AA015- CHAPTER 1

INTRODUCTION TO ACCOUNTING AA015
CHAPTER 1

financial accounting
aa015

CHAPTER 1

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INTRODUCTION TO ACCOUNTING AA015
CHAPTER 1

DEFINITION OF ACCOUNTING

● Process of:
1) Identifying
2) Recording
3) Classifying
4) Summarizing
5) Reporting
6) Interpreting
7) Communicating

● The results of business or economic transactions to users in order for
them to make a better decision.

1.2 USERS OF ACCOUNTING INFORMATION
Internal Users

Management Making routine decisions and controlling operations.

Internal Verified the management system and the financial
auditor system of a company comply with accounting
standards.

Workers Identify and evaluate business performance for
salary and bonus.

Investors External Users

To know the company’s profitability and the
amount of

dividends paid out to shareholders.

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To decide whether to buy more shares or dispose
the shares they have.

Creditors Assess the ability of the business to repay the
(Suppliers & loan/credit.
bankers)
To determine the amount of tax to be collected by
Inland Revenue them.
Board (LHDN)

1.3 DIFFERENCES BETWEEN BOOKKEEPING AND ACCOUNTING

BOOKKEEPING ACCOUNTING

Definiti Bookkeeping is a part of Accounting is an information
on accounting. system.

Process of recording, in Process of recording,
chronological order, the daily
transactions of a business classifying, summarizing,
entity.
reporting, analyzing and

interpreting the financial

condition and performance of a

business.

Scope The process involved is Accounting is more extensive and

preliminary work in the thorough work beyond

accounting. bookkeeping.

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Person Accounting Clerk Accountant
in
charge

1.4 CATEGORIES OF ACCOUNTING

FINANCIAL ACCOUNTING MANAGERIAL ACCOUNTING

Financial accounting is the field Managerial accounting
of accounting that provides provides economic and
economic and financial for financial for internal users.
external users.

1.5 FORMS OF BUSINESS ENTITIES

1) Sole Proprietorship
2) Partnership
3) Company

Differences Sole Partnership Company
Proprietorship 2 – unlimited
Shareholders
1. Number of 1 2 – 20 Indefinite
owner
Limited
2. Capital source Proprietor Partners

3. Life of Limited Limited
organization

4. Liabilities Unlimited Unlimited

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5. Laws of Businesses Act Partnership Act Companies Act
Regulation
1956 1961 1965

6. Distribution of Wholly owned by Among partners Allocated
profits/losses proprietor
according to

shares of capital/

equity ratio

1.6 TYPES OF BUSINESS ACTIVITIES

1) Services
2) Manufacturing
3) Merchandising

Services Manufacturing Merchandising

Provide services Change basic Purchase
rather than inputs into inventories from
products to products that are other businesses
customers. sold to individual (such as
customers. manufacturers)
Example: and resell the
Example: inventories to
MAS, Maraliner, Gardenia, Intel individual
Keretapi Tanah customers.
Melayu.
Example: Giant,
Tesco, Econsave.

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1.7 COMPONENTS OF FINANCIAL STATEMENTS

● The basic components of financial statements as stated in MFRS 1 are
as follows:

a) a statement of comprehensive income/Profit or loss for the period.
b) a statement of financial position as at the end of the period.
c) a statement of changes in equity for the period.
d) a statement of cash flows for the period.

(1) Statement of Comprehensive Income /Profit or loss

Reports the financial performance of an entity over a
specific accounting period.
Contains information on revenues and expenses including the net
profit or loss of the business entity.
There are several formats in reporting the revenue and expenses
depending on the nature of business run by the entity.

An example of Statement of Comprehensive Income/Profit or
loss for Service Companies

Syarikat Dobi Cuci Bersih

Statement of Comprehensive Income

For the year ended 31st December 2020
RM RM
Revenues:
Laundry fees 140,000
(-) Expenses:
Rental expenses (40,000)
Utilities expenses (20,000) (60,000)
Net profit 80,000

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An example of Statement of Comprehensive Income/Profit or
loss for Merchandise Companies

Riana Baju Kurung Enterprise
Statement of Comprehensive Income
For the year ended 31st December 2020

RM RM

Sales
100,000

(-) Cost of good sold
(60,000)

Gross profit
40,000

(-) Operating expenses :

Depreciation expenses 3,000

Salaries expenses 10,000
(2) S(1ta3t,e0m00e)nt of Changes in Equity
Reports hNowet tPhreofoitwner’s equity has changed over27t,h0e00reporting

period.

It reports how opening capital has increased through net income, and

how it decreased through net losses and drawings

An example of Statement of Changes in Equity

Riana Baju Kurung
Enterprise

Statement of Changes in
Equity

For the year ended 31 December 2020

Opening Capital RM
Net Profit 40,000
(-) Drawings 27,000
Closing Capital (10,000)
57,000

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(3)Statement of Financial Position

● Also known as the balance sheet reports the financial position of a
business entity.

● It contains of three main components:
(1) Assets
(2) Liabilities
(3) Owner’s equity

An example of Statement of Financial Position

Riana Baju Kurung Enterprise

A Statement of Financial Position as at 31 December 2020

RM RM RM

ASSETS:

Non-current assets:

Motor Vehicle 64,600

(-) Accumulated depreciation (3,000) 61,600

Current assets:

Inventory 6,200

TOTAL ASSETS 67,800

EQUITY AND LIABILITIES 40,000
Equity 27,000
Opening capital
+ Net profit 5,000
- Drawings 5,800
(10,000)
Closing capital 10,800
67,800
57,000
Non-current liabilities
Long term borrowings
Current liabilities:
Account Payables
Total liabilities
TOTAL EQUITY AND LIABILITIES

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(4)Statement of Cash Flows

● Also known as cash flow statement, presents the movement in cash
flows over the period.

● It shows the in-flow and out-flow of cash of an organization according
to three main activities which are operating, investing and financing.

An example of Statement of Cash Flows
Sajad Baju Kurung Enterprise
Statement of Cash Flows

for the year ended 31 December 2020_____________

Cash flow from operating activities RM RM
25,000 12,000
Cash receipts from customers (8,000)
Cash payment to suppliers (5,000)
Cash payment for expenses
Net cash flow from operating activities

Cash flow from investing activities (13,000)
Purchase of land and building (13,000)
Net cash flow used for investing activities

Cash flow from financing activities 6,000
Owner investment (3,000)
Drawings
Net cash flow from financing activities 3,000
Net cash inflow 2,000
Add opening cash balance - 1 Jan 2020
Closing cash – 31 Dec 2020 500
2,500

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1.8 PROFESSIONAL ACCOUNTING BODIES IN MALAYSIA
1) Malaysian Accounting Standards Board (MASB)
2) Malaysian Institute of Accountants (MIA)
3) Malaysian Institute of Certified Public Accountants (MICPA)

● Malaysian Accounting Standards Board (MASB)
Established under the Financial Reporting Act 1997
The main functions and authority:

1) Issue new accounting standards Malaysian Financial Reporting
Standards (MFRS)

2) Review, revise or adopt existing accounting standards.
3) Issue statements of principles for financial reporting.
4) Sponsor or undertake development of possible accounting standards.
5) Develop a conceptual framework for the purpose of evaluating

proposed accounting standards.
● Malaysian Institute of Accountants (MIA)

Established under the Accountants Act (1967)

The main functions of MIA are to:
1) Determine the qualifications for members.
2) Provide training and continuing professional education to existing and

potential practitioners.
3) Control the accounting practice in Malaysia

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● Malaysian Institute of Certified Public Accountants (MICPA)

The Malaysian Institute of Certified Public Accountants (MICPA) was
formed as a professional body in 1958.

The main functions of MICPA are to:

1) Advance the theory and practice of accountancy in all its aspects.

2) Recruit, educate, train and assess a body of members skilled in these
areas.

3) Maintain high standards of practice and professional conduct by all its
members.

4) Develop the accounting profession.

1.9 POTENTIAL CAREER IN ACCOUNTING

● In Malaysia, under the Accounting Act 1967, those who register with
MIA are known as Chartered Accountants. To be called a Chartered
Accountant they must have:

i. An accounting degree from any institution recognized by the Malaysia
Institute of Accountant (MIA)

ii. 3 Years of working experience in accounting
iii. Becoming a full member of the recognized professional body of the

MIA or pass the eligibility exam conducted by MIA.

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● Potential career for a Chartered Accountants in a public and private
sector:

i. Auditors – The duty of an auditor is to examine and to evaluate the
financial statements to determine and ensure that financial statements
provide a true and fair view.

ii. Tax Consultant – A tax consultant will assist individuals as well as
business for tax preparation and planning. They need to make sure
that it is in line with the requirements of the tax laws.

iii. Management Advisory Services – This field involves the process of
designing computerized accounting information systems and planning
more efficient business finance

In the nut shell…….’every day is a new day and you’ll never be able to
find happiness if you don’t move on…

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DO IT!

Question 1
Define accounting in general.

Question 2

Complete the appropriate information in the following fields:

NO Users Internal / Types of information Purpose of
information external users Information
(Financial Accounting
1 Manager @ Management
Accounting)

2 Employees /
Workers

3 Inland Revenue
Department

4 Financial
companies

5 Existing Investors

6 Potential
Investors

7 Suppliers

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Question 3

Sandmesh is the owner of a housing developer. His business has shown growth and
progress. Sandmesh intends to change the shape of its business from a sole
proprietorship to a company. Discuss two (2) advantages that will be enjoyed by
Sandmesh if he formed a company.

Question 4

List three (3) accountancy bodies in Malaysia as well as its primary role.

EXERSICES

Question 1

(i) Give two (2) differences between sole proprietorship, partnership and company

(ii) Give the two (2) examples of internal users and two (2) examples of external users

of accounting information.

Question 2

(i) Kaisara is doing a book distribution business throughout the country with a

contribute capital of RM50,000. Kaisara offers Aisyah to invest in her business with

special benefits of profit by the amount of capital contributed by Aisyah.

a) What is the type of business owned by Kaisara?

b) Should Aisyah accept the offer, what kind of business would it be?

c) Please state the two (2) business features such as (b) above.

Question 3

(i) State four (4) types of financial statements.
(ii) Give three (3) types of business activities.

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