Chapter 1

Fundamentals of Financial Accounting All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 1

Chapter 1
Introduction to Accounting

Overview

Learning Outcomes

History and Development of
Accounting
 Started from the beginning of civilisation
 Early accounting involved primitive methods
 As trade grew, accounting becomes more
sophisticated
 The Chinese introduced the abacus for counting
and calculating
 Accounting dealt with money instead of actual
goods with the arrival of coins

Accounting – cont.
 The double-entry bookkeeping was developed and

introduced by Luca Pacioli during the Renaissance when
businesses grew larger and transactions became complex.
 Luca Pacioli earned a place in history as “the Father of
Accounting”. He published the first formal book on
accounting entitled “Summa de Arithmetica, Geometria,
Proportioni et Proportionalita” (Everything about Arithmetic,
Geometric and Proportion) in 1494. The Chinese
introduced the abacus for counting and calculating.

Accounting – cont.
 Cost accounting was introduced during the

Industrial Revolution in the 18th and 19th
centuries to provide for cost control measures
and improve profits
 As businesses continue to grow, the need for
proper reporting of funds led to the
specialised area of accounting-auditing

What Is Accounting?
 Accounting can be described as a means used

by individuals and business entities to record
their financial transactions and measure their
financial performance. The person in charge is
called an accountant.
 Accounting enables businesses to analyze the
financial performance by determining the profit
or loss made during a certain period. Hence it is
sometimes called the “language of business”

What is Accounting? – cont.
 Accounting involves the process of identifying,

measuring, recording and communicating
the economic events of an organization
(business or non-business) to interested users
of the information.
IDENTIFYING MEASURING
COMMUNICATING RECORDING

What is Bookkeeping?
 Bookkeeping involves only the basic level of

accounting. i.e. the identifying and recording
of economic events and therefore bookkeeping
is only a part of the accounting process.

The Accounting Cycle
 The cycle represents the flow of information

from the beginning of the recording process to
the preparation of financial reports. The steps
in the cycle are performed in sequence and
are repeated in each period.

The Accounting Cycle – cont.
Source Journals Ledger

documents
Adjusting Entries Trial Balance
Post-adjusted
Trial Balance
Financial Statements

Users of Accounting Information
 Users of accounting information may be

categorized as internal users or external
users
THE USERS OF
ACCOUNTING
INFORMATION
INTERNAL USERS EXTERNAL USERS
MANAGEMEN DIRECT INDIRECT

EMPLOYEES
TS INTEREST INTEREST

Examples of Questions Asked
by Internal Users
 Which product line is the most profitable to the

company?
 Should we introduce new product to the
market?
 Can we afford to pay cash dividends to our
shareholders this year?
 Should we raise the price of the product?
 How much is the total cost of production for
each product line?
Examples of Questions Asked by
Internal Users – cont.
 Do we have a good career prospect in the

company?
 Should we find job in other companies?
 Are we getting satisfactory returns from our
investment?
 Does Mutiara Berhad perform better than last
year?
 Does Suria Company perform better than Bulan
Company?
Examples of Questions Asked by
Internal Users – cont.
 Should we grant the loan to the company?

 Should we supply goods on credit to the firm?
 How much is the tax payable by the company
for this year of assessment?
 What is the estimated growth rate for the
economy next year?

Branches of Accounting
 Accounting has several branches, among them

are financial accounting, cost accounting,
management accounting, taxation and auditing.
These branches of accounting are inter-related
and have been developed to serve different
types of objectives.

Branches of Accounting – cont.
BRANCHES OF ACCOUNITNG
FINANCIAL COST MANAGEMENT

AUDITING
ACCOUNTING ACCOUNTING ACCOUNTING
FORENSIC
TAXATION
ACCOUNTING

Forms of Business Organisations
 A business can take one of the three main forms

of organisation, and in some cases the
accounting procedures depend on which form
the organisation takes. The three types of
business organisations are:
– Proprietorship or Sole Trader
– Partnership
– Company

Forms of Business Organisations
– cont.
 The main differences among sole proprietorship,

partnership and company can be summarized as
follows:
Sole Proprietor Partnership Company
Owned by a single Owned by two or more Owned by unlimited
Ownership person. persons or entities. number of shareholders.
Managed by the Managed by partners. Managed by the company’s

Management owner of business Board of Directors.
Unlimited liability Unlimited liability Limited liability

– Owner is personally – Partners are jointly – Shareholders’ liability is
Liability
liable for all debts of and severely liable for limited to their investment
business. all debts of partnership. in the company.


Chapter 1

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Fundamentals of Financial Accounting All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 1

Fundamentals of Financial Accounting All Rights Reserved

Fundamentals of Financial Accounting All Rights Reserved

Fundamentals of Financial Accounting All Rights Reserved

Fundamentals of Financial Accounting All Rights Reserved

 The double-entry bookkeeping was developed and

Fundamentals of Financial Accounting All Rights Reserved

 Cost accounting was introduced during the

Fundamentals of Financial Accounting All Rights Reserved

 Accounting can be described as a means used

Fundamentals of Financial Accounting All Rights Reserved

 Accounting involves the process of identifying,

Fundamentals of Financial Accounting All Rights Reserved

 Bookkeeping involves only the basic level of

Fundamentals of Financial Accounting All Rights Reserved

 The cycle represents the flow of information

Fundamentals of Financial Accounting All Rights Reserved

Source Journals Ledger

Adjusting Entries Trial Balance

Fundamentals of Financial Accounting All Rights Reserved

 Users of accounting information may be

INTERNAL USERS EXTERNAL USERS

MANAGEMEN DIRECT INDIRECT

Fundamentals of Financial Accounting All Rights Reserved

 Which product line is the most profitable to the

 Do we have a good career prospect in the

 Should we grant the loan to the company?

Fundamentals of Financial Accounting All Rights Reserved

 Accounting has several branches, among them

Fundamentals of Financial Accounting All Rights Reserved

FINANCIAL COST MANAGEMENT

Fundamentals of Financial Accounting All Rights Reserved

 A business can take one of the three main forms

Fundamentals of Financial Accounting All Rights Reserved

 The main differences among sole proprietorship,

Managed by the Managed by partners. Managed by the company’s

Unlimited liability Unlimited liability Limited liability

Fundamentals of Financial Accounting All Rights Reserved

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