefit of the information to the users of the financial
statements

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CONSTRAINTS
CONSTRAINTS IN
IN ACCOUNTING
ACCOUNTING

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Characteristics
Characteristics of
of Accounting
Accounting
Information
Information
USEFUL
FINANCIAL
INFORMATION

RELEVANCE RELIABILITY
1. Predictive value 1. Verifiable
2. Feedback value 2. Faithful representation
3. Timely 3. Neutral

COMPARABILITY CONSISTENCY

Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2005


QUALITATIVE CHARACTERISTICS OF
USEFUL INFORMATION

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IMPORTANCE OF
ACCOUNTING INFORMATION
1. simply the data which an organization/business
entity is able to make known to its users.

2. enable it manage and control its finances and


resources.

3. able to improve on its level of profit earning, should


it realises it is declining in its profitability level.

4. know the differences between its marginal liability


and its marginal assets.
Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2005
Differences
Differences between
between Financial
Financial and
and Cost
Cost
Accounting
Accounting
CHARACTERISTICS FINANCIAL ACCOUNTING COST ACCOUNTING
1. Audience involves the preparation of a involves the preparation
standard set of reports for an of a broad range of
outside audience, which may reports that management
include investors, creditors, needs to run a business.
credit rating agencies, and
regulatory agencies.

2. Format Report prepared under financial creating reports that can


accounting are highly be in any format specified
specific in their format and by management, with the
content, as mandated by intention of including only
either that information pertinent
generally accepted accounting to a specific decision or
principles situation.
or
international financial report
Ropidah, Haslinda, Aryati, Liana ing standards The McGraw-Hill Companies, Inc., 2005
Differences
Differences between
between Financial
Financial and
and Cost
Cost
Accounting
Accounting
CHARACTERISTICS FINANCIAL ACCOUNTING COST ACCOUNTING
3. Level of detail primarily focuses on results in reports at a
reporting the results and much higher level of
financial position of an entire detail within the company,
business entity. such as for individual
products, product lines,
geographical
areas, customers,
or subsidiaries.

4. Product costs incorporates this information compiles the cost of raw


into its financial reports materials, work-in-
(primarily into the balance process, andfinished
sheet). goods inventory.

Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2005


Differences
Differences between
between Financial
Financial and
and Cost
Cost
Accounting
Accounting
CHARACTERISTICS FINANCIAL ACCOUNTING COST ACCOUNTING
4. Regulatory the structure of financial there is no regulatory
framework accounting reports are tightly framework governing
governed by either generally cost accounting reports.
accepted accounting
principles or international
financial reporting standards.

5. Report content contains an aggregation of the information in a cost


the financial information accounting report can
recorded through the contain both financial
accounting system. information and
operational information.
The operational
information can come
from a variety of sources
that are not under the
direct control of the
accounting department.
Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2005
Differences
Differences between
between Financial
Financial and
and Cost
Cost
Accounting
Accounting
CHARACTERISTICS FINANCIAL ACCOUNTING COST ACCOUNTING
6. Report timing primarily focuses on results in reports at a
reporting the results and much higher level of
financial position of an entire detail within the company,
business entity. such as for individual
products, product lines,
geographical
areas, customers,
or subsidiaries.

7. Product costs issue reports only at the end issue reports at any time
of a reporting period. and with any degree of
frequency, depending
upon management's
need for the information.
Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2005
Differences
Differences between
between Financial
Financial and
and Cost
Cost
Accounting
Accounting
CHARACTERISTICS FINANCIAL ACCOUNTING COST ACCOUNTING
8. Time horizon only concerned with Cost accounting does this
reporting the results of too, but also can be
reporting periods that have involved in a variety of
already been completed. projections for future
periods.

Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2005


Business
Business Entity
Entity Forms
Forms

Proprietorship
Proprietorship Partnership
Partnership Corporation
Corporation

Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2005


Characteristics
Characteristics of
of Businesses
Businesses

Characteristics
Characteristics Proprietorship
Proprietorship Partnership
Partnership Corporation
Corporation
Business
Businessentity
entity yes
yes yes
yes yes
yes
Legal
Legal entity
entity no
no no
no yes
yes
Limited
Limited liability
liability no
no* no
no* yes
yes
Unlimited
Unlimited life
life no
no no
no yes
yes
Business
Businesstaxed
taxed no
no no
no yes
yes
One
One owner
owner allowed
allowed yes
yes no
no yes
yes

**Proprietorships
Proprietorshipsandandpartnerships
partnershipsthat
thatare
areset
set up
upas
asLLCs
LLCs
provide
providelimited
limitedliability.
liability.

Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2005


Corporation
Corporation

Owners of a corporation are called


shareholders (or stockholders).

When a corporation issues only


one class of share, we call it
common share (or capital share).
Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2005
End of Chapter 1

Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2005

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