PP for Chapter 1 - Introduction to Accounting - Final

8/11/2019 PP for Chapter 1 - Introduction to Accounting - Final

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Accounting: A Malaysian Perspective,

4

th

ed

(Adapted from Accounting 22

nd

ed

)

Warren, Reeve and

Duchac

Introduction toAccounting and

Business

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1. Describe the nature of a business and types of business

organization.

2. Describe the role of ethics and accounting in business.

3. Describe the importance of business ethics, why ethics isa fundamental business concept and the basic principles of

proper ethical conduct and legal compliance.

4. Explain what accounting is.

5. Identify the users and uses of the accounting information.6. Describe the role of accounting in business and

specialized accounting fields.

After completing this chapter, you should be able to:


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After completing this chapter, you should be able to:7. Explain the meaning of generally accepted accounting

principles (GAAPs).

8. Describe the assumptions, principles, and constraints and

relate to the practice of accounting.9. State the basic accounting equation and explain each

element of the equation.

10. Analyze the effects of business transactions on the basic

elements of the accounting equation.11. Describe the financial statements of a proprietorship and

how they are prepared.


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Descr ibe the nature of a

business and types of business

organization

Objective 1

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ServiceBusiness Service

The Walt Disney Company Entertainment

Malaysia Airlines System (MAS) TransportationMaybank Corporation Financial services

Marriott International Hotels Hospitality and lodging

KPMG Auditing

1-1Types of Businesses


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Merchandising Business Product

Giant General merchandise

Amazon.com Internet books, music, videoToy R Us Toys

Panasonic Consumer electronics

Gap Inc. Apparel

Types of Businesses 1-1


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Manufacturing Business Product

General Motors Corporation Cars, trucks, vans

Nokia Cell phonesDell Inc. Personal computers

Nike Athletic shoes and apparel

F & N Company Beverages

Sony Corporation Stereos and televisions

Types of Businesses 1-1


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Proprietorship

Partnership Corporation

Limited liability company

Common Forms of Business Organizations 1-1


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Proprietorship

owned by one individual,

more than70%of business organizations in

Malaysia are organized by proprietorships,

easy and low cost of organizing,

financial resources are limited to the owners

resources, and

commonly used by small businessessuch as

hardware stores, laundries, restaurants, and grocery

shop.

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Partnership

owned by two or more individuals,

about 10%of business organizations in Malaysia

are organized by partnerships,

combine the skills and resourcesof more than one

person, and

like proprietorships, small local businesses suchas automotive repair shops, music stores, beauty

salons, and clothing stores may be organized as

partnerships.

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Corporation

organized under state or federal statutes as a separate

legal taxable entity

generates 90%of the total dollars of business receipts

received.comprises only 20% of the business organizationsin

Malaysia.

ownership is divided into sharesof stock, sold to

shareholders (stockholders)able to obtain large amount of resources by issuing

stock.

is used only by large businesses.

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L imited l iabi l i ty company(LLC)

combines attributes of a partnership and a

corporation in that it is organized as a corporation.

can elect to be taxed as a partnership

a popular alternative to a partnership

has tax and liability advantages to the owners.

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A business stakeholderis a

person orentity having an interest

in the economic performance and

well-being of a business.

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Capital market stakeholders

provide the major financing for thebusiness in order for the business to

begin and continue its operations.

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Product or service market stakeholders

include customers who purchase the

businesss products or services as well

as the vendors who supply inputs to the

business.

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I nternal stakeholdersinclude

individuals employed by the business.

Managers have an incentive tomaximize the economic value of the

business. Employees have an interest

because their jobs depend on it.

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Describe the role of ethics and accounting in

business

Describe the importance of business ethics,

why ethics is a fundamental business

concept and the basic pr inciples of proper

ethical conduct and legal compliance.

Objective 2 and 3

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Why ethics?

Because our actions are watched and judged as

r ight or wrong, honest or dishonest, and fair or bias.

because it has impact on society and others.

to communicate credible economic information

activities.

These judgments represent the standards of conduct

known as ethics.

Ethicsis the moral principles that guide the

conduct of individuals.

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Explain what accounting is.

Objective 4

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Accounting

aninformation system that provides

reports to stakeholders about theeconomic activities and condition of a

business.

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I denti fy the users and uses of the

accounting information

Objective 5

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Who uses the accounting information?

I nternal users

eg. marketing managers, production supervisors,

finance directors, and company officers.

they need detailed information like financial

comparison of operating alternatives, projection of

income from new sales, and forecasts of cash needs

for the coming year on a timely basis in running thebusiness.

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Who uses the accounting information?

External users

Investorsto make decisions whether to buy, hold, or sell their sharein the company.

Tax authoritycheck for companys tax compliance.

Security Commission (SC)to make sure that company is operating

within the prescribed rules.

Customersobserve whether company continues to maintain product

quality and warranty and then decide whether to continue supporting

its products.

Labour unionwant to know whether company can afford to give pay

raises or benefits.

Economic plannersto forecast economic activities.

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The process by which accounting provides

information to business stakeholders is as follows: Identify stakeholders.

Assess stakeholders information needs.

Design the accounting information system to meet

stakeholders needs.

Record economic data about business activities and events.

Prepare accounting reports for stakeholders.

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Descr ibe the role of the accounting

profession in business and specialized

accounting fields

Objective 6

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F inancial accountingis primarily concernedwith the recording and reporting of economic

data and activities for a business.

Managerial accountinguses both financial

accounting and estimated data to aid

management in running day-to-dayoperations and in planning future operations.

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Accountants employed by a business firm or

a not-for-profit organization are said to be

employed in private accounting.

Accountants and their staff who provide

services on a fee basis are said to be

employed in public accounting.

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GAAPs(Generally Accounting Accepted Principles)are a standard set of rules and standard system used in

preparing financial statements so that stakeholders can

compare financial performance and condition of one

company to another.

Accounting principles and concepts develop from

research, practice, and pronouncements of authoritative

bodies such as the Malaysian Accounting StandardsBoard (MASB).

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Describe the assumptions,pr inciples, and constraints

and relate to the practice of

accounting.

Objective 8

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There are at least five basic accountingprinciplesguiding accounting practices namely:

[i] Cost Principle,

[ii] Objectivity Principle,

[iii] Revenue Recognition Principle,

[iv] Matching Principle, and

[v] Full Disclosure Principle.

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There are two main accounting constraints:

[i] conservatism and

[ii] materiality

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The business entity concept

limits the economic data in

the accounting system to

data related directly to the

activities of the business.

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The objectivity concept

requires that the accountingrecords and reports be based

upon objective evidence.

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The unit of measure

conceptrequires thateconomic data be

recorded in dollars.

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State the basic accountingequation and explain each

element of the equation.

Objective 9

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Assets = Liabilities + Owners Equity

The resourcesowned by a

business

The Accounting Equation 1-9

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The rights of the

creditors, which

represent debts

of the business



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The rights of theowners




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Analyze the effects of businesstransactions on the basic elements

of the accounting equation.

Objective 10

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A business transactionis an

economic event or condition that

directly changes an entitys

financial condition or directly

affects its results of operations.

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On November 1, 2007, Kris

Klarah begins a business that

will be known as

JaringSolutions.

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a. Kris Klarah deposits $25,000 in a bank

account in the name of JaringSolutions.

Kris Klarah, Capital

25,000 Investment

by Kris

Klarah

Cash

25,000a.=

Assets Owners Equity=

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Accounts Kris Klarah,

Cash + Supplies + Land Payable Capital

Assets

c. During the month, JaringSolutionspurchased supplies for $1,350 and agreed

to pay the supplier in the near future (on

account).

OwnersLiabilities + Equity=

5,000 20,000 25,000=+1,350 +1,350c.

Bal.

5,000 1,350 20,000 1,350 25,000Bal.

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Beginning with entry (d) the

asset section will be shown

first, then the liabilities andowners equity will be shown in

the following slide.

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d. JaringSolutions provided services to

customers, earning fees of $7,500 and

received the amount in cash.55

Liabilities + Owners Equity

Accounts Kris Klarah, Fees

Payable Capital + Earned

1,350 25,000Bal.

+7,500 d.

+

25,000 7,500 Bal.1,350

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The amounts used in earning revenue are

called expenses. Adding expenses to the

owners equity section results in a space

problem. To adjust for these addedheadings, the word Bal. has been omitted

from the following Slides. The bottom

row in these four slides provides thebalances after each transaction.

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Cash + Supplies + Land

Assets

e. JaringSolutions paid the following

expenses: wages, $2,125; rent, $800;utilities, $450; and miscellaneous, $275.

Bal. 12,500 1,350 20,000

Bal. 8,850 1,350 20,000

e. 3,650

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Accounts Kris Klarah, Fees Wages Rent Utilities Misc.

Payable + Capital + Earned Expense Expense Expense Expense


1,350 25,000 7,5002,125 800 450 275 e.

1,350 25,000 7,500 2,125 800 450 275

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e. JaringSolutions paid the following expenses:wages, $2,125; rent, $800; utilities, $450; and

miscellaneous, $275.

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f. JaringSolutions paid $950 to

creditors during the month.


Assets

Bal. 8,850 1,350 20,000

Bal. 7,900 1,350 20,000f. 950

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Accounts Kris Klarah, Fees Wages Rent Utilities Misc.

Payable + Capital + Earned Expense Expense Expense Expense


1,350 25,000 7,500 2,125 800 450 275

400 25,000 7,500 2,125 800 450 275

f. JaringSolutions paid $950 to

creditors during the month.

f.950

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g. At the end of the month, the costof supplies on hand is $550, so

$800 of supplies were used.


Assets

Bal. 7,900 1,350 20,000

Bal. 7,900 550 20,000g. 800

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Assets

Bal. 7,900 550 20,000

Bal. 5,900 550 20,000h. 2,000

h. At the end of the month, Kriswithdrew $2,000 in cash from the

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Owners

withdrawals

Expenses

Decreased by

Owners Equity

Increased by

Owners

investments

Revenues

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Example 3

Salyo Delivery Service is owned and operated by Jo Salyo.

The following selected transactions were completed by

Salyo Delivery Service during February:

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1. Received cash from owner as additional investment,

$35,000.

2. Paid creditors on account, $1,800.

3. Billed customers for delivery services on account,

$11,250.

4. Received cash from customers on account, $6,740.

5. Paid cash to owners for personal use, $1,000.

Continued

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Example 3

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Indicate the effect of each transaction on the accounting

equation elements (Assets, Liabilities, Owners Equity,

Drawing, Revenue, and Expense) by listing the numbers

identifying the transactions, (1) through (5). Also, indicatethe specific item within the accounting equation element

that is affected. To illustrate, the answer to (1) is shown

below.

(1) Asset (Cash) increases by $35,000; Owners Equity (JoSalyo, Capital) increases by $35,000.

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Follow My Example

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(2) Asset (Cash) decreases by $1,800; Liability (Accounts

Payable) decreases by $1,800.

For Practice: PE 1-3

(3) Asset (Accounts Receivable) increases by $11,250;

Revenue (Delivery Service Fees) increases by $11,250.

(4) Asset (Cash) increases by $6,740; Asset (Accounts

Receivable) decreases by $6,740.

(5) Asset (Cash) decreases by $1,000; Owners Equity (JoSalyo, Drawing) increases by $1,000.

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Descr ibe the f inancial

statements of a propr ietorship,

explain how they interrelate,

and how they are prepared.

Objective 11

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Accounting reports, called

f inancial statements,provide summarized

information to the owner.

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The incomestatementis asummary of the revenue and

expensesfor a specific

period of time, such as amonth or a year.

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Net income is carried

to the statement of

owners equity

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A statement of owners equityis a summary of the changes

in the owners equity that haveoccurred during a specific

period of time.

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From the income statement

To the balance sheet

Statement of Owners Equity 1-

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A balance sheetis a list of

the assets, liabilities, andowners equity as of aspecific date.

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This amount is comparedto the net cash flow on the

statement of cash flows

From the statement

of owners equity

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A statement of cash flows

is a summary of the cash

receipts and paymentsfor

a specific period of time.

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This amount should match

Cashon the balance sheet.

Statement of Cash Flows 1-

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The income statement reports the

revenues and expenses for a period of

time based on the matching concept.This concept is applied by matching the

expenses with the revenue generated

during a period by those expenses.

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The excess of revenue over

the expenses is called net

incomeor net prof it. If theexpenses exceed the revenue,

the excess is anet loss.

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Example 4

The assets and liabilities of Chickadee Travel Service at April 30,

2009, the end of the current year, and its revenue and expenses

for the year are listed below. The capital of the owner, Adam

Cellini, was $80,000 at May 1, 2008, the beginning of the current

year.

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Accounts payable $ 12,200 Miscellaneous expense $ 12,950

Accounts receivable 31,350 Office expense 63,000

Cash 53,050 Supplies 3,350

Fees earned 263,200 Wages expense 131,700

Land 80,000Prepare an income statement for the current year ended April

30, 2009.

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Follow My Example

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CHICKADEE TRAVEL SERVICE

INCOME STATEMENT

For the Year Ended April 30,

2009Fees earned $263,200

Expenses:Wages expense $131,700

Office expense 63,000

Miscellaneous expense 12,950

Total expenses 207,650

Net income $ 55,550

For practice: PE 1-4

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The statement of owners

equity reports the changes in

the owners equity for a periodof time. It is prepared afterthe

income statement.

Statement of Owners Equity 1-

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Follow My Example


STATEMENT OF OWNERS EQUITY

For the Year Ended April 30, 2009

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Adam Cellini, capital, May 1, 2008 $ 80,000

Additional investment by owner during year $ 50,000Net income for the year 55,550

$105,550

Less withdrawals 30,000

Increase in owners equity 75,550

Adam Cellini, capital, April 30, 2009 $155,550


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The account formof balance

sheet lists the assets on the left

and the liabilities and owners

equity on the rightsimilar to

design of an account.

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The report formof balance

sheet presents the liabilitiesand owners equity sections

below the assets section.

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Example

Using the data for Chickadee Travel Service shown in ExampleExercise 4 and 5, prepare the balance sheet as of April 30, 2009.

89For Practice: PE 1-6

Follow My Example

CHICKADEE TRAVEL SERVICEBALANCE SHEET

April 30, 2009Assets Liabilities

Cash $ 53,050 Accounts payable $12,200

Accounts receivable 31,350

Supplies 3,350 Owners EquityLand 80,000 Adam Cellini, capital 155,550

Total assets $167,750 Total liab. & owners eq. $167,750

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The cash f lows from

operating activi tiessection

reports a summary of cashreceipts and cash payments

from operations.

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The cash flows from investing

activitiessection reports the cash

transactions for the acquisition and sale

of relatively permanent assets.

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The cash f lows from financing

activitiessection reports the

cash transactions related to cashinvestments by the owner,

borrowings, and cash

withdrawals by the owner.

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Follow My Example



STATEMENT OF CASH FLOWSFor the Year Ended April 30, 2009

Cash flows from operating activities:Cash received from customers $251,000Deduct cash payments for expenses 210,000

Net cash flows from operating activities $ 41,000

Cash flows from investing activities:Cash payments for purchase of land (80,000)

Cash flows from financing activities:Cash received from owner as investment $ 50,000Deduct cash withdrawals by owner 30,000

Net cash flows from financing activities 20,000Net decrease in cash during year $(19,000)Cash as of May 1, 2008 72,050Cash as of April 30, 2009 $ 53,050

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The income statement and the statement

of owners equity are interrelated.

Net income or net loss

appears on both statements.

Interrelationships Among Financial Statements 1-

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The statement of owners equity and

the balance sheet are interrelated.

The owners capital at the end of the

period on the statement of owners

equity also appears on the balance

sheet as owners capital.

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PP for Chapter 1 - Introduction to Accounting - Final