Chapter 1 - Acc in Business

8/10/2019 Chapter 1 - Acc in Business

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Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Li ana The McGraw-Hi ll Companies, Inc., 2007

Accounting inBusinessChapter

1 100 Shares$1 par value

Accounting?


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Learning Objectives

Identify users and uses of

accounting

Identify opportunities in

accounting and related fields

Explain the meaning of

Generally Accepted

Accounting Principles, and

define and apply several key

principles of accounting

Identify Professional

Accounting Bodies and

standards setting in Malaysia

Define and interpret the

accounting equation andeach of its components

Analyze business

transactions using the

accounting equation Identify and prepare basic

financial statements and

explain how they interrelate


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Identifies

Records

CommunicatesRelevant

Reliable

Comparable

Importance of Accounting

Accountingis a

system that

information

that is

to help users makebetter decisions.


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IdentifyingBusinessActivities

RecordingBusinessActivities

CommunicatingBusinessActivities

Accounting Activities


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Users of Accounting Information

External Users

Lenders

Shareholders

Governments

Consumer Groups

External Auditors

Customers

Internal Users

Managers

Officers

Internal Auditors

Sales Staff

Budget Officers

Controllers


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Users of Accounting Information

External Users

Financial accountingprovidesexternal users with financial

statements.

Internal Users

Managerial accountingprovidesinformation needs for internal

decision makers.


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Characteristics of AccountingInformation

USEFULFINANCIAL

INFORMATION

CONSISTENCYCOMPARABILITY

RELEVANCE1. Predictive value

2. Feedback value

3. Timely

RELIABILITY1. Verifiable

2. Faithful representation

3. Neutral



Opportunities in Accounting

Financial

PreparationAnalysisAuditingRegulatory

ConsultingPlanningCriminalinvestigation

Managerial

General accountingCost accountingBudgetingInternal auditing

ConsultingControllerTreasurerStrategy

Taxation

PreparationPlanningRegulatoryInvestigations

ConsultingEnforcementLegal servicesEstate planning

Accounting-related

LendersConsultantsAnalysts

TradersDirectorsUnderwritersPlannersAppraisers

FBI investigatorsMarket researchersSystems designers

Merger servicesBusiness valuationHuman servicesLitigation supportEntrepreneurs



Financial accounting practice is governed byconcepts and rules known as Generally Accepted

Accounting Principles (GAAP).

Generally Accepted AccountingPrinciples

RelevantInformation

Affects the decision ofits users.

Reliable Information Is trusted byusers.

ComparableInformation

Is helpful in contrastingorganizations.



The Securities Commissionis the governmentgroup that establishes reporting requirementsfor companies that issue share to the public.

Setting Accounting Principles

Financial AccountingStandards Boardis the privategroup that sets both broad and

specific principles.



The Operating Guidelines of Accounting

ASSUMPTIONS PRINCIPLES CONSTRAINTS

Economic entity Historical costs Conservatism

Monetary unit Revenue recognition Materiality

Going concern Matching

Time period Full disclosure



Accounting Assumptions

Economic Entity

The business is accounted forseparately from other business

entities, including its owner

Monetary Unit PrincipleExpress transactions and events in

monetary, or money, units

Now Future

Going-Concern PrincipleReflects assumption that the

business will continue operating

instead of being closed or sold

Time PeriodThe economic life of business can be

divided into artificial time period for

the purpose of financial reporting



Historical CostAccounting information is based

on actual cost.

Revenue Recognition1. Recognize revenue when it is

earned.

2. Proceeds need not be in cash.3. Measure revenue by cash

received plus cash value of items

received.

MatchingExpenses are matched against

revenues, and recorded in the

same period in which the related

revenues are earned

Accounting Principles

Full DisclosureReport enough information for

users to make knowledgeable

decisions about the company


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Professional Accounting Bodies andStandard Setting in Malaysia

Malaysian Institute of Accountant (MIA)

http://www.mia.org.my

Malaysian Institute of Certified Public Accountant

(MICPA) Malaysian Accounting Standards Board (MASB)

http://www.masb.org.my

Financial Reporting Foundation (FRF)
http://www.mia.org.my/http://www.masb.org.my/http://www.masb.org.my/http://www.mia.org.my/




established under the Accountants Act 1967

regulating the accounting profession.

play a significant role in the development and

advancement of accounting profession globally. Its membership in such bodies include the:

Asean Federation of Accountants (AFA)

Confederation of Asian and Pacific Accountants(CAPA)

International Federation of Accountants (IFAC)

Intergovernmental Working Group of Experts onInternational Standards of Accounting and Reporting(ISAR)




Objectives:

To promote and regulate professional and ethical

standards

To enhance competency through continuouseducation and training to meet the challenges of the

global economy

To enhance the status of members

To lead research and development for the

enhancement of the profession

To inculcate a high sense of social responsibility



Malaysian Institute of Certified PublicAccountant (MICPA)

Objectives: To advance the theory and practice of accountancy in

all its aspects.

To recruit, educate, train and assess by means of

examination or otherwise a body of members skilled inthese areas.

To preserve at all times the professional independenceof accountants in whatever capacities they may beserving.

To maintain high standards of practice and professionalconduct by all its members.

To do all such things as may advance the profession ofaccountancy in relation to public practice, industry,commerce, education and the public service.


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Malaysian Accounting Standards Board(MASB)

Established under the Financial Reporting Act 1997(the Act) as an independent authority to develop andissue accounting and financial reporting standards in

Malaysia. Working with FRF to make up the new framework for

financial reporting in Malaysia, with representationfrom all relevant parties in the standard-settingprocess, including preparers, users, regulators andthe accountancy profession.


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Financial Reporting Federation (FRF)

Established under the Financial Reporting Act 1997

(Act), comprises representation from all relevant

parties in the standard setting process, including

preparers, users, regulators and accountancyprofession.

Oversight the MASB's performance, financial and

funding arrangements, and as an initial source of

views for the MASB on proposed standards andpronouncements. It has no direct responsibility with

regard to standard setting. This responsibility rests

solely with the MASB.


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Business Entity Forms

Proprietorship Partnership Corporation


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Characteristics Proprietorship Partnership Corporation

Business entity yes yes yes

Legal entity no no yesLimited liability no no yes

Unlimited life no no yes

Business taxed no no yes

One owner allowed yes no yes

*

* Proprietorships and partnerships that are set up as LLCs

provide limited liability.

Characteristics of Businesses

*


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Owners of a corporation are called

shareholders(or stockholders).

When a corporation issues only oneclass of share, we call it common

share (or capital share).

Corporation


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Land

Equipment

Buildings

Cash

Vehicles

StoreSupplies

NotesReceivable

AccountsReceivable

Resourcesowned orcontrolled

by a

company

Assets


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TaxesPayable

WagesPayable

NotesPayable

AccountsPayable

Creditors

claims onassets

Liabilities


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Ownersclaims

on

assets

Revenues

OwnerInvestments

OwnerWithdrawals

Expenses

Equity


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Liabilities EquityAssets = +

Expanded Accounting Equation

Revenues ExpensesOwner

Capital

Owner

Withdrawals_

+_


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Transaction Analysis Equation

The accounting equation must remain in

balanceafter each transaction.

Liabilities EquityAssets = +


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Transaction Analysis

The accounts involved are:

(1) Cash (asset)

(2) J. Scott, Capital (equity)

J. Scott, the owner, contributed $20,000cash to start the business.


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Assets = Liabilities + Equity

Cash Supplies Equipment AccountsPayable NotesPayable J. Scott,Capital

(1) 20,000$ 20,000$

20,000$ -$ -$ -$ -$ 20,000$

20,000$ = 20,000$

J. Scott, the owner, contributed $20,000cash to start the business.


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The accounts involved are:(1) Cash (asset)

(2) Supplies (asset)

Purchased supplies paying $1,000cash.


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Purchased supplies paying $1,000cash.


Cash Supplies Equipment

Accounts

Payable

Notes

Payable

J. Scott,

Capital

(1) 20,000$ 20,000$

(2) (1,000) 1,000$

19,000$ 1,000$ -$ -$ -$ 20,000$

20,000$ = 20,000$


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The accounts involved are:(1) Cash (asset)

(2) Equipment (asset)

Purchased equipment for $15,000cash.


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Purchased equipment for $15,000cash.



Accounts

Payable

Notes

Payable

J. Scott,

Capital

(1) 20,000$ 20,000$

(2) (1,000) 1,000$

(3) (15,000) 15,000$

4,000$ 1,000$ 15,000$ -$ -$ 20,000$

20,000$ = 20,000$


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(1) Supplies (asset)

(2) Equipment (asset)

(3) Accounts Payable (liability)

Purchased Supplies of $200 andEquipment of $1,000 on account.


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Purchased Supplies of $200 andEquipment of $1,000 on account.



Accounts

Payable

Notes

Payable

J. Scott,

Capital

(1) 20,000$ 20,000$

(2) (1,000) 1,000$

(3) (15,000) 15,000$

(4) 200 1,000 1,200$

4,000$ 1,200$ 16,000$ 1,200$ -$ 20,000$

21,200$ = 21,200$


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(1) Cash (asset)

(2) Notes payable (liability)

Borrowed $4,000 from 1st AmericanBank.


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Borrowed $4,000 from 1st AmericanBank.



Accounts

Payable

Notes

Payable

J. Scott,

Capital

(1) 20,000$ 20,000$

(2) (1,000) 1,000$

(3) (15,000) 15,000$

(4) 200 1,000 1,200$

(5) 4,000 4,000$

8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$

25,200$ = 25,200$


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Accounts

Payable

Notes

Payable

J. Scott,

CapitalBal. 8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$

8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$

25,200$ = 25,200$


The balances so far appear below. Note that theBalance Sheet Equation is still in balance.

Now lets look at transactions involving

revenue, expenses and withdrawals.


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(1) Cash (asset)

(2) Revenues (equity)

Rendered consulting servicesreceiving $3,000 cash.


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(1) Cash (asset)

(2) Salaries expense (equity)

Paid salaries of $800 to employees.

Remember that the balance in the salariesexpense account actually increases.

But, equity actually decreases because

expenses reduce equity.


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(1) Cash (asset)

(2) J. Scott, Withdrawals (equity)

J. Scott withdrew $500 from thebusiness for personal use.

Remember that the balance in the J. Scott,

Withdrawals account actually increases.

But, equity actually decreases because

withdrawals reduce equity.


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Assets = Liabilities +


Accounts

Payable

Notes

Payable

J. Scott,

Capital

J. Scott,

Withdrawal Revenue ExpensesBal. 8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$

(6) 3,000 3,000$

(7) (800) (800)$

(8) (500) (500)$

9,700$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$ (500)$ 3,000$ (800)$

26,900$ = 29,500$

Equity

Remember that withdrawals decreaseequity.

J. Scott withdrew $500 from thebusiness for personal use.


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Financial Statements

Lets prepare the Financial Statements

reflecting the transactions we have recorded.

1. Income Statement2. Statement of Owners Equity

3. Balance Sheet

4. Statement of Cash Flows


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Scott CompanyI St t t


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The profit of$2,200

increasesScotts capital

by $2,200.

Revenues:

Consulting revenue 3.000$Less Expenses:

Salaries expense 800

Profit for the period 2.200$

Income Statement

For Month Ended 31 December 2006

J. Scott, Capital, 1 Dec. 2006 -$

Add: Investment by owner 20.000Net income 2.200

Less: Withdrawals 500

J. Scott, Capital, 31 Dec. 2006 21.700$

Scott Company

Statement of Owner's Equity


The Statement ofOwners Equity

explains changes in

equity from profit (or

loss) and from owner

investments andwithdrawals for a

period of time.

Scott Company


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J. Scott, Capital, 1 Dec. 2006 -$

Add: Investment by owner 20.000

Profit for the period 2.200

Less: Withdrawals 500

J. Scott, Capital, 31 Dec.2006 21.700$

Scott Company

Statement of Owner's Equity


The Balance

Sheetdescribes acompanys

financialposition at apoint in time.

Owners Equity in Balance Sheet

SCOTT COMPANY


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ASSETS

Non-current assets Equipment $16,000

Total non-current assets $16,000

Current Assets

Cash $ 9,700

Supplies 1,200

Total current assets 10,900

Total assets $ 26,900

EQUITY AND LIABILITIES

EquityJ.Scott, Capital $ 21,700

BALANCE SHEET

31 DECEMBER 2006

SCOTT COMPANY

From Statement of Owners Equity


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Current liabilities

Accounts payable $1,200

Notes payable 4,000

Total current liabilities $5,200

Total equity and liabilities $26,900

BALANCE SHEET

31 DECEMBER 2006

SCOTT COMPANY

SCOTT COMPANY


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Cash flows from operating activities:

Cash received from clients 3,000$Purchase of supplies (1,000)

Cash paid to employees (800)

Net cash provided by operating activities 1,200$

Cash flows from investing activities:

Purchase of equipment (15,000)

Net cash used in investing activities (15,000)Cash flows from financing activities:

Investment by owner 20,000

Borrowed at bank 4,000

Withdrawal by owner (500)

Net cash provided by financing activities 23,500

Net increase in cash 9,700$Cash balance, 1 December 2006 -

Cash balance, 31 December 2006 9,700$

STATEMENT OF CASH FLOWS

FOR THE MONTH ENDED 31 DECEMBER 2006

SCOTT COMPANY

The Statement of Cash Flowsidentifies cash inflows and cash outflows over a

period of time.


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Chapter 1 - Acc in Business

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