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8/3/2019 Topic 2 Accounting Business Noriah
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Accounting andBusiness
Topic
22
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Learning Outcomes:
At the end of this topic, students
should be able to:
1. Explain the nature and types of business.
2. Defined assets, liabilities, owners equity,
revenue and expenses.
3. Discuss on the differentiation of cash and
accrual accounting.4. Explain accounting assumptions, principles
and constraints.
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Business Entity Forms
Proprietorship
Proprietorship Partnership
Partnership Corporation
Corporation
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Cha racte ristics Proprie torshipPartne rshipCorporatio
Business e ntity yes ye s ye s
Le ga l e ntity no no ye s
Lim ite d lia bility no no ye s
Unlim ite d life no no ye s
Business ta x ed no no ye s
One ow ner a llow e d yes no ye s
*
*
*
Characteristics of Businesses
Exh.
1.8
*
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Proprietorship
Owned by one person owner is manager
No special legal requirement
Accounting viewpoint-separate entity
Legal viewpoint not separate entity - unlimitedliability owner responsible for the debts
The most common form of business organisation
in Malaysia
Not subject to business tax owner pay their owntax
Small retail stores, farms, services businesses,
professional practices in law, medicine & public
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Partnership
Owned by 2 or more
Widely used for small business & large
professional practices (CPA firms)
Accounting viewpoint business entity separatefrom personal affairs of its owner
Legal viewpoint not separate entity from owner
unlimited liability for its partners
No special legal requirement only agreementbetween partners (oral/written) sharing of profit
and loss
Each partners pay their own tax
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Corporation
Governed by: Companies Act 1965, Memorandum ofGoverned by: Companies Act 1965, Memorandum ofAssociation & Article of AssociationAssociation & Article of Association
Owners of a corporation are called shareholders (orstockholders).
When a corporation issues only one class of stock, we call it
common stock (or capital stock or ordinary capital). Stock certificate issues to each shareholders showing
number of shares
Shareholder can sell some or all his shares
Legal viewpoint separate entity from owner limited
liability owners not responsible for the debt only lose theamount they invested
Provide financial statement to shareholder
Double taxation : 1) business tax (corporate tax) 2) Tax fordividend (pay by owner)
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Definitions of Income ,Expenses Assets,Liabilities and Equity, based on MASB
Framework for the Preparation Presentation of
Financial Statement.
Refer to FRS101 Presentation of Financial
Statements at www.masb.org.my
DEFINITIONS
http://www.masb.org.my/http://www.masb.org.my/8/3/2019 Topic 2 Accounting Business Noriah
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INCOME
Income is increases in economic benefits
during the period in the form of inflows or
enhancements of assets or decreases of
liabilities that result in increases in equity,other than those relating to contributions from
equity participants.
Income includes both revenue and gains.
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INCOME
REVENUE - the gross inflow of economic benefitsduring the period arising in the course of the ordinaryactivities of an enterprise when those inflows result inincreases in equity, other than increases relating tocontributions from equity participants. increases assets results from the sales of
goods and services, fees, interest, dividends,royalties, grants and rent.
GAINS - increase assets might arise from the disposalof assets, or the revaluation of financial instruments,investment property and agricultural assets, amongother things
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EXPENSES
Expenses are decreases in economic benefits during
the period in the form of outflows or depletions of
assets or increases of liabilities that result in
decreases in equity, other than those relating to
distributions to equity participants.
Expenses include both expenses and losses.
Expense:
Salary expense, Wages Expense, Rent Expense,
Utility expense, Insurance Expense
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Probable future economic benefit obtained or controlled by a
particular entity as a result of past transactions or events
Asset can provide a future benefit in various ways:
a.) Used in production of goods & services
b) Exchange for other assets
c) Used to settle liability
d) Distributed to owners
E.g.:
1. Cash,2. Accounts and notes receivable
3. Inventories
4. Prepaid items
5.
Property, plant, and equipment
ASSETS
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LandLand
EquipmentEquipment
BuildingsBuildings
CashCash
VehiclesVehicles
Store
Supplies
Store
Supplies
Notes
Receivable
Notes
ReceivableAccounts
Receivable
Accounts
Receivable
Resourcesowned or
controlled
by a
company
Resourcesowned or
controlled
by a
company
Assets
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Assets
Inventory
Prepaid Expense : pay expense in advance
such as prepaid rent, prepaid insurance
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Probable future sacrifice of economical
benefit arising from a present obligation of a
particular entity to transfer assets or provide
services to other entities in the future as aresult of past transactions or events.
Obligation includes legal, moral, social, and
implied commitments.
LIABILITY
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Taxes
Payable
Taxes
PayableWages
Payable
Wages
Payable
Notes
Payable
Notes
PayableAccounts
Payable
Accounts
Payable
Creditors
claims on
assets
Creditors
claims on
assets
Liabilities
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OWNERS EQUITY
Residual interest in the assets of an entity that remainsafter deducting its liabilities.
E.g.: (corporation) Share capital ordinary and preferred shares
Reserves share premium, revaluationreserve, etc.
Retained earnings is the amount of theundistributed earnings of past periods.
ASSET LIABILITY = EQUITY
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Owners
claims
on
assets
Ownersclaims
on
assets
RevenuesRevenues
Owner
Investments
Owner
InvestmentsOwner
Withdrawals
Owner
Withdrawals
ExpensesExpenses
Equity
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Classification of
Assets and Liabilities
How to Classify Items on the Balance Sheet
1. Current (one year or less)
2. Non-current (more than 1 year)
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those assets that; Are either expected to be realised in, or intended for sale
or consumption in, the normal course of entitys operating
cycle;
Held primarily for trading purposes; Expected to be realised within 12months after the
balance sheet date;
E.g.:
1. Accounts and notes receivable
2. Inventories
3. Prepaid items
4. Cash
CURRENT ASSETS
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Operating Cycle
the time between the acquisition of assets for processing and
their realisation in cash or cash equivalents.
When the entity's normal operating cycle is not clearly
identifiable, its duration is assumed to be twelve months.
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Operating Cycle
Receivables
Cash
Inventories
Purchases
Collections
Sales
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All other assets that do not meet the currentassets criteria.
E.g.:
Investments
Property, plant, and equipment (PPE)
Deferred income taxes PPE - properties of a tangible and relatively permanent
nature that are used in the normal business operations.
Intangible assets - long-term rights and privileges of a
nonphysical nature acquired for use in business operations.
E.g.: goodwill, patent, copyright, etc.
NON-CURRENT ASSETS
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Liabilities are classified as CURRENT if they are: Expected to be settled in the entitys normal
operating cycle or less than 12 months.
Held for trading.
it is due to be settled within twelve months after
the balance sheet date
E.g.:
1. accounts payable,2. notes payable,
3. accrued expenses
CURRENT LIABILITIES
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NON-CURRENT LIABILITIES
All other liabilities that do not meet the current
liabilities criteria.
E.g.: Long-term debt
Long-term lease obligations
Deferred income tax liability
Pension obligations
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Timing Issue:
Cash-Basis Accounting
Vs
Accrual-Basis Accounting
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Cash-Basis Accounting
Revenues are recognized when cash is
received.
Expenses are recognized when cash is paid.
Cash-basis accounting is not in accordancewith generally accepted accounting principles
(GAAP).
Use by public sector (government). But mostof the public sector is moving towards the
application of accrual basis.
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Transactions recorded in the periods in which
the events occur
Revenues are recognized when earned, rather
than when cash is received.
Expenses are recognized when incurred,
rather than when paid.
Accrual-basis accounting is appliedaccordance with generally accepted
accounting principles (GAAP).
Use by private entities
Accrual-Basis Accounting
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The Operating Guidelines of
Accounting
ASSUMPTIONS PRINCIPLES CONSTRAINTS
Economic entity Historical costs Conservatism
Monetary unit Revenue recognition Materiality
Going concern Matching
Time period Full disclosure
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Accounting Assumptions
Economic Entity
The business is accounted forseparately from other business
entities, including its owner
Monetary Unit Principle
Express transactions and events in
monetary, or money, units
Now Future
Going-Concern Principle
Reflects assumption that the
business will continue operating
instead of being closed or sold
Time Period
The economic life of business can be
divided into artificial time period for
the purpose of financial reporting
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Accounting Assumptions
Economic entity:
Defines the scope of the business
Identifies which transactions should be recorded
Going Concern
Allow to record assets at historical cost
Monetary Unit:
Provides a common unit of measure
Permit to add & subtract items on FS
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Time Period Assumption
Time Interval/ Periodicity
assumption
Final accounts are preparedat regular intervals (monthly, quarterly,Annually)
Known as accounting period /financial year.
Examples of annual accounting period:
Calendar year : 1/1/2008 31/12/2008
Fiscal year:1/7/2006-30/6/2007
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Historical Cost
Accounting information is based
on actual cost.
Revenue Recognition
1. Recognize revenue when it is
earned.
2. Proceeds need not be in cash.3. Measure revenue by cash
received plus cash value of items
received.
Matching
Expenses are matched against
revenues, and recorded in the
same period in which the related
revenues are earned
Accounting Principles
Full Disclosure
Report enough information for
users to make knowledgeable
decisions about the company
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Accounting Principles
MatchingPrinciple
FullDisclosurePrinciple
Profit is recognized by matchingthe income of the period with all
expenses incurred in earning sucincome.
Financial statements should providsufficient / relevant informationto influence users decision making(e.g Acctg policies, methods,Changes in policy)
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Accounting Constraints
Conservatism
Income and assets be reported at
their lowest reasonable amounts (i.e.
minimizing the assets and
understating the income) Materiality
Accountants are required to
accurately account for significantitems and transactions
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Accounting Constraints
Materiality
Principle
ConservatismPrinciple
An item is said to be material
if it is sufficiently important
to affect our judgment of thetrue position of the firm.
When in doubt, choose the solution
that will be least likely to overstate
assets and income. In easy word,
Income and asset are reported at
their lowest reasonable amounts.
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Material
Omissions or misstatements of items are material if they could,individually or collectively, influence the economic decisions ofusers taken on the basis of the financial statements.
Materiality depends on the size and nature of the omission ormisstatement judged in the surrounding circumstances.
The size or nature of the item, or a combination of both, couldbe the determining factor.
(FRS101)