Chap 1 Introduction

Chapter 1
The Context and Purposes

of Financial Reporting
Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

S.MAGESHWARI,SGFS,
© Oxford Fajar Sdn. Bhd. (008974-T), 2018 AIMST UNIVERSITY 1–1
Learning Outcomes
After studying this chapter, you should be able to:

 Explain briefly the history and development of
accounting
 Explain the meaning of accounting
 Distinguish between bookkeeping and accounting
 Explain briefly the accounting cycle
 Identify the users of accounting information
 Explain the branches of accounting

S.MAGESHWARI,SGFS,
Learning Outcomes (cont.)
 Explain the roles of accountants

 Discuss the forms of business organisations
 Explain the different types of business
organisations

S.MAGESHWARI,SGFS,
1.0 Introduction
 Accounting
– important to individuals, businessmen and
companies
– deals with financial information
– helps users to make economic decisions
 Firms rely on accounting & financial information
– to decide on which investments to make; or
– whether to increase the number of employees; or
– whether to issue new shares; and
– to establish the actual profit or loss they make
S.MAGESHWARI,SGFS,
1.1 History and Development of
Accounting
 Basic single-entry bookkeeping system was

used in the beginning.
 Luca Pacioli was the first to document the
double-entry bookkeeping system of accounting
which earned him the title ‘Father of Accounting’.
 Cost accounting was introduced in the Industrial
Revolution. The need for proper reporting of
funds led to another specialised area of
accounting—auditing.

S.MAGESHWARI,SGFS,
1.2 Definition of Accounting
Accounting involves the processes of identifying,

measuring, recording and communicating the
economic events of an organisation to interested
users of the information.
 Identifying: involves the selection of data that

are considered evidence of economic activity
relevant to a particular organisation.
S.MAGESHWARI,SGFS,
(cont.)
 Measuring: involves the translation of

economic events or transactions into financial
terms, i.e. in Ringgit and sen.
– Limitations: a very skillful and experienced
employee who is invaluable to a particular
company cannot be recorded as an asset in the
company’s books of accounts because this lacks
measurability in financial terms.

S.MAGESHWARI,SGFS,
(cont.)
 Recording: the stage in which the business

transactions are recorded to provide a
permanent history of the financial activities of
the organisation.
– It consists of keeping a chronological diary of
measured events in an orderly and systematic
manner in accounting books.

S.MAGESHWARI,SGFS,
(cont.)
 Communicating: involves communicating the

financial information to various parties through
‘financial statements’.
– Financial statements are the accounting reports
that are prepared to communicate financial
information to various interested parties, such as
the shareholders and management of a business
entity.

S.MAGESHWARI,SGFS,
1.2.1 What is Bookkeeping?
Bookkeeping involves only the basic level of accounting,

i.e. the identifying and recording of economic events,
and therefore is only a part of the accounting process.
Summary of differences between bookkeeping and accounting:

S.MAGESHWARI,SGFS,
1.4 Users of Accounting
Information

S.MAGESHWARI,SGFS,
USERS OF ACCOUNTING INFORMATION
Internal Users: External Users:
Management group:  Financing group:
 Board of Directors  Investors (present and potential)
 Lenders
 Partners  Suppliers
 Managers  Public Group:
 Officers  Govt and Regulatory
Authorities
 Employees and Trade Unions
 Customers
 Rating Agencies
 Others:
 Security Analysts
 Academicians
 Researchers
1.4.1 Internal Users
 Internal users are the parties inside a

company who manage the company and work
for the business.
– Managers use accounting information to set
goals for their organisations, evaluate and
monitor progress, and to take corrective action if
necessary.
– Employees use financial information to see if the
company is profitable and whether they should
expect a salary increment.
S.MAGESHWARI,SGFS,
1.4.2 External Users
 External users are the parties outside the

business who have either a present or a potential
interest in the business, direct or indirect.
 External users with direct interest include:
– Investors/Owners
• evaluate the wisdom of buying, holding or selling their
financial interests in the company
– Creditors/Bankers
• evaluate the risks of granting credit or lending money
to businesses
S.MAGESHWARI,SGFS,
1.4.2 External Users (cont.)
 External users with indirect interest include:

– Government agencies
• The Inland Revenue Board
• Securities Commissions Malaysia and Bursa
Malaysia
– Customers: to know if the business will continue
to serve & honour warranties given on their
products
– Economic planners: to analyse & forecast
economic activities
S.MAGESHWARI,SGFS,
1.5 Branches of Accounting
Accounting has several interrelated branches, and

they have been developed to serve different sets
of objectives.

S.MAGESHWARI,SGFS,
(cont.)
 Financial Accounting
– The original form of accounting, related to the
preparation of financial statements for the use of
external users
– The main objective is to determine the profit or
loss made by a business during the year
 Cost Accounting
– The main function is to provide information to
determine the total cost of the product or service
– The objective is to help in cost control
S.MAGESHWARI,SGFS,
(cont.)
 Management Accounting
– Prepared by ‘management accountants’ for the
management—to enable it to perform its
functions
– The management uses the financial accounting
information to assist in making policies and
decisions, and controlling various business
activities and departments

S.MAGESHWARI,SGFS,
(cont.)
– Responsibilities include:
• Designing and evaluating business processes
• Preparing budgets and forecasts
• Preparing trend and ratio analysis

S.MAGESHWARI,SGFS,
(cont.)
 Auditing
– Examination & verification of company’s accounts
– Two types of auditors:
• External: independent audit firms that examine
company’s accounts; give an opinion on whether
its financial statements conform to accounting
standards, and present a true and fair view of its
financial performance & position
• Internal: company’s own accountant to evaluate
its performance & operations; make suggestions
for continuous improvement
S.MAGESHWARI,SGFS,
(cont.)
 Taxation
– Tax accountants use financial statements to
compute the company’s taxes payable, and
prepare & file tax returns forms and
documentation
 Forensic Accounting (Investigative Accounting)
– A new branch of accounting which applies
accounting, auditing and investigative skills to
detect financial wrongdoing and fraud

S.MAGESHWARI,SGFS,
1.6 Roles of Accountants
 Accountants prepare annual reports & financial

statements for planning & decision-making and
advise on taxation & investment opportunities;
– prepare, analyse & review budgets
– establish, maintain, coordinate and implement
accounting system & control procedures
 Under the Accountants Act 1967, no one can
practice as an accountant unless he is
registered as a member of the Malaysian
Institute of Accountants (MIA).
S.MAGESHWARI,SGFS,
1.7 Forms of Business
Organisations
A business can take one of three main forms of organisation.

S.MAGESHWARI,SGFS,
Forms of Business Organization
 Sole Proprietorship
 Single individual
 Unlimited Liability
 Partnership Firms
 A few individuals
 Unlimited Liability
 Limited company
 Numerous individuals, often strangers
 Large business
 Limited liability
The Accounting sequence
Record Accounting data
Classify data
Summarise data
Communicate information
Financial Statements
 Statement of profit and loss(Income

statement)
 Statement of financial position

Assets
 What a business “owns”
 Probable future economic benefits
 Examples
Cash
Investments
Buildings
Plant and Machinery
Patents and Copyrights
Accounts receivable/Customers/Debtors
Liabilities
 What a business “owes”
 Probable future sacrifices of economic
benefits
 Examples
Loans payable
Warranty obligations
Pensions payable
Income tax payable
 Accounts Payable/Suppliers/Creditors
Owner’s Equity
• It is what’s left of the assets after liabilities have been
deducted
• the same as net assets
– the owner’s claim on the entity’s assets
 Examples
 Share capital
 Share premium
 Revenues
 Retained profit
Revenues
• They are amounts received or to be received
from customers for sales of products or
services.
– sales
– performance of services
– rent
– interest
• They are amounts that have been paid or will
be paid later for costs that have been
incurred to earn revenue.
– salaries and wages
– utilities
– supplies used
– advertising
Thank you

S.MAGESHWARI,SGFS,

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Chapter 1

The Context and Purposes

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

After studying this chapter, you should be able to:

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

 Explain the roles of accountants

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

 Basic single-entry bookkeeping system was

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

Accounting involves the processes of identifying,

 Identifying: involves the selection of data that

 Measuring: involves the translation of

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

 Recording: the stage in which the business

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

 Communicating: involves communicating the

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

Bookkeeping involves only the basic level of accounting,

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

 Internal users are the parties inside a

 External users are the parties outside the

 External users with indirect interest include:

Accounting has several interrelated branches, and

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

 Accountants prepare annual reports & financial

A business can take one of three main forms of organisation.

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

 Statement of profit and loss(Income

 Statement of financial position

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

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