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Topic 1 Study Guide

Uploaded by

ReneeLim
Copyright
© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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BACT1013 Financial Accounting 1 Topic 1

DIPLOMA IN BUSINESS ADMINISTRATION


DIPLOMA IN INTERNATIONAL BUSINESS
DIPLOMA IN MARKETING

FINANCIAL
ACCOUNTING 1

EDITION
MARCH 2020

Prepared by Renee Lim


BACT1013 Financial Accounting 1 Topic 1

COPYRIGHT © 2020

NO PART OF THIS WORK MAY BE REPRODUCED OR USED IN ANY FORM OR BY ANY MEANS
WITHOUT THE WRITTEN PERMISSION OF THE COLLEGE.

Prepared by Renee Lim


BACT1013 Financial Accounting 1 Topic 1

TOPIC 1 INTRODUCTION TO ACCOUNTING


Learning Objectives
 Understand the basic concepts of accounting
 Identify the users of the accounting information
 Explain the types of business entities
_________________________________________________________________________
1 What is accounting
Accounting can be defined as:
The process of identifying, measuring and communicating economic
information of a business to interested users of the information.

Accounting consists of three basic activities:-


Identifying:
 To identify whether or not an event or activity is considered an economic
activity.
 i.e.
(i) When cash is received an official receipt is given to the payer
(ii) When payment is made a payment voucher is required
(iii) When sales are made sales invoice will be issued

Recording:
 After related transactions have been identified, transactions will be recorded in
chronological order.
 Recording activities include classifying and summarising.
 i.e.
(i) Key-in the information on the documents received into accounting
system

Communication:
 Provide information to potential users in the form of financial statements, which
are also known as accounting reports.

Prepared by Renee Lim


BACT1013 Financial Accounting 1 Topic 1

Bookkeeping, which is different from accounting, refers to the mechanical aspects of


accounting, such as recording, classifying and summarising transactions.
Bookkeeping is therefore a part of accounting.

2 Objectives of financial accounting


Financial accounting is the branch of accounting that is concerned with:
(i) Recording business transactions
(ii) Preparing financial statements that report on entity’s financial performance
and financial position

Financial accounting has many objectives, including allowing business and people
know:
 If they are making a profit or a loss;
 What the entity is worth;
 How wealthy they are;
 How much they owe;
 Sufficient information that enable entity to keep a financial check on the things
they do.
However, the primary objective of financial accounting is to provide information to
users for decision-making.

3 Users of accounting information


 Users can be classified into two types:
i. Internal users refer to the owners of the business and those who are inside the
business who plan, organise and run a business;
ii. External users refer to individuals or group outside of the business who want
financial information about the business.
 Each user as different concerns or decisions to be made. For example:
Example of users Example of concern by users
Business owners To evaluate the financial status of the business
To assess the business profitability and its
Employees
consequence on their job security
Lenders To evaluate the firm’s ability to repay loan
Investors To assess the viability of investing in a company
To assess the credit worthiness of a business and
Suppliers
ascertain whether to supply goods on credit

Prepared by Renee Lim


BACT1013 Financial Accounting 1 Topic 1

To assess whether a business has the resources


Customers
to ensure the steady supply of goods in future
Government To determine the tax declared

4 Forms of businesses
There are many forms of businesses. A business can be a sole proprietorship, a
partnership, or a company.

4.1 Sole Proprietorship


 Sole proprietorship is a business owned and managed by an individual (owner).
 Characteristics:
 Easily formed and dissolved
 Has full authority to run the business
 Has few regulations to adhere to
 Has unlimited liability (Owner is personally liable for all debts of business)
 Has limited capital and limited life

4.2 Partnership
 Partnership can be formed when two and not more than twenty partners agree to
start a business together and share its profit or loss.
 Partnership is a business owned and managed by partners.
 Characteristics:
 Easily formed
 Partnership may dissolved by death or withdrawal of a partner
 Has opportunity to increase the capital
 Additional expertise and knowledge
 Has unlimited liability (Partners are jointly and severely liable for all debts of
partnership)
 Profit and loss shared among partners

4.3 Company
 Company is a separate entity from its owners.
 Separate entity assumption refers to the separation of owner’s accounts and
business’s accounts.
 Company is owned by unlimited number of shareholders but managed by the
company’s Board of Directors.
 Characteristics:
 Has limited liability
 Easily acquire large capital
 Ownership can be easily transferred
 Has to adhere to government regulations and pay corporate tax

Prepared by Renee Lim

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