CHAPTER 1: Shafawati F.

Mohd Safihie
INTRODUCTION TO Faculty of Accountancy
FINANCIAL UiTM Sabah
ACCOUNTING
SF 1
LEARNING OUTCOMES
At the end of the chapter, students should be able to:
Define accounting.
Explain the three activities of accounting- Identification,
Recording and Communication.
Explain the main objective of financial reporting.
Identify main user groups of financial statements – Internal
and external users (investors and lenders).
Understand and explain the qualitative characteristics of the
accounting information.
Understand the types of business entity.
 Differentiate the four types of business entity.
SF 2
 Business
A business can be defined as an
organization that provides goods and
services to others who wanted or needed
them.

SF 3
FATHER OF ACCOUNTANCY:
LUCA PACIOLI

Image extracted via Google Images

SF 4
WHAT IS ACCOUNTING?
Accounting is an information system that
measures business activities, processes
data into reports, and communicates
results to decision makers
(Harrison & Hongren, 2004)
Accounting is a process of
identifying, recording, classifying
business transactions, summarising
these transactions in monetary units,
the interpreting and communicating
them to those who have interests in
the business in making financial
decisions”.
(Siti Noor Hayati, Amla Abu & Rokimah)
SF 5
 DEFINITION OF ACCOUNTING
The process of classifying, recording and summarizing of
transactions and business events in monetary terms, and
interpreting the results to interested parties (users of financial
statements) to assist them in decision making.

Classifying + Recording + Summarizing + Interpreting = Accounting

SF 6
What is Three Activities of Accounting?

Three Activities

The accounting process includes

the bookkeeping function.

LO 1 Explain what accounting

SF 7 is.
STEP 1: CATION
E NTIFI
ID

• Identify the business transactions (economics

events)

SF 8
 US INES S
B T I ONS
AC
TRANS
• Economic events of the business entity
• Examples:
• Sales of goods/services
• Purchases of inventories
• Payments of expenses (rental, electricity bill, maintenance,
etc)
• Receipts of payment (from customers, debtors, interest
received, etc)
• Obtaining loan
• Purchase of business assets (eg; machinery, office
equipment, motor van)

SF 9
STEP 2: G
ORD IN
REC
 The economic events are recorded in a
systematic and chronological order to provide a
history of financial activities, (in journals and
ledgers).
 The economic events are classified and
summarized (classification into assets,
liabilities, expenses, revenue or capital)

SF 10
STEP 3: ICATION
COMMUN
• The collected financial information is
communicated to interest users by using
financial statements (accounting reports)
• Financial statements include:
• Statement of profit or loss (to determine net
profit or net loss for the year)
• Statement of financial position (to report the
total assets, liabilities and equity as at particular
date – end of financial year)

SF 11
 DIFFERENCES BETWEEN
BOOKKEEPING AND
ACCOUNTING
Covers not only the process of
recording but also other
the process of recording processes such as identifying,
business transactions measuring, and communicating
accurately and economic information to the
systematically in users of accounting information.
accordance with certain
principle or rules.

Bookkeepin
Accounting
g
SF 12
FUNCTIONS OF FINANCIAL STATEMENT

Accounting serves the function of providing valuable

information to users of accounting information.
To record & control the business transactions
To maintain accuracy in recording
To meet the requirements of the law
To present final accounts to the owners of the business
To facilitate the efficient allocation of resources

SF 13
OBJECTIVES OF
FINANCIAL STATEMENT
The primary objective is to provide information for
decision making.
To provide information about entity’s financial
performance & financial position
To provide information to evaluate the stewardship of
the entity’s management

SF 14
USES OF FINANCIAL STATEMENTS

FS tells where, when, how and why money has been spent.
FS are very helpful in evaluating the performance of a
business
To ensure the smooth running of any organisations.

SF 15
Users of Financial Information
EXTERNAL
IN
T
E
R
N
A
L

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 INTERNAL USERS OF
ACCOUNTING INFORMATION
MANAGERS:
To guide them in
planning, organizing,
and controlling the
organization and
analyzing the
operations of the
business

OWNERS: EMPLOYEES:
Interested in the profits To evaluate business ability to
earned from their pay salary and other benefits.
investment in the Interested in stability & growth
business and the of organization – job security &
financial stability. career prospect. SF 17
 EXTERNAL USERS OF
ACCOUNTING INFORMATION

Government
Creditors
s

Investors Customers

SF 18
 EXTERNAL USERS OF
ACCOUNTING INFORMATION

CREDITORS:
Interested on financial stability
and growth of the business to
determine the firm’s ability to
repay loans/ debts

GOVERNMENTS:
•To determine the taxable
income of a business.
•To make better financial
decisions for the economy.

SF 19
 EXTERNAL USERS OF
ACCOUNTING INFORMATION

INVESTORS: CUSTOMERS:
To make a decision whether or To evaluate the ability of the
not to invest in that particular business to provide a reliability
business based on their financial products or services at the lowest
status. cost.

SF 20
QUALITATIVE
CHARACTERISTICS OF
ACCOUNTING
INFORMATION
 Relevance
 Faithful representation
 Comparability
 Verifiability
 Timeliness
 Understandability

SF 21
 ua lita tiv e
Q s tic
ct e ri
Cha ra
Faithful
Relevance Comparability
Representation
• The financial • The information • The information is
information can reflects the comparable.
influence the users’ phenomena that it is • Users are able to
decision making. supposed to compare the
• The information must represent. financial position &
have predictive and • Information should performance of the
confirmatory value. free from errors, business with prior
neutral and complete. years or with other
businesses.

SF 22
 ua lita tiv e
Q s tic
ct e ri
Cha ra
Verifiability Timeliness

•The information can be •Information is reported in

verified. Different sources timely manner to enable
of information would still users to make decisions.
provide similar The older the information,
information. the less useful it is.

SF 23
 ua lita tiv e
Q s tic
ct e ri
Cha ra

Understandability

•Information presented in the financial statements

have to be understandable to users. It is assumed
that users have reasonable knowledge about the
business and about accounting.

SF 24
TYPES AND VARIOUS FORM OF BUSINESS

SF 25
TYPES / FORM OF BUSINESS ENTITIES

SOLE LIMITEDLIABILITY
PARTNERSHIP COMPANIES
PROPRIETORSHIP PARTNERSHIP

Ownership Ownership Ownership Ownership

A business with 2- 20 partners 2 - unlimited partners 2- 50 (private company)
single/sole owner. 2-50 professional partners 2- unlimited (public co.)

Legal Status Legal Status Legal Status Legal Status

No legal Created by Created by Incorporated under the
formalities agreement agreement Companies Act 2016.
needed. known as known as
Partnership Partnership
Source of Agreement.
Source of Capital Agreement.
Source of Capital Source of Capital
Capital From the partners From the partners From public /
From the owner based based shareholders
himself. on agreed portion. on agreed portion. by issuing shares.

SF 26
TYPES / FORMS OF BUSINESS ENTITIES
SOLE PARTNERSHIP LIMITEDLIABILITY
COMPANIES
PROPRIETORSHIP PARTNERSHIP
Act applied Act applied Act applied Act applied
Governed and Governed by Partnership Governed by Partnership Governed by
administered by Act 1961 Act 1961 Memorandum
Business Registration of Association and Articles
Act 1956 & 1957. Profit Sharing Profit Sharing of Association under
Profit Sharing Partner receives profit Partner receives profit Companies Act 2016
The owner receives based on profit sharing based on profit sharing Profit Sharing
and ratio stated in ratio stated in Profit earned by the
enjoy profits made and Partnership Partnership Agreement. company is distributed
suffer any losses Agreement. in
incurred. Liability Liability form of dividend.
Liability Liability
Unlimited liability. If Limited liability. if
Unlimited liability. if Limited liability. if
business fails, business fails, creditors
business fails, business
creditors have no right on
creditors fails, creditors have no
have right on personal personal
have right on personal right on personal assets.
assets Assets.
Assets.

SF 27
SF 28
THE ROLE OF ACCOUNTING PROFESSION
IN THE BUSINESS

The accounting profession plays vital role in the business

since it provides financial data to assist management in the
decision making.

It also provide audit service that is to verify the financial

report prepared by the organization.

SF 29
EMPLOYMENT
OPPORTUNITIES
CEO
Auditor (internal/external)
Accountant
Financial Executive
Bookkeeper
Tax executive

SF 30
 BUILDING Shafawati F. Mohd Safihie

BLOCKS OF Faculty of Accountancy

ACCOUNTING UiTM Sabah

SF 31
LEARNING OUTCOMES
At the end of the chapter, students should be able to:
Explain the ethics in Financial Reporting.
Explain the importance of GAAP and MFRS.
Explain the Measurement Principles
Explain and understand the Assumptions, Concepts
and Conventions and able to apply in answering the
short cases questions.
Justify the need of having GAAP and MFRS.

SF 32
THE BUILDING BLOCKS OF
ACCOUNTING
1. Ethics in financial reporting
2. Generally accepted accounting principles
and accounting standards
3. Measurement principles:
Historical cost principle
Objectivity principle
Full-disclosure principle
Revenues and expenses recognition principle

SF 33
CONTINUE…..

4. Accounting concepts, conventions and assumptions:

Monetary unit assumption
Going concern concept
Accrual based accounting
Neutrality concept
Materiality concept
Consistency concept

SF 34
ACCOUNTING CONVENTIONS,
BASES & POLICIES
Introduction:
 Accounting principles or concepts – rules that must be followed to
ensure subjectivity. Consists of conventions, bases & policy
considerations.
 Conventions – assumptions, refer to general understanding or
generally accepted ideas.
 Base or basis – principle that helps in recording process,
measurement approach.
 Policy – adoption of certain accounting method or basis &
consistent application.
The concept of true and fair view is applied in ensuring whether
company’s accounts show accurately the business' activities.
Adopt certain concepts and conventions which help to ensure that
accounting information is presented accurately and consistently.
SF 35
 s ur e ment
Mea
identify the timing and basis of the transactions that would
affect the financial statements
Prin cip les
Four measurement principles:

•Historical cost principle

•Objectivity principle
•Full-disclosure principle
•Revenue regocnition principle and
•expense recognition principle
17

SF 36
 HISTORICAL COST CONCEPT/
COST PRINCIPLE
 A measure of value in which the price of an asset is based on its
actual price (original cost) when acquired/purchased by the
business.
 It provides important cash flow information as it represents the
actual amount paid.
Example: In year 2010, a business entity bought a land at
RM500,000. In the financial statement for the year 2010, the land
account would show an amount of RM500,000. This amount
remain the same in the next financial years even though the current
market value of the land shows an increase in value.

SF 37
OBJECTIVITY PRINCIPLE
• The accounting measurements and accounting reports are
based on facts or evidence and not opinions or biases.
• Some form of evidence or documentation must exist to
verify or support a transaction before it can be recorded
into accounts.
• Example: Purchase of office equipment RM50,000. The
evidence (or source document) is the invoice received from
the seller. The invoice shows the amount agreed to by the
buyer and the seller.

SF 38
FULL DISCLOSURE
PRINCIPLES
• Disclosure – the amount and other information that are
necessary to be presented in financial statements
• All relevant information that would affect users’
understanding and decision making should be reported
in the financial statements (either on the face or in the
notes to the financial statements)
• Example: details of property, plant and equipment are
presented in a schedule showing the movement in cost
and accumulated depreciation should be shown in notes
to the financial statement.

SF 39
REVENUE RECOGNITION
PRINCIPLE
When a company agrees to perform a service or sell a product
to a customer, it has a performance obligation. (when the co.
meets this performance obligation, it recognizes revenue).
satisfied performance obligation

Customer request Cash received

service

Revenue is recognised when performance obligation is

satisfied
SF 40
EXPENSE RECOGNITION
PRINCIPLE (MATCHING
CONCEPT)
The expense recognition is tied to revenue recognition.
Expense recognition principle: the principle that companies
match efforts (expenses) with accomplishment (revenues).
-Often referred to as “matching principle”.
Example:
Employees hired in December, performed work till 30/12,
however, business paid employees’ salary in January. Salary
expense must be recognises in December because employees
work to earn December’ revenue.

SF 41
ACCOUNTING CONCEPTS
Accounting concepts consists of:

MONEY
GOING CONCERN
BUSINESS ENTITY MEASUREMENT /
MONETARY UNIT

CONSISTENCY COMPARABILITY MATERIALITY

ACCRUAL NEUTRALITY PERIODICITY

SF 42
 BUSINESS ENTITY CONCEPT
In accounting, a business is considered as a separate
entity from the owner of the business.
The business entity is therefore considered to be distinct
from its owners for the purpose of accounting or a unit by
itself.
Items recorded in bussiness books are transaction
affecting the business only.
E.g: one of the owner transfer his personal assets to the
business for business use. As a result, the assets are now
consider to be the property of the business (business view
point) & investment (owner’s view point).

SF 43
MONEY MEASUREMENT/ MONETARY UNIT
CONCEPT
Requires every recorded event or transaction is measured in
terms of money.
If cannot be expressed in terms of money, it cannot be
recorded in the accounting books.
Innovation

E.g. Ringgit Malaysia (RM) Skill

Honesty
Experience
Assumption: Attitude
Teamwork

a. Money – common denominator

b. Monetary units – appropriate basis for accounting
measurement & analysis.
c. Monetary units – most effective means of expressing to
interested parties changes in capital & exchanges of goods &
services
SF 44
 GOING CONCERN CONCEPT
Business is assumed to have an indefinite life (presumed
to be healthy and likely to continue in business for the
foreseeable future) unless there is going to be liquidated in
the near future.

It is made on the basis of long-term considerations.

SF 45
 CONSISTENCY
Deals with the consistent use of accounting basis or
methods.
Transactions and valuation methods are treated the same
way from year to year. Therefore, more meaningful
comparisons of financial performance from year to year
can be made
Where accounting policies are changed, companies are
required to disclose this fact and explain the impact of any
change.
This concept helps to achieve comparability.

SF 46
COMPARABILITY CONCEPT
Financial statements of one accounting period must be
comparable to another in order for the users to derive
meaningful decision.
Must be able to compare entity’s financial statement:
a. Through times to identify trends
b. With other’s entity – evaluate relative financial
position, performance & changes in financial position
E.g. in computing depreciation and valuing inventory
Once it is adopted, it should be followed consistently in
subsequent periods.

SF 47
MATERIALITY CONCEPT
In accounting, an amount is considered material if it has
significant effect upon financial statement of the business
[Statement of Profit or Loss (SOPL) or Statement of
Financial Position (SOFP)].
Material is exercising informed judgment & did not apply
specific rules.
E.g:
1) cost of new building is a
material amount & must be depreciated.
2) cost of an eraser or paper clips is not material.
SF 48
 ACCRUAL CONCEPT
Requires that income and expense must be recognized in
the accounting periods to which they relate rather than on
cash basis.
Revenue must be recorded in the accounting period in
which it is earned, whether received in cash or not.
Expenses, on the other hand, must be recorded in the
accounting period in which they are incurred, whether these
expenses have been paid or not.

SF 49
 NEUTRALITY CONCEPT
Financial information should be neutral and free from bias.
Information must be free from bias to be reliable.
Neutrality will lost if the financial statements are prepared
to influence users to make judgements or decision in order
to achieve predetermined outcome.

SF 50
PERIODICITY
The assumption implies that the economic activities of a
business can be divided into regular time periods:
Monthly, quarterly or yearly
Reporting purposes – yearly basis
Management purposes – Quarterly or monthly

SF 51
WHY ACCOUNTING
STANDARDS EXIST?
To have a uniform financial statements as it serve various
types of users.
To reduce the possibilities of very large variations in financial
reporting.
For comparability purposes.
To show ‘true and fair view’ of an organisation.

SF
SF 53