WEEK 1 - LECTURE

PRINSIP PERAKAUNAN
PRINCIPLES OF ACCOUNTING
(BT11003)
Sekolah Perniagaan dan Ekonomi
School of Business and Economics
Universiti Malaysia Sabah
Semester I, 2009/2010

BT11003, SPE, UMS 1

 LECTURE OBJECTIVES
• To explain the meaning of accounting
• To identify users and uses of accounting
• To identify the accounting process
• To explain the meaning of generally
accepted accounting principles (GAAP)
and concepts
• To identify the main financial statements

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 LECTURE OUTLINE
• What is accounting?
• Accounting profession & regulatory bodies
• Accounting process
• Accounting concepts and principles
• Financial statements

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 WHAT IS ACCOUNTING?
“Accounting is a service activity. Its function
is to provide quantitative information,
primarily financial in nature, about
economic entities, that is intended to be
useful in making economic decisions” –
Statement of Accounting Principles Board
No.4

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 TYPES OF INFORMATION
• Quantitative information: Any information, which
relates to something, which can be calculated,
counted or measured
• Financial information: Any information which can
be calculated in monetary denomination or terms
• Accounting information: Any information which is
produced through the accounting process

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 ECONOMIC ENTITY (1)
• Bodies that exist separately and in varying sizes
for the sole purpose of serving the needs of
communities

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ECONOMIC ENTITY (2)
ECONOMIC ENTITY

NON-PROFIT BUSINESS

SOLE
LIMITED COMPANIES
PROPRIETERSHIPS

PARTNERSHIPS

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ECONOMIC ENTITY (3)
ECONOMIC ENTITY

NON-PROFIT BUSINESS

MANUFACTURING SERVICE

MERCHANDISING

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 PARTIES INTERESTED IN
ACCOUNTING INFORMATION (1)
• External parties:
– Potential investors
– Shareholders
– Banks and financial institutions (creditors/lendors)
– Academicians
– Tax authorities
– Other companies (competitors)
– Public

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 PARTIES INTERESTED IN
ACCOUNTING INFORMATION (2)
• Internal parties:
– Board of directors
– Management
– Employees/Union

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FINANCIAL VS MANAGEMENT
ACCOUNTING
• Financial Accounting: Produces financial
statements for the benefit of external parties
• Management Accounting: Produces financial
reports for management’s use

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ACCOUNTING PROFESSION (1)
• Malaysian Institute of Accountants (MIA), formed
under the Accountants Act 1967, is responsible
for the accounting profession in Malaysia
• Malaysian Institute of Certified Public
Accountants (MICPA), formed in 1958, is
another professional body with contribution in
standards formulation, publication of guides and
articles and conducting professional examination

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ACCOUNTING PROFESSION (2)
• Accountants are in various economic entities –
companies, accounting firms, not-for-profit
organisations, etc
• Accounting firms provide financial statements
preparation, auditing and consultancy services
• Code of Ethics adopted by the professional
bodies spell out the functions, quality of service
and manner of conduct of accountants

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ACCOUNTING PROFESSION (3)
• Regulatory Bodies (1)
– Companies Commission of Malaysia (CCM):
Established under Companies Act 1965 and its main
function is to regulate registration of companies
– Securities Commission: Established under Securities
Commission Act 1993 and its main function is to
control and supervise securities transactions

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ACCOUNTING PROFESSION (4)
• Regulatory Bodies (2)
– Bursa Saham Malaysia: Main function is to regulate
listing on the Malaysian bourse
– Foreign Investment Committee (FIC) / Ministry Of
International Trade and Industry

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THE ACCOUNTING PROCESS

MEASURING REPORTING
IDENTIFYING
& RECORDING (COMMUNICATING)

Choose what Placing Provision of

events monetary values accounting and
(transactions) (Ringgit and financial
are business in Sen) on information to
nature and transactions the various
have impact on identified as interested
an entity’s business parties
financial transactions
position
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 BOOKKEEPING VS.
ACCOUNTING
• Bookkeeping is only a part of the accounting
process and covers only recording of
transactions
• Other scope of accounting include accounting
systems, auditing, budgeting, cost analysis,
forecasting, taxation and accounting information
analysis

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 ACCOUNTING CONCEPTS &
PRINCIPLES
• Generally Accepted Accounting Principles
(GAAP) are specific guidelines for the
preparation of financial statements and “cover
conventions, rules and procedures, which are
necessary to determine the accounting practice
which is acceptable at any one time” –
Statement of Accounting Principles Board No.4
• GAAP change over time and are derived from
experiences of practitioners in the accounting
field and business to meet the needs of users
and preparers of financial statements
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ACCOUNTING CONVENTIONS
• Basis of accounting theory and practice
• Consist of concepts and principles
– Concepts: Opinion on accounting which have wider
scope i.e. covering a few situations
– Principles: Based on concepts and specific to a
certain topic

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ACCOUNTING CONCEPTS (1)
4 CONCEPTS
• The Entity Concept:
– An assumption that an economic entity is separate
from other organisations and individuals and clear
boundaries must be drawn around each entity
– Confusion may arise from unclear boundaries
• The Going-Concern Concept:
– A concept that accounting records are prepared with
the assumption that the entity will continue operations
in the foreseeable future

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ACCOUNTING CONCEPTS (2)
• The Monetary Stability Concept:
– An assumption that the value of currency used is
stable and any changes in the value of the currency is
insignificant
• The Accounting Period Concept:
– A concept that financial reports based on accounting
records are produced within a specified time period,
usually over a year

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ACCOUNTING PRINCIPLES (1)
8 PRINCIPLES
• Disclosure Principle:
– All material information must be disclosed or
published
• Objectivity Principle:
– All information disclosed must be objective i.e.
information is true and can be verified by other parties

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ACCOUNTING PRINCIPLES (2)
• Cost Principle:
– Assets acquired must be recorded at the price paid
for in the transaction
• Consistency Principle:
– Same accounting methods are applied over
consecutive time periods
– A different method may be used if the method is more
relevant and objective due to a change in
circumstances

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ACCOUNTING PRINCIPLES (3)
• Conservatism Principle:
– In valuation of assets, the lower of cost valuation must
be opted for.
– The principle also prevents overstatement of asset
values and profit/income
• Matching Principle:
– Expenses of an entity must be recognised when the
revenue of the said expense is recognised.

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ACCOUNTING PRINCIPLES (4)
• Realisation Principle:
– Revenue can be recognised at the point of sale and
not at the point when debt is recovered.
– Also known as the Accrual Principle
• Materiality Principle:
– Importance is placed on material information, i.e.
those information than can affect’s one ability to make
decisions
– Judgment is required to decide if information is
material or not

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 ACCOUNTING RULE &
PROCEDURES
• Apart from conventions, GAAP also consists of
rules, procedures and methods
• In Malaysia, Malaysian Accounting Standards
Boards (MASB), a body established under the
Financial Reporting Act 1997, is responsible to
issue standards and statement of principles for
accounting
• MASB issued standards (FRS) are based on
those issued by the International Accounting
Standards Board (IFRS)

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 TRUE AND FAIR CONCEPT
• A requirement for all limited companies under
Companies Act 1965
• Financial statements issued by an entity must
reflect truth and fairness
• GAAP helps to achieve this by:
– Controlling the presentation of financial statements
– Enhancing comparability of the financial position and
performance between entities

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 FINANCIAL STATEMENTS (1)
• Financial statements for limited companies are
known as financial reports and are required
under for all limited companies under
Companies Act 1965

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 FINANCIAL STATEMENTS (2)
• The four main financial statements are
– Income statement: Reflects the financial performance
of a company over a period of time
– Statement of Changes in Equity: Reflects the changes
of equity position of the owners of a company over a
period of time
– Balance Sheet: Reflects the financial position of a
company at a point in time
– Cash flow statement: Reflects the cash flow of a
company over a period of time

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 WEEKS 1 & 2 ASSIGNMENT
• Week 1 / Chapter 1:
– Questions 2, 6, 9, 12 and 15 (Do any 3)
– Due date: Before tutorial starts (from 20th July 2009)
• Week 2 / Chapter 2:
– Questions 1, 2 and 7 (Do any 1)
– Problems 25 and 28 (Do Both)
– Due date: Before tutorial starts (from 20th July 2009)

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