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CHAPTER 1
INTRODUCTION TO
FINANCIAL ACCOUNTING
TABLE OF CONTENTS 2

What is Accounting?

History & development of accounting

Definition and comparison between accounting and bookkeeping

Branches of accounting

The objective of general purpose of financial accounting and reporting

Users and uses of accounting information

Component of financial statements

Types of business formation

Qualitative characteristics of useful financial information (Conceptual Framework)

INTENDED LEARNING OUTCOME (ILO) 3

At the end of this chapter, student should be able to:

Define what is Accounting?

Know the history & development of accounting

Define and compare between accounting and bookkeeping

Know and understand the branches of accounting

Explain the objective of general purpose of financial accounting and reporting

Know who are the users and uses of accounting information

Know and understand the 5-component of financial statements

Know and understand the 3-type of business formations

Understand the qualitative characteristics of useful financial information

WHAT IS ACCOUNTING? • Accounting is an information system, that provides quantitative financial information to 4

internal as well as external stakeholders about the economic | business activities and
transaction, as well as the business condition, so that they can make business | economic
decisions wisely and accurately.

• Financial accounting is the maintenance of daily record of all the financial transactions, for
the preparation of suitable information regarding the financial affairs | matters of a business |
organization to be used by various users.

• Financial accounting helps to classify, analyse, summarise and record the financial
transactions for the purpose of preparation the financial report of the company.

• Accounting is the act of collecting or gathering, recording, analysing and interpreting the
financial transactions.
HISTORY AND DEVELOPMENT OF ACCOUNTING 5

THE BEGINNING OF RECORD KEEPING

Ancient Babylonia • Business transactions between two parties are recorded by a scribe on a clay tablet.
(2286 – 2242 BC) • The tablet serves as a record of the transaction and provides protection to each party.
• The scribe is the predecessor to modern accountant.

Ancient Greece • The Greeks record every transaction and also their possessions to protect “the property of gods”.
• Since business transactions are commonly conducted by barter, documentation is very descriptive.

Manorial England • Accounting records are kept to ensure that rents, fines and taxes are collected in a timely manner.
HISTORY AND DEVELOPMENT OF ACCOUNTING 6

THE DEVELOPMENT OF DOUBLE ENTRY ACCOUNTING

Commerce in Old Italy • Trading centers developed rapidly, literacy is more widespread, currency instead of barter system is
used, international banking system is introduced and the use of credit is prevalent.
• It is also common for two or more people to pool their resources and form a partnership.

• Writes a book entitled “Everything about Arithmetic, Geometry and Proportion” with 36 short
Luca Pacioli:
The Father of Accounting chapters on bookkeeping, later known as the Method of Venice.
• He recognizes three (3) important books in accounting system; the memorandum, the journal as well
the ledger.

Beginning of Corporation • The Industrial Revolution that started in England leads to a divergence between internal and external
and The Standardization of accounting information.
Accounting • Thus cost accounting and accrual basis of accounting are introduced.
LUCA PACIOLI: THE FATHER OF ACCOUNTING • Luca Pacioli, was a Franciscan friar born in Borgo San 7
Sepolcro in what is now known as Northern Italy in 1446 or
1447.
• He is best remembered for his 615-page mathematical
compendium, Summa de Arithmetica Geometria
Proportioni et Proportionalità, published in 1494; and for
his friendship with Leonardo da Vinci.
• Many accountants perceive his greatest contribution as
being the 27-page treatise on double-entry bookkeeping and
business contained within his Summa.
• Today, we still teach double-entry bookkeeping following
the principles set down by Pacioli, and all manual and
computerized accounting systems owe much of their
processing logic to the principles and processes he
described earlier.
DEFINITION OF ACCOUNTING AND BOOKKEEPING 8

ITEM BOOKKEEEPING ACCOUNTING

POSITION Bookkeeper or Account clerk Account Executive / Accountant

SCOPE • Bookkeeping involves ONLY on the basic level of • Accounting involves the process of identifying, measuring, recording,
accounting i.e. the collecting, classifying, identifying, summarising business transactions in monetary units, interpreting the financial
recording of economic events | accounting data of a business, in order to (1) assist stakeholders in making decisions and
transactions and summarising business transactions. (2) communicating the economic events of an organisation (business or non-
• Therefore, bookkeeping is only a part of the business) to interested users of financial | accounting information.
accounting process. • Used by individuals and business entities to record their financial transaction
and measure their financial performance by determining the profit or loss.

PURPOSE • To provide financial information to enable the • To produce financial statements to enable users and interested parties to make
accountant to proceed with the remaining stages of the comparisons, plans, forecasts, estimations and decisions.
accounting process.
THE DIFFERENCE AND COMPARISON OF ACCOUNTING AND BOOKKEEPING 9

COMMUNICATIN
G
ACCOUNTING

INTERPRETING ANALYSING

SUMMARISING RECORDING MEASURING

BOOKKEEPIN
G
COLLECTING CLASSIFYING IDENTIFYING
DEFINITION OF ACCOUNTING & BOOKKEEPING 10

TERM DEFINITION

CLASSIFYING • Accounting data from business documents are arranged and categorised.
• Eg. Business documents are receipts, invoices and cash bills.

IDENTIFYING • Sorting accounting data into orderly and meaningful categories

• Eg. payment, purchases, sales etc.

MEASURING • Measuring involves the translation of economic events or transactions into financial terms.
• Eg. In Ringgit and Sen.

RECORDING • Transactions are then recorded in the books eg. Journals and ledgers.
• Business or accounting transaction are recorded in order to provide a permanent history of the financial activities of the
organisation.

SUMMARISING • All will be summarised in the form of financial statement, SOPL, SOFP, etc

ANALYSING & • Financial statements are analysed and the result of the analysis will be used to guide users’ decision.
INTERPRETING • The accountant is also required to interpret the reported information.
• Interpretation involves analysing and explaining the meaning, uses and limitations of the reported data.

COMMUNICATING • The final process involves communicating the financial information to various interested parties, such as shareholders and
management, through accounting reports called financial statements.
BRANCHES OF ACCOUNTING 11

FINANCIAL MANAGEMENT
TAXATION & SST
ACCOUNTING ACCOUNTING

INTERNAL AUDIT
RISK MANAGEMENT TREASURY
EXTERNAL AUDIT

ACCOUNTING
FINANCE ANALYST FORENSIC ACCOUNTING &
INFORMATION SYSTEM
INVESTOR RELATIONS FINANCIAL CRIMINOLOGY
(IT ACCOUNTING)

PROJECT MANAGEMENT
OPPORTUNITY IN ACCOUNTING 12
AUDIT FIRM IN MALAYSIA 13
PROFESSIONAL BODIES AND CERTIFICATE 14
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THE OBJECTIVE OF THE

GENERAL PURPOSE OF
FINANCIAL
ACCOUNTING AND
REPORTING
 GENERAL OBJECTIVE OF FINANCIAL 16
REPORTING
• The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing
and potential investors, lenders and other creditors in making decision about providing resources to the entity (The conceptual framework
for financial reporting)

• The general objective of financial statements is to provide financial/accounting information about the company's financial performance
(SOPL) and financial position/Balance Sheet (SOFP) that is useful to a wide range of users in assessing the capability of company’s
management for making economic decisions.

Financial • To gather accounting information → with respect to financial performance and financial position of a business →
Statements for the purpose of preparing the financial statements.

Users of FS • To assist a wide range/ varieties of users of the financial statements → to analyse, evaluate and assess the
stewardship of the business management → to making economic decisions.
PURPOSE OF FINANCIAL ACCOUNTING 17

To keep a permanent and systematic records

To protect business properties

To ascertain the operational profit or loss

To measure the outcome of business

To ascertain the financial position of the business

To portray the liquidity position of the company

To facilitate rational decision making

To provide accounting information system

To measure the creditworthiness level of the company

To measure the level of efficiency on the usage of resources

To satisfy the requirements of various parties and agencies – Malaysian Financial Reporting Standard (MFRS) and
Companies Act 2016.
USERS AND USES OF ACCOUNTING 18
INFORMATION

The Users of
Accounting
Information

External
Internal users
Users

Direct Indirect
Management Employees
Interest Interest
USERS AND USES OF ACCOUNTING 19
INFORMATION EXTERNAL
INTERNAL
DIRECT INTEREST INDIRECT INTEREST

Business Owners/ Current Investors or Government Authorities

Shareholders future investors & Agencies
Securities Commission
(SC)
Tax Authorities
Inland Revenue Board
(IRB)

Company’s officer, Suppliers and Creditors Consumers &

Management eg. Debtors Customers
Marketing Managers
Finance Managers

Employees Bankers/ Lenders/ Public

Employee Unions Borrowers

Financial Analyst
 USERS AND USES OF ACCOUNTING 20
INFORMATION
USER USES

CURRENT & FUTURE • Concerned about risk and return of their investments eg. Dividend.
INVESTORS • To determine whether to buy, hold or sell their shares and investment.
• Current investors and future or potential investors need financial information about the business’s liquidity position and
finances, the business’s prospects and ability to generate profit and the ability of the management to handle the
business.

MANAGEMENT • Management uses financial information as a guideline to plan, organise and control the organization and analyze the
performance of the business.

FINANCE • Financial information enables the finance department to evaluate the ability of the organisation or company to pay its
DEPARTMENT business debts.
FINANCE MANAGER

MARKETING • Financial information is used as guideline to determine the policies and the price of the products to be marked.
DEPARTMENT

EMPLOYEES • Assess the stability and profitability of their employers.

• Ability to provide salary and other benefits eg. Retirement benefits.
• Employment opportunities.
 USERS AND USES OF ACCOUNTING 21
INFORMATION
USER USES

• An employee union uses financial information to ensure that their demands to the employer such as salary increments and other
EMPLOYEE UNIONS
benefits are reasonable compared with the company’s financial ability.

LENDERS, BANKERS,
• Assess the ability to settle amount owed to them when due eg. Loan and interest.
BORROWERS

SUPPLIERS AND • Assess ability to settle the amount owed when due.
CREDITORS • Over short period or long term if the company is likely to be their permanent customers.

CUSTOMERS/
• Assess the ability of the company to continue providing products and services.
CONSUMERS

• Information about allocation of resources eg. Activities of the company.

GOVERNMENT AND
• Information to enable them to regulate the business activities, determine taxation policies and basis regarding national income
AGENCIES
and similar statistics.

• Assess contribution to local economy eg. Employment and business opportunities for local suppliers.
PUBLIC • Trends and recent developments in the prosperity of the company and the range of activities.
• Corporate Social Responsibility (CSR)

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 USERS AND USES OF ACCOUNTING 22
INFORMATION
Owners: Investors:
• The owners provide funds or capital for the organization. • The prospective investors, who want to invest their money in a firm, of
• They possess curiosity in knowing whether the business is being conducted course wish to see the progress and prosperity of the firm, before investing
on sound lines or not, and whether the capital is being employed properly their amount, by going through the financial statements of the firm.
or not. Owners, being businessmen, always keep an eye on the returns from • This is to safeguard the investment.
the investment. • For this, this group is eager to go through the accounting which enables
• Comparing the accounts of various years helps in getting good pieces of them to know the safety of investment.
information.

Management: Creditors:
• The management of the business is greatly interested in knowing the • Creditors are the persons who supply goods on credit, or bankers or lenders
position of the firm. of money.
• The accounts are the basis, the management can study the merits and • It is usual that these groups are interested to know the financial soundness
demerits of the business activity. before granting credit.
• Thus, the management is interested in financial accounting to find whether • The progress and prosperity of the firm, two which credits are extended, are
the business carried on is profitable or not. largely watched by creditors from the point of view of security and further
credit.
• Profit and Loss Account and Balance Sheet are nerve centres to know the
soundness of the firm.

Employees: Government:
• Payment of bonus depends on size of profit earned by the firm. • Government keeps a close watch on the firms which yield good amount of
• The demand for wage rise, bonus, better working conditions etc. depend profits.
upon the profitability of the firm and in turn depends upon financial • The state and central Governments are interested in the financial
position. statements to know the earnings for purpose of taxation.
• For these reasons, this group is interested in accounting.
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TYPES OF BUSINESS FORMATION 23
SOLE PROPRIETORSHIP:
Capital: owner’s
Ownership: One person
Liability: Unlimited
Profit/loss: belong and borne by owner
Book and accounts: no legal obligation to keep the books

PARTNERSHIP:
Capital: contributed by partners

TPYES OF BUSINESS Ownership: 2 to 20@ prof 2 -50

Liability: unlimited
FORMATION Profit/loss: according to profit sharing ratio –
partnership agreement
Book and accounts: no legal obligation to keep the books

LIMITED COMPANIES:
Capital: contributed by shareholders through purchase of shares
Ownership: private co. = 1 -50,
public co. = 2 shareholder min, max not exceed authorised capital.
Liability: limited
Profit portion: paid to holder in the form dividend
Book and accounts: Must be properly kept annually, will be audited
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TYPES OF BUSINESS FORMATION 24

USER USES

Sole Proprietorship • Small organisation, the owner is inseparable from the business (same entity).
Sole Trader • Owner is financially and legally responsible for all debts and legal actions against the business.
• Taxes on the sole proprietorship are determined at the personal income tax rate of the owner.

Partnership • A type of business formation where two or more people share ownership of a single business.
• They must decide up front how much time and capital each will contribute.
• Partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be
resolved, how future partners will be admitted to the partnership, how partners can be bought out, or what steps will be taken to
dissolve the partnership when needed.

Companies • A separate legal entity.

• A legal entity (can sued, be sued, has property it its own name, enter into a contracts, has its own bank account and employ
people).
• Large funds through the issue of shares and debentures.
• Limited liability, perpetual existence and shares to be traded on the stock exchange (Bursa Malaysia)
• The owners of a corporation are its shareholders. The shareholders liability is only limited to the capital amount invested in the
company.

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TYPES OF BUSINESS FORMATION 25

USER USES

Co-operatives • A co-operative is an autonomous association of persons united voluntarily to meet their common economic and social
needs through a joint owned and democratically controlled entity.
• Co-operatives are joined together locally, regionally, nationally and internationally in federations, alliances and other
joint undertakings so that they can meet member needs most effectively.

Societies • They do not exist with the primary purpose of making a profit.
• Such entities normally exist with the primary purpose of furthering the interests of its members (for example, chess
clubs exist to allow chess players to play.
COMPONENT OF FINANCIAL STATEMENTS 26

SOPL Statement of Profit or Loss

SOFP Statement of Financial Position

SOCE Statement of Changes in Equity

SOCF Statement of Cash Flows

NOTES Notes To The Financial Statements

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QUALITATIVE
CHARACTERISTICS
OF USEFUL
FINANCIAL
INFORMATION
(The Conceptual
Framework of Financial
Reporting)
THE CONCEPTUAL FRAMEWORK OF FINANCIAL 28
REPORTING
FUNDAMENTAL QUALITATIVE 29
CHARACTERISTICS

https://quizlet.com/67955315/chapter-one-qualitative-characteristics-of-financial-reporting-information-sfac8-400-
flash-cards/
 FUNDAMENTAL QUALITATIVE 30
CHARACTERISTICS
Relevant • Relevant financial information is capable of making a difference in the decisions made by users if it has predictive value,
confirmatory value or both.
• Financial information has predictive value if it can be used as an input to processes employed by users to predict future outcomes.
• The predictive value and confirmatory value of financial information are interrelated.
• Information that has predictive value often also has confirmatory value.
• For example, revenue information for the current year, which can be used as the basis for predicting revenues in future years, can also
be compared with revenue predictions for the current year that were made in past years.
• The results of those comparisons can help a user to correct and improve the processes that were used to make those previous
predictions.

Materiality • Information is material if omitting it or misstating it could influence decisions that the primary users of general purpose financial
reports make on the basis of those reports, which provide financial information about a specific reporting entity.
• In other words, materiality is an entity-specific aspect of relevance based on the nature or magnitude, or both, of the items to which the
information relates in the context of an individual entity’s financial report.
• Consequently, the Board cannot specify a uniform quantitative threshold for materiality or predetermine what could be material in a
particular situation.
 FUNDAMENTAL QUALITATIVE 31
CHARACTERISTICS
Faithful • Information which is useful should faithfully represent the actual situation of a business or entity.
Representation • To provide faithful representation, information should be complete, neutral and free from error.
• Complete information includes all information necessary for users to understand the business standing.
• Information that is neutral is not slanted, weighted, emphasized, deemphasized or manipulated. In the other words, an entity cannot
select information in favour of one interested party over another.
• Free from error means there are no errors in the information or omission of information.
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COMPARABILITY VERIFIABILITY TIMELINESS UNDERSTANDABILITY

COMPARABILITY VERIFIABILITY

• Users’ decisions involve choosing between alternatives, for example, selling • Verifiability helps assure users that information faithfully represents
or holding an investment, or investing in one reporting entity or another. the economic phenomena it purports to represent. Verifiability means
Consequently, information about a reporting entity is more useful if it can be that different knowledgeable and independent observers could reach
compared with similar information about other entities and with similar consensus, although not necessarily complete agreement, that a
information about the same entity for another period or another date. particular depiction is a faithful representation. Quantified information
• Comparability is the qualitative characteristic that enables users to identify need not be a single point estimate to be verifiable. A range of possible
and understand similarities in, and differences among, items. Unlike the other amounts and the related probabilities can also be verified.
qualitative characteristics, comparability does not relate to a single item. A
comparison requires at least two items
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COMPARABILITY VERIFIABILITY TIMELINESS UNDERSTANDABILITY

TIMELINESS UNDERSTANDABILITY

• Timeliness means having information available to • Classifying, characterising and presenting information clearly and concisely makes it
decision-makers in time to be capable of understandable.
influencing their decisions. Generally, the older • Some phenomena are inherently complex and cannot be made easy to understand. Excluding
the information is the less useful it is. However, information about those phenomena from financial reports might make the information in those
some information may continue to be timely long financial reports easier to understand. However, those reports would be incomplete and therefore
after the end of a reporting period because, for possibly misleading.
example, some users may need to identify and • Financial reports are prepared for users who have a reasonable knowledge of business and
assess trends. economic activities and who review and analyse the information diligently. At times, even well-
informed and diligent users may need to seek the aid of an adviser to understand information
about complex economic phenomena.
THE COST CONSTRAINT ON USEFUL FINANCIAL 34
REPORTING
• Cost is a pervasive constraint on the information that can be provided by financial reporting. Reporting financial
information imposes costs, and it is important that those costs are justified by the benefits of reporting that information.
There are several types of costs and benefits to consider.
• Providers of financial information expend most of the effort involved in collecting, processing, verifying and
disseminating financial information, but users ultimately bear those costs in the form of reduced returns. Users of
financial information also incur costs of analysing and interpreting the information provided. If needed information is
not provided, users incur additional costs to obtain that information elsewhere or to estimate it.
• Reporting financial information that is relevant and faithfully represents what it purports to represent helps users to make
decisions with more confidence. This results in more efficient functioning of capital markets and a lower cost of capital
for the economy as a whole. An individual investor, lender or other creditor also receives benefits by making more
informed decisions. However, it is not possible for general purpose financial reports to provide all the information that
every user finds relevant.
REFERENCES 35

1. Financial Accounting & Reporting 1 by Azlina Ahmad, Nur Ashikin Mohd Saat, Radziah Mahmud, Rosmini Mohd Aripin,
Siti Manisah Ngalim, Maswati Abd Talib & Asna Atqa Abdullah.
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Q&A
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