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Accounting in
Business
Chapter
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 and
each 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
Communicates Relevant
Reliable
Comparable
Importance of Accounting
Accounting
is a
system that
information
that is
to help users make
better decisions.
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Identifying
Business
Activities
Recording
Business
Activities

Communicating
Business
Activities
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 accounting provides
external users with financial
statements.
Internal Users
Managerial accounting provides
information needs for internal
decision makers.
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Characteristics of Accounting
Information
USEFUL
FINANCIAL
INFORMATION
CONSISTENCY COMPARABILITY
RELEVANCE
1. Predictive value
2. Feedback value
3. Timely

RELIABILITY
1. Verifiable
2. Faithful representation
3. Neutral
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Opportunities in Accounting
Financial
Preparation
Analysis
Auditing
Regulatory
Consulting
Planning
Criminal
investigation
Managerial
General accounting
Cost accounting
Budgeting
Internal auditing
Consulting
Controller
Treasurer
Strategy
Taxation
Preparation
Planning
Regulatory
Investigations
Consulting
Enforcement
Legal services
Estate planning
Accounting-
related
Lenders
Consultants
Analysts
Traders
Directors
Underwriters
Planners
Appraisers
FBI investigators
Market researchers
Systems designers
Merger services
Business valuation
Human services
Litigation support
Entrepreneurs
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Financial accounting practice is governed by
concepts and rules known as Generally Accepted
Accounting Principles (GAAP).
Generally Accepted Accounting
Principles
Relevant
Information
Affects the decision of
its users.
Reliable Information Is trusted by
users.
Comparable
Information
Is helpful in contrasting
organizations.
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The Securities Commission is the government
group that establishes reporting requirements
for companies that issue share to the public.
Setting Accounting Principles
Financial Accounting
Standards Board is the private
group that sets both broad and
specific principles.
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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
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Accounting Assumptions
Economic Entity
The business is accounted for
separately from other business
entities, including its owner
Monetary Unit Principle
Express transactions and events in
monetary, or money, units
Now Future
Going-Concern Principle
Reflects assumption that the
business will continue operating
instead of being closed or sold
Time Period
The economic life of business can be
divided into artificial time period for
the purpose of financial reporting
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Historical Cost
Accounting information is based
on actual cost.
Revenue Recognition
1. 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.
Matching
Expenses are matched against
revenues, and recorded in the
same period in which the related
revenues are earned
Accounting Principles
Full Disclosure
Report enough information for
users to make knowledgeable
decisions about the company
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Accounting Constraints
Conservatism
Income and assets be reported at
their lowest reasonable amounts (i.e.
minimizing the assets and
understating the income)
Materiality
Accountants are required to
accurately account for significant
items and transactions
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Professional Accounting Bodies and
Standard 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)
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Malaysian Institute of Accountant (MIA)
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 on
International Standards of Accounting and Reporting
(ISAR)

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Malaysian Institute of Accountant (MIA)
Objectives:
To promote and regulate professional and ethical
standards
To enhance competency through continuous
education 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

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Malaysian Institute of Certified Public
Accountant (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 in
these areas.
To preserve at all times the professional independence
of accountants in whatever capacities they may be
serving.
To maintain high standards of practice and professional
conduct by all its members.
To do all such things as may advance the profession of
accountancy 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 and
issue accounting and financial reporting standards in
Malaysia.
Working with FRF to make up the new framework for
financial reporting in Malaysia, with representation
from all relevant parties in the standard-setting
process, including preparers, users, regulators and
the 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 accountancy
profession.
Oversight the MASB's performance, financial and
funding arrangements, and as an initial source of
views for the MASB on proposed standards and
pronouncements. 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 yes
Limited 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 one
class of share, we call it common
share (or capital share).
Corporation
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Assets
Liabilities
& Equity
Accounting Equation
Liabilities Equity Assets
= +
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Land
Equipment
Buildings
Cash
Vehicles
Store
Supplies
Notes
Receivable
Accounts
Receivable
Resources
owned or
controlled
by a
company
Assets
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Taxes
Payable
Wages
Payable
Notes
Payable
Accounts
Payable
Creditors
claims on
assets
Liabilities
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Owners
claims
on
assets
Revenues
Owner
Investments
Owner
Withdrawals
Expenses
Equity
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Liabilities Equity Assets
= +
Expanded Accounting Equation
Revenues Expenses
Owner
Capital
Owner
Withdrawals
_
+
_
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Transaction Analysis Equation
The accounting equation must remain in
balance after each transaction.
Liabilities Equity Assets
= +
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Transaction Analysis



The accounts involved are:
(1) Cash (asset)
(2) J. Scott, Capital (equity)
J. Scott, the owner, contributed $20,000
cash to start the business.
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Transaction Analysis
Assets = Liabilities + Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable
J. Scott,
Capital
(1) 20,000 $ 20,000 $
20,000 $ - $ - $ - $ - $ 20,000 $
20,000 $ = 20,000 $
J. Scott, the owner, contributed $20,000
cash to start the business.
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Transaction Analysis


The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
Purchased supplies paying $1,000
cash.
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Transaction Analysis
Purchased supplies paying $1,000
cash.
Assets = Liabilities + Equity
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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Transaction Analysis


The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
Purchased equipment for $15,000
cash.
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Transaction Analysis
Purchased equipment for $15,000
cash.
Assets = Liabilities + Equity
Cash Supplies Equipment
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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Transaction Analysis


The accounts involved are:
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)
Purchased Supplies of $200 and
Equipment of $1,000 on account.
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Transaction Analysis
Purchased Supplies of $200 and
Equipment of $1,000 on account.
Assets = Liabilities + Equity
Cash Supplies Equipment
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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Transaction Analysis


The accounts involved are:
(1) Cash (asset)
(2) Notes payable (liability)
Borrowed $4,000 from 1st American
Bank.
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Transaction Analysis
Borrowed $4,000 from 1st American
Bank.
Assets = Liabilities + Equity
Cash Supplies Equipment
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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Assets = Liabilities + Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable
J. Scott,
Capital
Bal. 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 $
Transaction Analysis
The balances so far appear below. Note that the
Balance Sheet Equation is still in balance.
Now lets look at transactions involving
revenue, expenses and withdrawals.
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Transaction Analysis



The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
Rendered consulting services
receiving $3,000 cash.
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Assets = Liabilities +
Cash Supplies Equipment
Accounts
Payable
Notes
Payable
J. Scott,
Capital Revenue
Bal. 8,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000 $
(6) 3,000 3,000 $
11,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000 $ 3,000 $
28,200 $ = 28,200 $
Equity
Transaction Analysis
Rendered consulting services
receiving $3,000 cash.
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Transaction Analysis


The accounts involved are:
(1) Cash (asset)
(2) Salaries expense (equity)
Paid salaries of $800 to employees.
Remember that the balance in the salaries
expense account actually increases.
But, equity actually decreases because
expenses reduce equity.
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Transaction Analysis
Assets = Liabilities +
Cash Supplies Equipment
Accounts
Payable
Notes
Payable
J. Scott,
Capital Revenue Expenses
Bal. 8,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000 $
(6) 3,000 3,000 $
(7) (800) (800) $
10,200 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000 $ 3,000 $ (800) $
27,400 $ = 29,000 $
Equity
Remember that expenses decrease equity.
Paid salaries of $800 to employees.
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Transaction Analysis


The accounts involved are:
(1) Cash (asset)
(2) J. Scott, Withdrawals (equity)
J. Scott withdrew $500 from the
business 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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Transaction Analysis
Assets = Liabilities +
Cash Supplies Equipment
Accounts
Payable
Notes
Payable
J. Scott,
Capital
J. Scott,
Withdrawal Revenue Expenses
Bal. 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 decrease equity.
J. Scott withdrew $500 from the
business for personal use.
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Financial Statements

Lets prepare the Financial Statements
reflecting the transactions we have recorded.
1. Income Statement
2. Statement of Owners Equity
3. Balance Sheet
4. Statement of Cash Flows
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Profit is the
difference
between
Revenues and
Expenses.
Revenues:
Consulting revenue 3.000 $
Less:Expenses
Salaries expense 800
Profit for the period 2.200 $
Scott Company
Income Statement
For Month Ended 31 December 2006
The income statement describes a
companys revenues and expenses
along with the resulting profit or loss
over a period of time due to earnings
activities.
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The profit of
$2,200
increases
Scotts capital
by $2,200.
Revenues:
Consulting revenue 3.000 $
Less Expenses:
Salaries expense 800
Profit for the period 2.200 $
Scott Company
Income Statement
For Month Ended 31 December 2006
J. Scott, Capital, 1 Dec. 2006 - $
Add: Investment by owner 20.000
Net income 2.200
Less: Withdrawals 500
J. Scott, Capital, 31 Dec. 2006 21.700 $
Scott Company
Statement of Owner's Equity
For Month Ended 31 December 2006

The Statement of
Owners Equity
explains changes in
equity from profit (or
loss) and from owner
investments and
withdrawals for a
period of time.
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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
For Month Ended 31 December 2006
The Balance
Sheet
describes a
companys
financial
position at a
point in time.
Owners Equity in Balance Sheet
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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
Equity
J.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
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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 Flows identifies cash inflows and cash outflows over a
period of time.
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End of Chapter 1