INTRODUCTION TO

ACCOUNTING
DBA 103
MISS SITI NUR ZUHAINI
BINTI
MOHD FISAH

LECTURE 1
LEARNING OUTCOMES

Upon completion of the lecture, the student should be able to:

Understand that accounting is concerned with the recording,

classifying, summarising and communicating of the economic
data.

Know the different users who can benefit from using the data.

Know the different characteristics of useful infromation

Understand the rules to be followed when preparing the

financial statement

DEFINITION:

Accounting is the process of recording,

summarizing, analyzing, and interpreting
financial (money related) activities to permit
individuals and organizations to make
informed judgments and decisions.

By law all businesses must keep accounting

records. Decisions are based on accounting
information for profit and non-profit companies
alike.

FINANCIAL STATEMENT
Summary report that shows how a firm has used the funds
entrusted to it by its stockholders (shareholders) and lenders,
and what is its current financial position.
The three basic financial statements are the

Balance sheet- Which shows firm's assets, liabilities, and

net worth on a stated date;
Income statement (also called profit & loss account)Which shows how the net income of the firm is arrived at over
a stated period, and

Cash flow statement- Which shows the inflows and

outflows of cash caused by the firm's activities during a stated
period. Also called business financials.

TYPES OF BUSINESS
ORGANIZATION

Sole Proprietor
Partnership
Corporation

SOLE PROPRIETOR

A Sole Proprietorship consists of one

individual doing business. Sole Proprietorships
are the most numerous form of business
organization in the United States, however
they account for little in the way of aggregate
business receipts.

Advantages

Disadvantages

Ease of formation and dissolution.

Establishing a sole proprietorship can be as
simple as printing up business cards or
hanging a sign announcing the business.
Taking work as a contract carpenter or
freelance photographer, for example, can
establish a sole proprietorship. Likewise, a
sole proprietorship is equally easy to
dissolve.

Unlimited liability. Owners who

organize their business as a sole
proprietorship are personally
responsible for the obligations of
the business, including actions
of any employee representing
the business.

Typically, there are low start-up costs and

low operational overhead.
Ownership of all profits.
Sole Proprietorships are typically subject
to fewer regulations.
No corporate income taxes. Any income
realized by a sole proprietorship is declared
on the owner's individual income tax
return.

Limited life. In most cases, if a

business owner dies, the
business dies as well.
It may be difficult for an
individual to raise capital. It's
common for funding to be in the
form of personal savings or
personal loans.

PARTNERSHIP

A Partnership consists of two or more individuals

in business together. Partnerships may be as
small as mom and pop type operations, or as
large as some of the big legal or accounting firms
that may have dozens of partners.

There are different types of partnerships-general

partnership, limited partnership, and limited
liability partnership-the basic differences
stemming around the degree of personal liability
and management control.

Advantages

Disadvantages

Synergy. There is clear potential for the

enhancement of value resulting from two or more
individuals combining strengths.

Unlimited liability.
General partners are
individually responsible
for the obligations of the
business, creating
personal risk.

Partnerships are relatively easy to form,

however, considerable thought should be put into
developing a partnership agreement at the point
of formation.
Partnerships may be subject to fewer regulations
than corporations.

There is stronger potential of access to greater

amounts of capital.
No corporate income taxes. Partnerships declare
income by filing a partnership income tax return.
Yet the partnership pays no taxes when this
partnership tax return is filed. Rather, the
individual partners declare their pro-rata share of
the net income of the partnership on their
individual income tax returns and pay taxes at
the individual income tax rate.

Limited life. A
partnership may end upon
the withdrawal or death of
a partner.

There is a real possibility

of disputes or conflicts
between partners which
could lead to dissolving
the partnership. This
scenario enforces the
need of a partnership
agreement.

CORPORATION

Corporations are probably the dominant form of

business organization in the United States.
Although fewer in number, corporations account
for the lion's share of aggregate business receipts
in the U.S. economy.

A corporation is a legal entity doing business, and

is distinct from the individuals within the entity.
Public corporations are owned by shareholders
who elect a board of directors to oversee primary
responsibilities. Along with standard, for-profit
corporations, there are charitable, not-for-profit
corporations.

Advantages

Disadvantages

Unlimited commercial life. The

corporation is an entity of its
own and does not dissolve when
ownership changes.

Regulatory restrictions. Corporations are

typically more closely monitored by
governmental agencies, including federal, state,
and local. Complying with regulations can be
costly.

Greater flexibility in raising

capital through the sale of stock.
Ease of transferring ownership
by selling stock.
Limited liability. This limited
liability is probably the biggest
advantage to organizing as a
corporation. Individual owners in
corporations have limits on their
personal liability. Even if a
corporation is sued for billions of
dollars, individual shareholder's
liability is generally limited to
the value of their own stock in
the corporation.

Higher organizational and operational costs.

Corporations have to file articles of incorporation
with the appropriate state authorities. These
legal and clerical expenses, along with other
recurring operational expenses, can contribute to
budgetary challenges.
Double taxation. The possibility of double
taxation arises when companies declare and pay
taxes on the net income of the corporation,
which they pay through their corporate income
tax returns. If the corporation also pays out
dividends to individual shareholders, those
shareholders must declare that dividend income
as personal income and pay taxes at the
individual income tax rates. Thus, the possibility
of double taxation.

THE FLOW OF ACCOUNTING

INFORMATION

Individuals
Other users
(Employees
and labour
unions)

Business

Non-profit
organisations

Investors

Taxing
authorities

Creditors
Government
regulatory
agencies

USER OF
ACCOUNTIN
G
INFORMATIO
N:
The Decision
Makers

WHY MANAGEMENT ACCOUNTING IS

IMPORTANT IN DECISION-MAKING

Small business owners are faced with

countless decisions every business day.
Managerial accounting information provides
data-driven input to these decisions, which can
improve decision-making over the long term.

Small business managers can leverage this

powerful tool to help make their business more
successful by understanding how
management accounting benefits common
business decision contexts.

RELEVANT COST ANALYSIS

Managerial accounting information is used by

company management to determine what should be
sold and how to sell it. For example, a small business
owner may be unsure where he should focus his
marketing efforts.

To evaluate this decision, an accounting manager

could examine the costs that differ between
advertising alternatives for each product, ignoring
common costs.

This process is known as relevant cost analysis and is

a technique that is taught in basic managerial
accounting courses. The same process can be used
to determine whether to add product lines or
discontinue operations.

ACTIVITY-BASED COSTING
TECHNIQUES

Once the company has determined what products

to sell, the business needs to determine to whom
they should sell the products. By using activitybased costing techniques, small business
management can determine the activities required
to produce and service a product line.

Embedded in this information is the cost of

customers. Deciding which customers are more or
less profitable allows the business owner to focus
advertising toward the consumers who are the
most profitable.

MAKE OR BUY ANALYSIS

A primary use of managerial accounting information is

to provide information used in manufacturing. For
example, a small business owner may be considering
whether to make or buy a component needed to
manufacture the company's primary product. By
completing a make or buy analysis, she can
determine which choice is more profitable.

While this technique is certainly useful, small business

owners should only use these analyses as a factor in
the decision. There could be other non-financial
metrics that are important to consider that would not
be part of the analysis.

UTILIZING THE DATA

Managerial accounting information provides a

data-driven look at how to grow a small business.
Budgeting, financial statement projections and
balanced scorecards are just a few examples of
how managerial accounting information is used to
provide information to help management guide the
future of a company.

By focusing on this data, managers can make

decisions that aim for continuous improvement
and are justifiable based on intelligent analysis of
the company data, as opposed to gut feelings.

SPECIALISED ACCOUNTING
SERVICES

Public
Accounting

Auditing
Tax Accounting
Management consulting

Private
Accounting

Cost Accounting
Budgeting
Information System
Design
Internal Auditing
Financial Accounting
Management Accounting

ACCOUNTING CONCEPT AND

PRINCIPLES
The
accounting
entity concept

The stablemonetary-unit
concept

The goingconcern
principle

The reliability
principle

The cost
principle

THE BUSINESS ENTITY CONCEPT

The business entity concept states that the

transactions associated with a business must
be separately recorded from those of its
owners or other businesses. Doing so requires
the use of separate accounting records for the
organization that completely exclude the
assets and liabilities of any other entity or the
owner. Without this concept, the records of
multiple entities would be intermingled, making
it quite difficult to discern the financial or
taxable results of a single business.

HERE ARE SEVERAL EXAMPLES OF

THE BUSINESS ENTITY CONCEPT:

A business issues a $1,000 distribution to its sole shareholder.

This is a reduction in equity in the records of the business, and
$1,000 of taxable income to the shareholder.
The owner of a company personally acquires an office building,
and rents space in it to his company at $5,000 per month. This
rent expenditure is a valid expense to the company, and is
taxable income to the owner.
The owner of a business loans $100,000 to his company. This is
recorded by the company as a liability, and by the owner as a
loan receivable.

There are many types of business entities, such as sole

proprietorships, partnerships, corporations, and government
entities.

THERE ARE A NUMBER OF REASONS

FOR THE BUSINESS ENTITY CONCEPT,
INCLUDING:

Each business entity is taxed separately.

It is needed to calculate the financial performance
and financial position of an entity.
It is needed when an organization is liquidated, to
determine the amounts of payouts to the various
owners.
It is needed from a liability perspective, to
ascertain the assets available in the event of a
legal judgment against a business entity.
It is not possible to audit the records of a business
if the records have been combined with those of
other entities and/or individuals.

THE RELIABILITY PRINCIPLE

Definition
An accounting method which only allows
expenses to be recorded for which there is
verifiable proof, such as a receipt or invoice
prepared by a third party. This concept does
not work with certain entries such as those
pertaining to the obsolescence of inventory.

THE COST PRINCIPLE

Definition
The accounting principle that goods and services
purchased should be recorded at their historical cost
and not at their current market value.

The cost principle requires that assets be recorded at

the cash amount (or its equivalent) at the time that an
asset is acquired. For example, if equipment is
acquired for the cash amount of $50,000, the
equipment will be recorded at $50,000. If the
equipment will be useful for 10 years with no salvage
value, the straight-line depreciation expense will be
$5,000 per year (cost of $50,000 divided by 10 years).

The equipment's market value, replacement cost or

inflation-adjusted cost will not affect the annual
depreciation expense of $5,000. The company's
balance sheets will report the equipment's historical
cost minus the accumulated depreciation.

The cost principle also means that valuable brand

names and logos that were developed through effective
advertising will not be reported as assets on the
balance sheet. This could result in a company's most
valuable assets not being included in the company's
asset amounts. (On the other hand, a brand name that
is acquired through a transaction with another company
will be reported on the balance sheet at its cost.)

If a company has an asset that has a ready

market with quoted prices, the historical cost
may be replaced with the current market value
on each balance sheet. An example is an
investment consisting of shares of common
stock that are actively traded on a major stock
exchange.

THE GOING-CONCERN PRINCIPLE

Definition
A basic principle in accounting that assumes a company will
continue to operate in the foreseeable future. The significance
of this principle becomes apparent when the value of a running
business is compared with the value of one being liquidated.

The moment a business is declared liquidated, all debts

become immediately due in full, tangible assets are worth only
what they will be sold for in an auction or fire-sale, and the
intangible assets (such as goodwill) become worthless. A going
concern is the only type of business banks lend money to, and
suppliers extend credit to. Directors of publicly traded
companies must explicitly state in their financial statements
(verified through an independent audit) that they have taken all
reasonable steps to ensure the continuing viability of the
company as a going concern. Also called continuity of
business unit principle.

THE STABLE-MONETARY-UNIT
CONCEPT

The monetary unit principle states that you

only record business transactions that can be
expressed in terms of a currency. Thus, a
company cannot record such non-quantifiable
items as employee skill levels, the quality of
customer service, or the ingenuity of the
engineering staff.

The monetary unit principle also assumes that the

value of the unit of currency in which you record
transactions remains relatively stable over time.
However, given the amount of persistent currency
inflation in most economies, this assumption is not
correct.

For example, a dollar invested to buy an asset 20 years

ago is worth considerably more than a dollar invested
today, because the purchasing power of the dollar has
declined during the intervening years. The assumption
fails completely if an entity records transactions in the
currency of a hyperinflationary economy. When there is
hyperinflation, it is necessary to restate a company's
financial statements on a regular basis.

THE END