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1.

HISTORY AND DEVELOPMENT OF ACCOUNTANCY

The first published works on double entry bookkeeping was done by Luca Pacioli, an Italian in 1494. Refined versions of Paciolis works were produced in England and Holland in the 17th century. This is where rules of double entry system and the preparation of financial statement were formulated.

1.2 ACCOUNTING VS BOOKKEEPING

Accounting is the process of identifying, measuring, recording and communicating economic information to permit informed judgements and decisions by users of the information. Accounting also known as language of a business. Bookkeeping is the mechanical aspects of accounting, such as recording, classifying and summarising of transactions.

1.3 OBJECTIVES OF ACCOUNTING


a) Decision making - Help management to plan strategy and policy in the future - Improve weaknesses b) Controlling - To watch and control over all business transactions that involved monetary value c) Report on financial position and performance

1.4

BRANCHES OF ACCOUNTING

The branches of accounting are shown in figure 1.1 below:

Branches of Accounting
Taxation Auditing

Forensic Accounting Government Accounting

Financial Accounting

Cost and management Accounting

Financial Accounting Financial accounting is the process of preparing the financial statements (income statement and balance sheet) from the happenings of the business transactions, that is, recording, classifying, summarizing and communicating through the final statements. It also includes preparation of cash flows statement and financial statement analysis such as ratio analysis. Cost and Management Accounting Management accounting includes activities to gather and prepare activities to gather and prepare information intended for management, for the purposes of planning, controlling, decision making, performance evaluation and generally managing the organization as a whole. The information consists of cost information and costing techniques for goods, services and production processes. The summarized management accounting reports are in the form of budgets and performance reports. Cost accounting is the process of gathering the operating cost information which will help managers in identifying, measuring and controlling expenditure. Auditing Once the financial statements are prepared, the statements must be examined to ensure that they are accurate and fair. The activity of examining the accounts is referred to as auditing. There are two levels of auditing; the internal audit and external audit which is carried out by a qualified external auditor. The financial statements that must be audited by external auditors are those of companies incorporated under Companies Act 1965. The purpose of the external audit is to enhance the credibility of the accounts and protect the interest of the shareholders. Taxation Tax accountants are responsible for calculating individual or business (sole proprietor, partnership and company) tax for the purpose of tax assessments. Besides calculating and assessing tax, tax accountants act as tax planners and advisers. In Malaysia, the tax accountants role has become more important since the Inland Revenue Board introduced the self-assessment system in the year 2000 for corporate organization and in 2005 for individuals. Tax accountants must have broad knowledge and expertise in accounting, especially in financial accounting. Government Accounting Government accounting also known as public sector accounting. Government accounting includes accounting for legislative bodies and government departments. For public sector accounting, focus is given to the process of accounting for public money and assets. This is because in the public sector, preparing accounting information is mandatory. In Malaysia, this requirement is specified under Item 97 of the Federal Constitution and Section 7 of the Financial Act 1957. The public sector includes government agencies under the federal government, state government and local municipals. Public sector accounting is different from other branches of accounting because a few factors such as the large size of the organization, multiple organization structures, multiple objectives to be achieved,

types of rules that need to be adhered to, types of responsibilities to be carried out and multiple financial resources obtained.

Forensic Accounting Forensic accounting is the latest branch of accounting that was introduced in the early 1980s. Forensic accounting involves the application of knowledge and accounting standards in the court of law. This means that it is used for investigation purposes, when misdeeds and illegal acts relating to accounting either directly or indirectly, occur. Evidence collected from the investigation will be presented to the court to help in the trials.

1.5 BASIC ACCOUNTING RULES


It is important to understand a few basic accounting rules and concepts before progressing further . These concepts can be divided into three categories, which are boundary rules, measurement rules and ethical rules. 1.5.1 Boundary rules The purpose of boundary rules is to limit the type and amount data gathered and stored in an entity or organization. Boundary rules are also known as accounting assumptions. There are three types of boundary rules which are as follows: Separate entity The transaction of the business entity is considered to be separate and distinct from all personal transactions of its ownership. Accounting period Life of a business is assumed to cover a long period of time. For accounting purposes, the period is divided into equal length, normally one year. Ongoing concern Assumption is made that a business entity will remain in operation indefinitely

1.5.2 Measurement Rules Measurement rules are also known as accounting principles. The following are the measurement rules: Money measurement Data must be presented in a financial configuration that is in monetary value, such as Ringgit Malaysia in Malaysia and US Dollar in USA. The monetary value is assumed to be stable. Historical cost Financial data must be recorded in the books of accounts or journal at cost that is the amount originally paid when transaction occurred not current market value. Realization

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 incur liability for them. Matching Expenses incurred during the generation of revenue must be matched to determine the profit of the period. It has to be noted that the expenses matched to the respective revenue must correspond to the same accounting period.

Duality All transaction occurred must have at least two effects on the financial statements which are the receiving and giving effect. This is in the form of double entry (debit and credit). Materiality An amount is considered material if it has a significant effect upon the income or the final position of the company.

1.5.3 Ethical Rules Ethics means standard morale acts which are considered reasonable. Accountants must adhere to the rules stated above and abide by the ethical rules. There are six ethical rules which are given as follows: Conservatism (prudence) No revenue or profit should be anticipated, whilst provision should be made for all possible losses. Revenue or profit should only be recorded when earning is reasonable certain. This practice makes organizational behaviour more rational and responsive. Consistency Procedures and techniques used in the preparation of financial statement from one accounting period to the next is similar. They cannot simply change their practices without concrete reasons. For example, if the accounting period for a firm is from January 1 to December 31 for the current year, the firm cannot simply change the accounting period for the next year to be April 1 to March 31. Objectivity All business transaction must be supported by objectives evidence proving that the transaction did in fact occur. Relevance Information disclosed in the financial statements must enable the users to obtain accurate and fair view of the business transactions and no information should be hidden from them. Integrity Accountants must express their views and evaluations professionally (either negative or positive). They must not have any conflict of interest, which can influence their actions and decisions in their role as the accountant of the organization. Confidentiality

All information obtained from the organization must be kept confidential by the accountants. The information can only be disclosed for professional purpose or adherence to the government law. Notes: The three rules discussed above (boundary rules, measurement rules and ethical rules) can be classified as assumptions (such as ongoing concern, accounting period, monetary measurement and separate entity) or principles (such as historical cost, matching, realization and duality) or doctrines (such as objectivity, consistency, relevance, materiality and conservatism).

1.6

FORMS OF BUSINESS
Sole Proprietor Partnership Limited Companies

Characteristics

Registration

Registered under Business Registration Act 1957 Contributed by owner Own by one person By owner Registrar of Business Unlimited All to owner No legal obligation to keep proper book of

Registered under Business Registration Act 1957 Contributed by partners according to the agreement Own by 2-20 partners By partners Partnership Act 1961 Unlimited As per partnership agreement No legal obligation to keep proper book of

Capital

Ownership Management & Control Authority Liability Profit & Loss division Books of the accounts

Registered under Companies Act 1965 (Syarikat Suruhanjaya Malaysia) Contributed by shareholders through buying of shares At least 2 and maximum unlimited By board of directors Companies Act 1965 Limited Profit is distributed in the form of dividend Proper book and records must be kept and annual

account Audit of accounts No legal obligations to have an audited accounts Drawings Income tax

account No legal obligations to have an audited accounts Drawings Income tax

Profit withdrawals Tax

account must be sent to the SSM Accounts are subject to an audit by a qualified independent auditor Dividends Corporate tax

1.7

USERS AND USES OF ACCOUNTING INFORMATION


Owner

Managers/Direct ors Employee s

INTERNAL IN USERS EXTERNAL USERS

Potential Investors Credito rs Financial Institution s Governmen t

Figure 1.1 Internal and external users of accounting

Others

Users Owners Managers Creditors Investors Employees Financial

Uses Interested in the profit earned Interested in the financial stability and growth To ensure the business is running smoothly To have the info for decision making purposes To determine the firms ability to repay loans To evaluate the financial positions of the business Firms ability to pay wages Employment prospects Loans purposes

institutions Government Others

Taxable income Academicians Planning of projects

1.8

HISTORICAL DEVELOPMENT AND CONCEPTUAL FRAMEWORK

The Conceptual Framework was created in 1980s by the Financial Accounting Standard Board and the International Accounting Standard Board in the US, Canada and Australia. The accounting conceptual framework states the principles for the preparation of generally accepted guidelines for the development of new practices and challenges to replace existing practices. The conceptual framework includes the boundaries that must be abided by accounting professionals. It consists the objectives of reporting the financial statements, the qualitative characteristics or reporting, the elements of financial statements and operational guideline. The operational guideline covers the recognition of items, measurement of values in the financial statement, presentation of financial statements and the reported entity. It is also states the assumptions, principles and limitations in each area mentioned above.

1.8.1 Generally Accepted Accounting Principles (GAAP) Generally Accepted Accounting Principles (GAAP) is defined as a set of standard or rules used by accounting professionals to prepare accounting information for external parties. GAAP started in the US when the United States Steel Corporation became the first company to issue financial statements and auditors report in 1983. GAAP consists of guidelines which includes the procedures and rules to account, record and report each transaction that occur in a profitable or nonprofitable organization. The purpose is to ensure that the financial statements can be understood by either external or internal users when they compare between firms and help them to make decisions. GAAP is widely used in financial accounting and auditing. 1.8.2 Malaysia Perspective In Malaysia, the Companies Act 1965 requires all registered companies to submit to the Companies Commission of Malaysia (Suruhanjaya Syarikat Malaysia) annual audited financial statements prepared in accordance with approved accounting standards. However, with changes in the reporting environment and good governance, there is pressure for enterprises to make adequate and even voluntary disclosure. With globalisation of economies there is a move to present highquality financial information which is internationally comparable.

In Malaysia, the financial reporting practices have developed by The Malaysian Accounting Standards Board (MASB). MASB is established under the Financial Reporting Act 1997 as an independent authority to develop and issue accounting and financial reporting standards in Malaysia. The MASB, together with the Financial Reporting Foundation (FRF), make up the new framework for financial reporting in Malaysia. This new framework comprises an independent standard-setting structure with representation from all relevant parties in the standard-setting process, including preparers, users, regulators and the accountancy profession. The functions and powers of the MASB as provided under the Act are to: o o o o o o o o o sponsor or undertake development of possible accounting standards; conduct public consultation as necessary; develop a conceptual framework for the purpose of evaluating proposed accounting standards; make such changes to proposed accounting standards as considered necessary; seek the view of the FRF in relation to new and existing standards, statement of principles, and changes to proposed standards; determine scope and application of accounting standards; and to perform such other function as the Minister of Finance may prescribe. issue statements of principles for financial reporting; issue new accounting standards as approved accounting standards and to review, revise or adopt existing accounting standards as approved accounting standards;

TUTORIAL ACTIVITIES
1. Briefly explain the followings accounting concepts: a) b) c) d) Business entity concept Prudence concept Realization concept Full disclosure principle

2. Give 3 differences between sole proprietor and partnership. 3. Give 5 differences between sole proprietor and company. 4. Give the 5 users of accounting information and their uses. 5. Define accounting. Why we need accounting?

6. Discuss the main advantage to the shareholders of a company as opposed to a sole proprietor or a partner in a partnership. 7. Differentiate between accounting and bookkeeping.

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