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Lecture 1

Introduction to
Financial Accounting
Overview
What is accounting?
Accounting process
Users of accounting information
Branches/types of accounting
The regulatory system
The Conceptual Framework
Accounting concepts/assumptions
Types of business entities
Introduction to Accounting
Accounting is an information system
that:
 identifies
 records
 communicates
the economic events (transactions) of
an entity to interested users to permit
informed judgement and decisions.
 The Accounting Process
Communication
Accounting

Identification Recording Reports

Prepare accounting
reports

SOFTBYTE
Select economic events Record, classify Annual Report

(transactions) and summarize

4Analyze and interpret

for users
Users of Accounting Information
 Branches of Accounting
Branches of Accounting

Auditing Taxation Forensic Accounting

Financial Management Accounting Public

Accounting Accounting
 Types of Accounting
 Financial accounting
 involves preparing financial statements in accordance
to approved standards
 E.g. Statements of Profit or Loss (SOPL)
 E.g. Statement of Financial Position (SOFP)

 Management accounting
 involves gathering & preparing costing information
intended for management
 for planning, controlling, decision-making, performance
evaluation and managing the organization as a whole.
 Types of Accounting (cont’)
 Auditing
 Activity of examining the accounts and providing
assurance services
 Taxation
 Calculating individual/business tax for the purpose of tax
assessment
 Public accounting
 involves accounting for legislative bodies and
government departments
 Forensic accounting
Involves the application of knowledge and accounting
standards in the court of law.
The Regulatory System
Aimed to produce better quality
standards with the purpose to give a
true and fair view of the financial
position and profit/loss (performance)
for the period

Continually develop ,improve, review,

revise or adopt accounting standards to
contribute to the international
development of financial reporting.
 The Regulatory System in Malaysia
 Malaysian Accounting Standards Board
(MASB)
- The sole authority established under the Financial
Reporting Act, 1997 to set legally binding finan-
cial
reporting standards in Malaysia

Note:
Generally accepted accounting principles (GAAP)
- Is a set of accounting standards/rules applied to
prepare accounting reports for external parties.
 The Regulatory System in Malaysia
 Securities Commission of Malaysia (SC)
- To promote and maintain fair, efficient, secured and
transparent securities and futures market/capital
market

 Companies Commission of Malaysia (CCM)

 Bursa Malaysia
 Bank Negara Malaysia
 Refer to pgs 6-9 for further readings
 The Conceptual Framework
a coherent system of interrelated
objectives and fundamentals that are
expected to lead to consistent
standards and which prescribe the
nature, function and limits of financial
accounting and reporting.
The objective of Conceptual Framework
is to provide financial information about
the business entity that is useful to users.
 Conceptual Framework
Fundamental Qualitative Characteris-
Enhancing Qualitative Characteristics
tics Faithful Rep-
Relevance resentation
Comparability
- Useful for de- - Not mislead- - Similarities and differences between 2 items
Predictive
cision making ing, true and
Complete-
value fairness
view
- Forecast
future per- - All de-
formance tails shown
Verifiability
Confirma- - Confirm event or amount
tory value Neutral
- Verify - Fair and
amount or not bias
event Timeliness
Material- - Not too late for decision making
ity Freedom
- Omission from Error
or misstat- - No mis-
ing affects
take
decision Understandability
making - Makes sense
 Income
- Increase in economic benefits Expense
- An accounting period - Decrease in economic benefits
- An accounting period
Conceptual Framework - Increase in equity
- Increase in asset or reduction in liability - Decrease in equity
- Not share issue - Decrease in asset or increase in liability
- Not dividend payment
Elements of
Underlying
financial
Asset
assumption
Going con-
- Control
cern statements
- Probable
- Operation
future eco-
is expected
nomic bene-
to continue
fits
for a fore-
- Cost mea-
seeable fu-
sured reli-
ture Liability
ably
- Present
obligation
- Transfer
out of eco-
nomic bene-
fits
- Cost mea-
sured reli-
ably
Equity
- Residual
amount
- Total assets
minus total
liabilities
Qualitative information
The fundamental qualitative characteristics are:
 Relevance
 Faithful representation

 The enhancing qualitative characteristics are:

 Comparability
 Verifiability
 Timeliness
 Understandabiity
Relevance
Relevant information to help evaluate past,
present or future events.
It has:
Predictive value – can be used as an
input to processes employed by users to
predict future outcomes
Confirmatory value - provides feedback
about (confirms or changes) previous
evaluations
Materiality
Information is material if its omission/
misstatement could influence the economic
decisions of users.
Materiality is an entity-specific aspect of
relevance based on the nature and/or
magnitude of the items to which the
information relates in the context of financial
report.
Faithful representation
Useful financial information must be relevant and
must also faithfully represent the phenomena or
event that it purports to represent
Has 3 characteristics: complete, neutral and free
from error

Note:
Substance over form – Need to present the accounting
information in accordance with their substance and
economic reality and not merely its legal form.
Comparability
Comparability is the qualitative characteristic
that enables users to identify and
understand similarities in, and differences
among items.

Information that is measured and reported in

a similar manner for different companies is
considered comparable
◦ Thus, comparability does not relate to a single item
Consistency
 Refers to the use of the same methods for
similar items, either from period to period
within a reporting entity or in a single
period across entities

 Company applies the same accounting

treatment to similar events from period to
period
 e.g. depreciation method and stock valuation
method,
Verifiability
Helps assure users that information
faithfully represents the economic
phenomenon
Verification can be direct or indirect
◦ Direct - verifying an amount or other
representation through direct observation
 E.g. Counting cash.
◦ Indirect - checking the inputs to a model,
formula or other technique and recalculating
the outputs using the same methodology.
Timeliness
Having information available to decision-
makers in time to be capable of
influencing their decisions
Generally, the older the information, the
less useful it is.
However, some information may continue
to be timely long after the end of a
reporting period
◦ E.g. Information to identify trends
 Understandability
 Classifying, characterising and presenting
information clearly and con-
cisely makes it understandable.

 Include financial information in a manner

that is easy to understand, but, should not
report incomplete & therefore, potentially
misleading information.
Accounting concepts/Assumptions
Going concern
Accrual concept
Matching
Separate entity
Time period
Money measurement
Historical cost
Consistency
 Accounting concepts/Assumptions
Going concern
A going concern entity prepare the accounts on the
assumption that the entity will continue in operation
for the foreseeable future

Accrual concept
Accrual basis vs cash basis
Revenue and expense are recognised and recorded
when earned and when incurred, and NOT when
cash is received/paid

Matching
Determining the expenses used up to obtain the
revenue is referred to as matching expenses against
revenues
 Accounting concepts/Assumptions
Separate entity
The activities of the business is captured in the financial
statement; i.e. affairs of business must be kept separate
from owners
Time period
Businesses can divide its economic activities into
time periods & can prepare Financial Statements at
regular interval of 12 months

Money measurement
All business transactions that are measured in terms
of money, which is a common denominator as it is
relevant, simple, understandable and useful
Accounting concepts/Assumptions
Historical cost

The price, established by the exchange transaction

[More details – Accounting for Property, Plant &
Equipment]
Consistency
Refer to Slide #20

Realisation concept
Revenue recognition - generally occurs:
(1) when realized or realizable and (2) when earned
Types of Business Entity
 SOLE PROPRIETORSHIP
Owner: 1 individual
Simple incorporation procedures
Easily dissolved
Small capital & limited financial
resources
Owner reaps all profits and bears all
losses alone
Unlimited liability characteristics
Owner pays individual income tax
 PARTNERSHIP
 Owner: Two or more partners
 Relatively simple incorporation procedures
 Relatively easy to dissolve
 Partners can bring in cash, assets and
expertise to the business
 Partners share all profits or losses
 Unlimited liability characteristics
 May be s.t. Partnership Act 1961
 COMPANY
Owner: Shareholders
Able to attract large financial resources
Separate entity from its owners
Limited liability characteristics – the
maximum the shareholder may lose is up to
the maximum of capital contributed; personal
assets cannot be claimed by the creditors
Formed under Companies Act 2016
Financial statements audited by auditor
 COMPANY
Private company Public company

Only need a single member/single Only need a single member to be

director company to be incorporated incorporated, but must have
minimum 2 directors
The shares only can be sold to other The shares can be sold to any
individual by invitation & circulated member of the public
among members
Not listed in Bursa Malaysia Listed in the Bursa Malaysia
Less strict disclosure requirement Subject to stricter requirement
- SC & Bursa Malaysia
Named as Sendirian Berhad (Sdn. Named as Berhad (Bhd.)
Bhd.)