TOPIC 1

CONCEPTUAL
FRAMEWORK
LEARNING OBJECTIVES

• Explain the definition of accounting.

• Explain the various users of

accounting information and their
needs.

• Explain the various types of business

and forms of business organisation.

• Explain the basic accounting

concepts used in preparing financial
statements.
KEY POINTS

1. Basic Introduction to Accounting

2. Users of Accounting Information

3. Nature of Business

4. Business Organisations

5. Accounting Concepts

6. Basic Introduction to Financial

Statements
1. BASIC INTRODUCTION TO
ACCOUNTING
 WHAT IS ACCOUNTING?
The process of RECORDING, REPORTING and INTERPRETING financial information.

1 2
REPORTING
3
INTERPRETING
RECORDING

DATA ENTRY ACCOUNTING ANALYSIS /

REPORTS ASSESSMENT
BOOK- OF FINANCIAL
KEEPING REPORTS
WHAT DOES ACCOUNTING RECORD?
Transactions:
• Economic event or activity that affects the financial condition of a business.
• Must be entered into the accounting records.
• Two types of transactions, cash and credit.

CASH CREDIT
Immediate payment Payment is postponed
is made to a future date
PURPOSE OF ACCOUNTING
• To permit users to make informed
judgments and decisions.

• To provide financial information about

business organizations to various
interested parties for decision making.

WHO USE ACCOUNTING DATA?

• External Users - outside of the organisation

• Internal Users - within the organisation

2. USERS OF ACCOUNTING
INFORMATION
INTERNAL USERS Work for the company and own the company

USERS WHO ARE THEY? WHY DO THEY NEED

THE FINANCIAL INFO?

SHAREHOLDERS Any person, company, or institution Decide whether to

that owns shares in a company. They buy/remain/sell shares.
will be paid back in dividend depending
on business’ profit.

OWNERS Providers of capital to the business Decide whether to expand,

organization; individuals who own the continue/end the business.
business.

MANAGERS Individuals responsible for managing Make decision on business

and making decisions for their operations.
departments in the company.

EMPLOYEES Individuals who work in the company. To know company’s ability to

pay salary & other benefits,
job security, career
advancement.
3. NATURE OF BUSINESS
NATURE OF BUSINESS

Primary activities in which basic

resources (inputs) are assembled and
processed to provide goods or services
(outputs) to customers.

Objective: To maximise profits

Profits = Revenue minus Cost/Expenses

 TYPES OF BUSINESSES
MANUFACTURING MERCHANDISING SERVICE
PROTON: CARS AUTOMOTIVE AEON: GENERAL MERCHANDISE DISNEY: ENTERTAINMENT
PARTS
TOYS'R'US: TOYS MALAYSIA AIRLINE: FLIGHT
INTEL: COMPUTER CHIPS SERVICES, TRANSPORTATION
GUARDIAN: BEAUTY & HEALTH
BOEING: JET AIRCRAFT PRODUCTS HILTON HOTELS:
HOSPITALITY AND LODGING
NIKE: ATHLETIC SHOES AND AMAZON.COM: BOOKS,
APPAREL ELECTRONICS, HOME- DHL EXPRESS: DELIVERY
IMPROVEMENT ITEMS, TOYS,
COCA-COLA: BEVERAGES ETC. MAXIS:
TELECOMMUNICATION
PANASONIC: ELECTRONICS
PRODUCTS

PRODUCE GOODS BUY/SELL GOODS PROVIDE SERVICES

RETAIL SALES
4. BUSINESS ORGANISATION
PROPRIETORSHIP

Owned by one individual

• Ease in organising
PROS • Low cost of organising
Often small businesses

Owner receives any profits and suffers

any losses and is personally liable for
• Limited source of financial resources
all debts.
CONS • Unlimited liability (the need to
personally bear all losses and debts)
PARTNERSHIP

Owned by two or more individuals

• More financial resources
PROS • Additional management skills
Often small to medium businesses

Generally unlimited liability

• Unlimited liability (the need to

CONS personally bear all losses and debts)
CORPORATION

Organised under Company Law as a • The ability to obtain large amounts

separate legal entity PROS of resources by issuing shares
• Limited liability
Ownership divided into the number of
shares held

Often medium to large businesses

CONS • Double taxation

Limited liability (shareholders are not

personally liable for company’s debts
or losses)
5. ACCOUNTING CONCEPTS
ACCOUNTING CONCEPTS
• Business Entity
• Going Concern
• Historical Cost
• Money Measurement
• Objectivity
• Accounting Period
• Consistency
• Conservatism/Prudence
• Accrual
• Matching Principle
• Materiality
• Full Disclosure
 BUSINESS ENTITY

What does the

Examples
concept say?
The business is regarded as an accounting Owner’s personal insurance expense must NOT
entity separated from its owners, creditors, be recorded as the business expense.
employers, customers and other persons.
Owner’s house/family expenses must NOT be
All business transactions must be recorded recorded as the business expense.
from the point of view of the business and
separated from non-business (personal) If owner uses business cash to pay for personal
transactions. or family expenses (withdrawal by owner for
personal use), it should be recorded into
drawing account.
 GOING CONCERN

What does the

Examples
Examples
concept say?
It is assumed that business will continue to The Coca Cola Company was established in 1892
operate for the foreseeable future (indefinite and will continue to operate for the foreseeable
life). future.

Due to this, business will not sell off its assets The current market value of all its assets
and will ignore current market values of (building, vehicles, machine, etc.) are ignored
assets. because they will be utilised by the busines in its
normal operations and not for sale.
 HISTORICAL COST

What does the

Examples
Examples
concept say?
All transactions are recorded at their original A building was purchased at the price of
cost (purchase price). RM400,000 in January 2019.

Today, the value of the building is RM550,000.

Amount that should be recorded in the account :

RM400,000
 MONEY
MEASUREMENT

What does the

Examples
Examples
concept say?
All transactions of business are recorded in Accounting data - sales revenue, electricity
monetary terms. expenses, rental expenses (record)

If the event cannot be measured in monetary Non accounting data - motivational level of the
terms, it is not considered as accounting data. staff, inefficient management, poor working
conditions (don’t record)
 OBJECTIVITY

What does the

Examples
Examples
concept say?
All accounting information recorded must be Equipment purchased by company is recorded
based on verifiable evidence such as receipts, based on the information (amount, date,
invoices or other relevant documents. supplier name, etc) written on the
invoice/receipt.
Important information on the document:
amount, date, seller’s name, etc.
 ACCOUNTING
PERIOD

What does the

Examples
Examples
concept say?
Span of time (equal length of business life Full accounting period (12mths):
cycle) covered by a set of financial statements. 1 Jan 22 – 31 Dec 22
1 Jul 22 – 30 June 23
Usually 12 months (yearly) for full sets of Monthly:
financial statement. Other length: monthly, 1 Jan 24 to 31 Jan 24
quarterly, half-yearly, etc. Quarterly:
1 Jan 24 to 31 Mar 24
Half-yearly:
1 Jan 24 to 30 Jun 24
 CONSISTENCY

What does the

Examples
Examples
concept say?
The same accounting method should be used BTS Enterprise applies Straight Line method in
to prepare reports in each accounting period. the calculation of depreciation for its assets
every year.
Purpose:
Ensure easy comparison yearly
Prevent misleading profits
 CONSERVATISM/
PRUDENCE

What does the

Examples
Examples
concept say?
Cautious in preparing accounting reports so SWY Sdn. Bhd. forecasted its annual sales to be
that: RM50,000. The accountant must not record the
anticipated sales/income in the financial statement.
Income & assets are not overstated (not to
anticipate income). There were signs that some of Aaron Sdn. Bhd.’s
customers might not be paying back the amount
Expenses & liabilities are not understated they owed. Hence, it could result in a possible loss
(provide for all losses). for the company. The company must make a
provision and record the potential loss in the
financial statement.
 ACCRUAL

What does the

Examples
Examples
concept say?
Jojo Enterprise sold goods on credit to its customer
Revenue reported when EARNED (goods on 1 Jan 2022 and received the amount in cash on
sold/services performed). 22 Feb 2022. The bookkeeper should record the
transaction on ___________.
Expenses reported when INCURRED (used).
Jojo Enterprise sent one of its computers for repair
Cash receipts/payments irrelevant. and was charged with RM200 repair fee on 15 Jan
2022. The repair fee was paid in cash on 1 Feb
2022. The repair expense should be recognized on
____________.
 MATCHING
PRINCIPLE

What does the

Examples
concept say?
Revenue must be matched with expenses of Jerry Enterprise's sales revenue for 2022 was
the same year/accounting period. RM25,000 while the expenses during the same
year was RM15,000. Hence, the profit earned is
Revenue - Expenses = Profits RM10,000.
 MATERIALITY

What does the

Examples
concept say?
Relating to the importance/significance of an Items bought for business use over a period of
amount or transaction. time should be recorded as assets.

Trivial matters (small/immaterial) can be However, a box of paper clips worth RM3 is
disregarded. recorded as an expense instead of an asset
because it is trivial.
Materiality threshold is a matter of
professional judgement.
FULL DISCLOSURE

What does the

Examples
Examples
concept say?
All important events/matters that will affect The company was sued by its client due to its
the business’ financial status must be reported product defects. Losing the lawsuit would incur
(disclosed). costs to the company. The CEO decided to report
the incident in the annual report as a contingent
liability, although the lawsuit's outcome is still
pending.

ABC Sdn. Bhd. decided to change its accounting

method to calculate depreciation. This change is
reported in the annual report.
6. BASIC INTRODUCTION TO
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS

Statement of Profit or Loss

A summary of the revenue and expenses for a
specific period of time.

Statement of Financial Position

A list of the assets, liabilities, and owner’s equity
as of a specific date.

Statement of Cash Flows

A summary of the cash receipts and
disbursements for a specific period of time.
SELF-EXERCISES
SELF-EXERCISE 1
1. Valuing closing inventory at cost is an application of 3. Including private costs incurred in running a car as
which concept? business costs would violate the concept of:
a. Prudence a. Historical cost
b. Consistency b. Going concern
c. Historical cost c. Consistency
d. Money measurement d. Business entity

2. Which of the following statements is not true? 4. Combining the activities of Mei Ling (the owner) and Mills
‘The going concern concept can be ignored if ______’. Sdn. Bhd. would violate the
a. business closure is in the near future a. Cost principle
b. the business is likely to fail in the forthcoming accounting b. Business entity
period c. Monetary unit assumption
c. parts of the business are likely to face closure d. Consistency principle
d. similar firms also have chosen to ignore the concept
5. A business organised as a separate legal entity under
state law having ownership divided into the number of
shares held is a
a. proprietorship
b. partnership
c. corporation
d. sole proprietorship
SELF-EXERCISE 2
In each of the following events or transactions, identify the relevant accounting concepts.

(a) At the end of the financial year, Company A recognised (d) The owner of Company D takes goods from inventory
stationery consumed but not yet invoiced as expenses. for his own personal use. This event is not recorded in the
Answer: financial statements of Company D.
Answer:
(b) During the accounting period, Company B acquired a
new machine. The machine will be used by the (e) The accounting period of Company E ends on 31 March
manufacturing department for 8 years. Depreciation will every year.
be provided on a straight-line basis so as to be similar to Answer:
the other machines owned by the company.
Answer: (f) Company F recognised the building acquired two years
ago at RM1.2 million, which is the value at the acquisition
(c) As at the year end, Company C discovered that date. The current market price of the building is now at
debtors figures include several debts which have been RM1.5 million.
outstanding for some time. The amount for doubtful debts Answer:
will be provided in the financial statements.
Answer: (g) As at the year end, Company G discovered that 10% of
its inventory are obsolete. The amount of the obsolete
inventory will be recognised in the financial statements.
Answer:
SELF-EXERCISE 3
Identify the appropriate concepts in each of the following situations. The accounting year
ends on 31 December.

(a) Blue Enterprise acquired inventory worth RM1,000 on 1 (c) As at 31 December 20X2, the inventory of Green
November 20X2. As at the Statement of Financial Position Enterprise is worth RM50,000. Due to inventory
date, the unsold inventory is reported in the Statement of obsolescence, 50% of the inventory will be sold at a
Financial Position at RM1,000. discount of 70%. The expected loss on the inventory is
Answer: recorded in the Statement of Comprehensive Income for
the year ended 31 December 20X2.
(b) Red Enterprise inventory as at 1 October 20X2 was Answer:
valued at RM10,000. As at 31 December 20X2, company
expects to sell this inventory at RM15,000. However, the (d) It is a company policy for Purple Enterprise to provide
expected profit of RM5,000 is not recorded in the depreciation on a reducing balance method for all motor
Statement of Comprehensive Income. vehicles owned by the business.
Answer: Answer:
KEY TAKEAWAYS
• Accounting is the process of recording, reporting and interpreting financial information to permit users to
make informed judgements and decisions.

• Internal users are Shareholders, Owners, Managers and Employees while external users are Investors, Tax
Authority, Labour Union and Creditors/Bankers.

• The three types of businesses are Manufacturing, Merchandising and Service.

• The three types of business organisations are Proprietorship, Partnership and Corporation. They can be
differentiated in terms of ownership, size/structure and liability. Each type has its pros and cons
depending on the business needs.

• The twelve basic accounting concepts provide a guide to accounting practices. They involve the
assumptions used in preparing financial statements under the purview of the regulatory framework
governing financial reporting.

• The three basic financial statements are Statement of Profit or Loss, Statement of Financial Position and
Statement of Cash Flows.
THE END