06 Bbfa2103 T2

Topic  Accounting
2 Principles
and Concepts
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Describe regulatory and conceptual framework for corporate
reporting;
2. Explain the components of financial statements;
3. Identify the elements of financial statements;
4. Discuss the qualitative characteristics of accounting information;
5. Describe the accounting assumptions and principles; and
6. Assess the accounting standards.
 INTRODUCTION
Accounting concepts and principles are built to measure the economic activities
of a company. Accounting systems in each country are different depending on
their influences of the economic structure and legal systems.
Imagine the world without traffic laws and enforcement! There will be havoc, as
people will drive as fast as they want, beat traffic lights as they please or park
their cars anywhere they like. To ensure our safety on the road, we have rules
and drivers need licenses before they can drive. Now, can you imagine the
accounting profession without rules and regulations?
You have learned earlier that external users rely on accounting information
produced by businesses to make decisions. How can users be assured that the
Copyright © Open University Malaysia (OUM)
TOPIC 2 ACCOUNTING PRINCIPLES AND CONCEPTS  25
information presented is reliable? After all, the financial statements are prepared
by the companyÊs accountant. Knowing that to prepare financial statements,
accounting professionals have to follow certain rules and regulation increases the
reliability of information provided by the financial statement. But who regulates
the accounting profession?
This topic begins with the introduction to the various accounting bodies in
Malaysia that govern the accounting profession. The main functions of these
bodies will be described.
We have to follow certain guidelines called the accounting standards in

preparing the financial statements. You will learn why it is important to have
such standards; the following article proves the consequence of not doing so!
Accountant Held Liable for Interest Expense from Tax Error
Accounting WEB.com - 26th June 2006 - The South Dakota Supreme Court last
week upheld a Circuit Court decision allowing a jury to award damages to
Doug OÊBryan Contracting Inc. for interest expense on underpayment of taxes
that resulted from an error made by his accountant. The stateÊs high court had
not previously allowed recovery of interest expense in lawsuits against tax
advisers, the Associated Press reports.
Bruce Ashland, a certified public accountant, understated OÊBryanÊs income

for 1995. The well-drilling company, located in Martin, South Dakota,
incorporated in April 1995, and Ashland used the wrong method to calculate
income for the first quarter of the year. When the error was discovered several
years later, OÊBryan owed an additional $239,933 in taxes and about $50,000 in
interest.
Source: http://www.accountingweb.com/tax/irs/accountant-held-liable-for-interest-
expense-from-tax-error
2.1 REGULATORY AND CONCEPTUAL

FRAMEWORK FOR CORPORATE
REPORTING
Framework is the basic requirement. The proposed framework by the Malaysian
Accounting Standards Board (MASB) for the preparation and presentation of
financial statements is similar with the one issued by the International
Accounting Standards Board (IASB) which deals with:

26  TOPIC 2 ACCOUNTING PRINCIPLES AND CONCEPTS
(a) Definition of financial statements;

(b) Purpose of financial statements;
(c) Qualitative characteristics of financial information;
(d) Definition, identification and recognition of the elements of financial
statements;
(e) Concepts of capital and capital maintenance; and
(f) Basis for the measurement of the elements of financial statements.
Conceptual framework is the guidance in preparing and presenting financial

statements instead of an accounting standard. Four aspects should be dealt with
by the preparers of financial statements. The four aspects are:
(i) Recognition – Whether the transactions concerning elements of financial
statements had taken place, relates to the timing of when the transactions
were taken place.
(ii) Measurement – The amounts of the elements which need to be recorded.
(iii) Recording – Procedure of debiting and crediting the relevant accounts.
(iv) Presentation – Transactions are disclosed in financial statements.
2.2 FINANCIAL STATEMENTS

The final output of an accounting system is the financial statements. The main
function of financial statements is to provide information of the business
financial position and financial performance to users.
This information is normally obtained from the income statement, balance sheet,
statement of changes in ownerÊs equity and cash flow statement. The information
provided will give a picture of how the resources are used by the business entity.
This module covers the steps required in the preparation of the income
statement, statement of changes in ownerÊs equity and balance sheet. You will
learn how to prepare the cash flow statement in another module.
The Malaysian accounting standard, MFRS 101, provides the guidelines on the
presentation of financial statements.

2.2.1 The Purpose of Financial Statements

MFRS 101 states the purpose of financial statement as the following:
Figure 2.1: MFRS 101

Source: MASB – MFRS 101 – Presentation of Financial Statements
In other words, the objective of preparing financial statements is to provide

useful information with regards to the financial position, performance and cash
flow of a business to all types of users in order for them to make an economic
decision. The result of the financial statements shows how the manager of a
business entity manages resources contributed by owners.
The information provided by the financial statements together with other

information provided in the explanatory notes will be used by users to
understand and make decisions.

SELF-CHECK 2.1
Users depend not only on financial information provided by the

financial statements but also on non-financial information to make
investment decisions. Can you identify the qualitative information that
users need to make decisions?
2.3 THE COMPONENTS OF FINANCIAL

STATEMENTS
Financial statements of listed public company can be obtained by the public
easily. Kuala Lumpur Stock Exchange (KLSE) provides access to the annual
reports of listed companies at its website.
ACTIVITY 2.1
You may visit KLSEÊs website for further information,
http://www.bursamalaysia.com/market/
Please take note that the following illustrations of financial statements are of a
sole proprietorship (single ownership). There are slight differences in reporting
requirement and format for a partnership and also a company.
(a) Income Statement

Income statement reports the financial performance of an entity. It contains
information on revenues and expenses including the profit and loss of the
business entity. It is also known as revenue statements or profit and loss
statements.

There are several formats in reporting the revenue and expenses depending
on the nature of business run by the entity. Figure 2.2 is an example of an
income statement for service providers. Service providers such as travel
agents, hotels and colleges earn their revenues by performing or providing
services to customers.
Figure 2.2: Income statement for a service provider

Meanwhile Figure 2.3 is an example of a merchandiser income statement. A

merchandiserÊs (or traderÊs) revenues come from selling goods to customers.
Figure 2.3: Income statement for a merchandiser
(b) Balance Sheet

A balance sheet reports the financial position of a business entity. It
contains information on the entityÊs assets, liabilities and ownerÊs equity.
Assets are categorised into two:
(i) Current assets are those assets that are expected to provide benefits
for twelve months or less from the reporting date. Examples are cash,
account receivables, inventories, prepaid expenses and short-term
investments.

(ii) Non-current assets are those assets that will provide benefits for a
period longer than twelve months from the reporting date, which
include land and building, motor vehicles, furniture and fittings,
equipment and long-term investments.
Liabilities are also categorised into two:

(i) Current liabilities are liabilities that are due within twelve months
from the reporting date. Examples are account payables and short
term loans.
(ii) Non-current liabilities are expected to be settled in a period longer
than twelve months from the reporting date, such as a long term bank
loan.
There are several formats of balance sheets, in „T‰ format (see Figure 2.4) or
in a statement format (see Figure 2.5). There are also differences in
reporting the ownerÊs equity depending on the form of business; whether it
is a sole proprietorship, a partnership or a company. However, at this level
the focus will be on a sole proprietorshipÊs balance sheet.

Figure 2.4: Balance sheet – „T‰ Format

Figure 2.5: Balance sheet – Statement Format

There are several different formats available for preparing balance sheets.
You might read one textbook showing one format and another textbook
showing another format. One format might show the working capital
which is current assets minus current liabilities while another lists current
assets first and then only non-current assets are listed.
At first you might find that this is confusing as one format is slightly
different than the next. Do take note that whichever format is used, all
assets, liabilities and ownerÊs equity, whether they are current or non-
current, will be categorised accordingly.
(c) Statement of Changes in OwnerÊs Equity

Statement of changes in ownerÊs equity reports how the ownerÊs equity has
changed over the reporting period. It reports how opening capital has
increased through net income, and how it decreased through net losses and
drawings. Refer to Figure 2.6 for an example.
Figure 2.6: Statement of changes in ownerÊs equity
(d) Cash Flow Statement

Cash flow statement shows the in-flow and out-flow of cash of an
organisation according to three main activities which are operating,
investing and financing. The format is shown in Figure 2.7, however, as
stated earlier preparing a cash flow statement is not part of the syllabus.

Figure 2.7: Cash flow statement
ACTIVITY 2.2
Do you know your net worth? Let us calculate your net worth.
1. List all your assets. These will be items that you own, house, car,
computer etc. Estimate how much they are worth in the market.
In other words you might have spent RM5,000 to buy your
computer, but now, if you were to sell your computer, the shop is
willing to pay RM300 for it. RM300 is the value of your computer.
2. List all your liabilities. These include any loans you have
outstanding on your house, education and even credit card.
3. Determine the difference (Total Assets minus Total Liabilities).
This is your net worth or capital.

ACTIVITY 2.3
Many online resources for accounting glossary and terms are available
on the net. If you need to look up certain accounting terms, do visit:
http://www.ventureline.com/accounting-glossary/A/
2.4 ELEMENTS OF FINANCIAL STATEMENTS

The financial statements reflect the financial position and performance as a result
of transactions carried out by the business. The primary objective of financial
statements is to provide information about the financial position, performance
and cash flows of the business that can be used by each user to make economic
decisions. The financial statements show the results from the completion of the
monitoring task (stewardship), and management must account for every action
related to the asset.
To meet this objective, the financial statements provide elements as shown in

Figure 2.8:
Figure 2.8: Elements of financial statements

The following are the details of the elements.
(a) Asset
Assets are economic resources owned or controlled by a firm whether it
was paid or not. Asset is something that is used to assist in the conduct of
business operations. Assets are divided into two groups, fixed assets and
current assets.
(i) Fixed Assets

Fixed assets are assets that are not easily changed in shape and there
is more than one financial period. Fixed assets are divided into two,
namely tangible assets and intangible assets. Tangible assets are assets
that can be seen physically such as machinery, cars and equipment.
Intangible assets are fixed assets that exist but cannot be seen
physically such as goodwill, patents, copyrights and trademarks.
(ii) Current Assets

Current assets are assets that exist for accounting periods and are
highly liquid. Examples of current assets are cash, receivables,
prepaid expenses and proceeds receivable.
(b) Liability
Liability is a debt to people outside the business. Liabilities are divided into
two groups, current liabilities and long-term liabilities.
(i) Current Liabilities

Current liabilities are liabilities that exist for an accounting period and
the borrower must pay off or settle the debt within one year.
Examples of current liabilities are accounts payable, payables, notes
payable, short-term loans and bank overdrafts.
(ii) Long-Term Liabilities

Long-term liabilities are debts that must be paid within a period
exceeding one year. Examples of long-term liabilities are long-term
loans and notes payable where the payment is more than a year.
(c) OwnerÊs Equity

Equity is the owner's intended claim against the assets of business to
business owners. Owners' equity is the amount of surplus assets over
business liabilities.

Owners' equity for each business structure is different where:

(i) Equity in a company consists of the owners of the paid-up capital,
share premium, retained earnings and reserves (over isolated);
(ii) Equity in partnerships comprise the owners of partner capital
accounts; and
(iii) Equity in sole business owners comprise capital contributed by the
owners.
(d) Revenue
This is the increase in gross value of assets as a result of the sale of goods or
provision of services by businesses to customers. Examples of revenue are
sales, discounts received, interest received and rent received.
(e) Expense
Expense is cost of services or goods used in the process to get revenue.
Expense is also known as part of the cost of assets that have been written-
off. Examples of expenses are rent, interest, electricity and water, salaries
and other expenses.
These elements together with other information (notes to the accounts) help users
predict the cash flow of a business in the future.
2.5 QUALITATIVE CHARACTERISTICS OF

ACCOUNTING INFORMATION
We will now discuss the characteristics that must exist in accounting information
in order to make it useful as listed in Figure 2.9:

Figure 2.9: Seven characteristics of accounting information
These characteristics will be discussed further in the next subtopics.
2.5.1 Relevant
The relevance principle stipulates that all relevant information should be
included in the financial statements. Information is considered relevant if it can
assist users in making decisions.

Let us assume that you have extra money and want to buy shares in one of the
companies listed in Bursa Malaysia. What type of information might be useful for
your needs? You might want to know:
(i) The companyÊs performance for the past five years;
(ii) What are future projects or new products of the company?; and
(iii) Who managed the company?
All the mentioned information, quantitative and/or qualitative, is relevant as it

will assist you in deciding whether to buy the company shares or not. For
example, the company has made a good profit of RM2,000,000 for the current
year. You should not rely on this information only. You must look at the past
trend. Assume you find out that the company has been making big losses for
three years before the current year. Will you invest your money in the company?
Knowing how the company performed in the past years is relevant to your
decision. Big losses for three consecutive years might indicate it is risky to invest
in the company even though it has been profitable in the current year.
2.5.2 Reliable
Reliable information is information that can be trusted by users. Information
must be objective, free from bias and significant errors. Only reliable information
will enable users to make better decisions.
How are external users of a financial statement ensured of the reliability of

information provided? After all, this statement is prepared by the companyÊs
accountant. The comic strip (refer to Figure 2.10) proves us the actual scenario in
the accounting profession.

Figure 2.10: How reliable is the accounting practice?
The accountant and the companyÊs management are bound by law to follow the
rules and regulations in preparing the financial statements. It is assumed that if
accountants follow the rules and regulations, the information that is reported in
the financial statements show a true and fair view of the companyÊs financial
performance and position and hence is reliable to users.
External users, to some extent are assured of the trustworthiness of the

information presented in the financial statement. Public listed companies are
required to have their financial statements audited by external auditors to ensure
the financial statement has been prepared according to accounting rules and
principles and it provides a true and fair view.
2.5.3 Comparable
Comparability refers to the quality of the information that enables users to make
comparison in evaluating similarities or differences between companies,
industries or over time. This characteristic is important as comparable
information is more useful.
Consider this example. You are only given this information on Syarikat Along;
Syarikat Along made RM10 million profit last year. Is this information enough
for you to decide whether you want to invest in the company or not? Will your

decision change if you had known that the company has made RM20 million in
the previous year? Comparing the companyÊs performance over two periods
can lead to a better decision as you can see that there has been a 50 per cent
drop in profit.
It is a requirement that a company must provide the previous yearÊs information

to enable comparison to be made by users.
2.5.4 Consistent
For information to be comparable across industries or over time, information
needs to be consistent from one company to another and also over time.
Consistency refers to the requirement that companies maintain consistency in the
treatment of various items for all accounting periods. In other words, companies
should not change the accounting procedures or methods used each year.
An example is methods for depreciating non-current assets. There are several

acceptable methods to recognise depreciation expense; among them are the
straight line method and the reducing balance method. If a company had used
the straight line method in one period, they ought to use the same method in the
next accounting period.
For your information, a company may change accounting methods they use.
However, a full disclosure is required in the notes to financial statements to explain
why the changes are made and the effects of the changes to the financial statements.
2.5.5 Materiality
Materiality is another important concept, which states that an entity must
account for items that are significant to the entityÊs financial statements. In other
words, an amount can be ignored if the effect on the financial statements is
unimportant to usersÊ business decisions.
The materiality of an item depends on the size or value of the items according to
the main activities of the business and the nature of the items involved.
For example, a separate account for postage expenses for a grocery store is not
required to be kept, as the amount is small and not significant for the grocery
store. It is sufficient to lump this expense with other expenses under a
miscellaneous expense account. However, for a courier company, postage
expenses are material and must be disclosed separately.

2.5.6 Understandable
The understandability principle requires information to be presented in a format
that can be easily understood. The information reported should be understood
by users, who are generally assumed to have reasonable knowledge of business
and economic activities.
2.5.7 Timely
Relevant and reliable information will be useless if you do not get the
information on time. Hence, it is extremely important to prepare the financial
statements on time.
ACTIVITY 2.4
You just read on the seven qualitative characteristics of accounting.
Based on your experience, which one quality is the most difficult to
comply with? Try to justify your claim.
2.6 ACCOUNTING ASSUMPTIONS

Let us now look at the four assumptions used to facilitate the preparation of
financial statements.
2.6.1 Assumption 1: Separate Entity

For accounting purposes, the business is considered as a separate entity from the
owner. Both the owner and the business are two separate accounting entities. An
accounting entity is an economic unit that controls its own resources. Activities
of each entity must be separated from its owner.
For example, Kak Long owns three different businesses; a restaurant, a

laundrette and a grocery store. Imagine, if only one account is prepared for all
businesses, would she be able to identify which business is profitable or not? For
accounting purpose there are four separate accounting entities; Kak LongÊs
personal entity, the restaurant, the laundrette and the grocery store (see Figure
2.11). It means each entity will need to have a separate accounting record.
Separation of accounts will enable the owner to know the financial position and
performance of each entity.

Figure 2.11: Separate entity
It is important to note that accounting entity is not the same as legal entity. A
business that is registered as a company is recognised as a legal entity. While for
a sole proprietorship and partnership the law does not differentiate the business
and its owner.
2.6.2 Assumption 2: Going Concern

An entity is assumed to be continuing its operations in the foreseeable future and
will not cease operations. This has important implication in valuing assets and
liabilities of a company.
Suppose Mak & Anak Bakery owned a unique bread making machine costing
RM100,000. If Mak & Anak Bakery decides to close down, the machine is
worthless, as nobody else wants to use the bread making machine.
Therefore in order to report the bread making machine as an asset worth

RM100,000, we have to make an assumption that Mak & Anak Bakery will
continue operating.

ACTIVITY 2.5
Syarikat Jojo has been making big profits for the past 10 years of
operation. However, it will only continue to exist for the next two
years. Will you consider investing your money in Syarikat Jojo? Justify
your claim.
2.6.3 Assumption 3: Monetary Unit

All transactions can be measured in monetary units. In Malaysia the monetary
unit is Ringgit Malaysia (RM). Items that cannot be measured in monetary unit
will not be reported in the financial statements but disclosed as notes.
Transactions in foreign currency will be converted to RM for recording purposes.
2.6.4 Assumption 4: Accounting Period

This assumption states that the life of a business entity can be divided into
periodic intervals. This enables financial statements to be prepared periodically.
The accounting year of a 12 month period has been established as the normal
period for reporting. This enables the comparison of present and past
performance to be made for each accounting period.
Accounting year or fiscal year can start at any period but normally it is from 1st
January until 31st December, or it starts from 1st July and ends on 30th June the
next year.
Interim reports can be produced for a period of less than a year; monthly,
quarterly and semi-annually reports. These reports are produced to meet the
requirements of users for timely information.
2.7 BASIC ACCOUNTING PRINCIPLES
SELF-CHECK 2.2
You purchased a new Ferrari for RM500,000 to be used in your
business. The day after, a tree fell onto your new Ferrari. Once
repaired, the insurance company valued the Ferrari at RM300,000.
Can you record the value of the Ferrari at RM300,000? Why?

The four basic assumptions have resulted in the following principles:
2.7.1 Principle 1: Historical Cost

This principle states that all transactions must be recorded and accounted for
according to their historical cost, in other words, the original cost incurred at the
time of transactions as agreed by both buyer and seller.
2.7.2 Principle 2: Revenue Recognition

This principle states that revenue must be recognised when it is earned. Earned
revenue commonly refers to the act of providing goods or services to customers.
Recognising revenue means the amount is recorded in the account.
This principle indicates that although cash has not been received, goods have
been delivered or services have been performed and, thus, revenue should be
recognised. The opposite also applies, if you have received cash in advance but
have not performed any service or provided any goods to your customer, you
cannot record the amount of cash received as revenue. In other words, revenue is
recognised when earned rather than when cash is received. This notion of
recognising revenue when it is earned and not when cash is received is called
accrual accounting.
The same applies to the recognition of expenses, where expenses should be

recognised when it is incurred not when cash changes hand. If you have received
the goods or services, although payments are to be made in the future, expense
must be recognised at that time (refer to Figure 2.12).
Figure 2.12: Relationship between revenues and expenses

2.7.3 Principle 3: Matching

To determine profit for the accounting period, the revenues of that period must
be matched with the expenses for the same period. As long as the revenue is
earned and expenses are incurred during the period, it must be taken into
account.
Take note that revenues can be cash or non-cash, and expenses can be cash or
non-cash as well. Hence, profit (revenues minus expenses) is not the same as
cash. You can make a large profit but might have a liquidity problem; in other
words you do not have enough cash to pay your creditors.
Use the time line diagram to help you learn the matching concepts and later
the calculation of revenue and expenses.
All Revenues for Year 1
match with Year 2

Year 1
All Expenses for Year 1
Profit for Year 1 = Total Revenue in Year 1 - Total Expenses in Year 1
2.7.4 Principle 4: Full Disclosure

This principle states that all relevant and material information must be
adequately disclosed either in the financial statements or as notes accompanying
the statements.
2.8 ACCOUNTING STANDARDS
Accounting standards are guidelines that need to be adhered by the

accounting profession in preparing and reporting of the financial statements.
Rules and guidelines will definitely increase the work quality of accounting
professionals. How can we be assured that companies will follow the prescribed
guidelines?
The Companies Act 1965 requires companies to comply with approved

accounting standards. Section 166A of the Companies Act 1965 requires directors
of companies incorporated under the Act to ensure accounts are prepared in

accordance with the applicable accounting standards to the extent that the
accounts give a true and fair view.
In Malaysia, the approved accounting standards comprise the following:

(a) Financial reporting standards issued by MASB;
(b) International accounting standards issued by International Accounting
Standard Board (IASB); and
(c) Technical pronouncements published by MASB.
These accounting standards are developed from guidelines, practices and rules
that are acceptable by the accounting profession and known as Generally
Accepted Accounting Principles (GAAP). The standards are established so that
the accounting practised is standardised and this increases the reliability and
comparability of financial statements.
Generally Accepted Accounting Principles (GAAP)

In preparing the financial statements, accountants have to follow certain
standards, guidelines, practices and rules which are known as Generally
Accepted Accounting Principles (GAAP). This is to ensure that the financial
information provided to external parties to the business is prepared according to
a uniform set of assumptions and principles.
To prepare, use and interpret financial statements effectively we need to
understand these assumptions and principles. There are a number of
assumptions and principles. However, this module will only introduce selected
assumptions and principles.
GAAP is the common set of accounting principles, standards and procedures

that companies use to compile their financial statements. GAAP is a combination
of authoritative standards (set by policy boards) and is simply the commonly
accepted ways of recording and reporting accounting information
(http://www.investopedia.com/terms/g/gaap.asp)
ACTIVITY 2.6
Even though GAAP principles have been in practice for a long time,
why do you think that unscrupulous accountants still distort figures?
Discuss.

• The accounting profession has to follow standards, rules and guidelines

known as the Generally Accepted Accounting Principles (GAAP) to ensure
uniformity in preparing and reporting the accounting information.
• The standards are established so that the accounting practised is standardised

and comparability of financial statements is increased.
 The proposed framework is a guide and is useful when confronted with

issues for which there are no pronouncements.
 The objective of the financial statement is to present information about the

financial position and performance of a company.
 Principal characteristics are relevant, reliable, comparable, consistent,

materiality, understandable and timely.
• There are four assumptions used to facilitate the preparation of financial

statements.
– Separate entity assumption;
– Going concern assumption;
– Monetary unit assumption; and
– Time period assumption.
 The basic principles in accounting are:

– Historical cost principle;
– Revenue recognition principle;
– Matching principle; and
– Full disclosure principle.

Accounting assumption
Accounting entity assumption Generally Accepted Accounting
Principles (GAAP)
Accounting principle
Maturation
Behaviourism
Reflex arc
Constructivism
1. Match the following accounting bodies with the main function listed as
follows:
MIA MICPA MASB
(a) ________________ publishes accounting standards.

(b) ________________ provides training to accountants.
(c) ________________ controls the accounting practice in Malaysia.
(d) ________________ issues statements of principles for financial
reporting.
2. Can a company ignore the accounting standards in the preparation and

reporting of its financial statements?
3. Malaysian AirlinesÊ (MAS) revenues come from a number of different

sources: ticket sales, holiday packages, rentals of planes and advertising.
Take for example, ticket sales; normal tickets sold are fully refundable until
24 hours of flight cancellation. However, tickets sold on super saver plan
are not refundable. At what point of time will MAS recognise the revenue
from these situations?
4. Classify the following businesses according to their type of business.
Business Type of Business

• Car Rental
• Car Dealership

• Tuition Centres
• Batik Factory
• Tailor
• Clothing Stores
1. Explain the following accounting assumptions:

(a) Separate entity;
(b) Going concern;
(c) Monetary units; and
(d) Accounting period.
2. Explain the following accounting principles:

(a) Historical cost;
(b) Revenue recognition;
(c) Matching; and
(d) Full disclosure.
3. Identify three types of business ownerships.
4. Explain the characteristics of each of the business ownership identified in

Question 3.
1. Which of the items in the following list are liabilities and which are assets?
(a) Loan to Permata SB
(b) Bank overdraft
(c) Fixtures and fittings
(d) Computers
(e) We owe a supplier for goods
(f) Warehouse we own

1. Classify the following items into liabilities and assets:

(a) Motor vehicles
(b) Premises
(c) Creditors for goods
(d) Stock of goods
(e) Debtors
(f) Owing to bank
(g) Cash in hand
(h) Loan from Mr. JS
(i) Machinery

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Topic  Accounting

We have to follow certain guidelines called the accounting standards in

Accountant Held Liable for Interest Expense from Tax Error

Bruce Ashland, a certified public accountant, understated OÊBryanÊs income

2.1 REGULATORY AND CONCEPTUAL

Copyright © Open University Malaysia (OUM)

(a) Definition of financial statements;

Conceptual framework is the guidance in preparing and presenting financial

2.2 FINANCIAL STATEMENTS

Copyright © Open University Malaysia (OUM)

2.2.1 The Purpose of Financial Statements

Figure 2.1: MFRS 101

In other words, the objective of preparing financial statements is to provide

The information provided by the financial statements together with other

Copyright © Open University Malaysia (OUM)

Users depend not only on financial information provided by the

2.3 THE COMPONENTS OF FINANCIAL

(a) Income Statement

Copyright © Open University Malaysia (OUM)

Figure 2.2: Income statement for a service provider

Copyright © Open University Malaysia (OUM)

Meanwhile Figure 2.3 is an example of a merchandiser income statement. A

Figure 2.3: Income statement for a merchandiser

(b) Balance Sheet

Assets are categorised into two:

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Liabilities are also categorised into two:

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Figure 2.4: Balance sheet – „T‰ Format

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Figure 2.5: Balance sheet – Statement Format

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(c) Statement of Changes in OwnerÊs Equity

Figure 2.6: Statement of changes in ownerÊs equity

(d) Cash Flow Statement

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Figure 2.7: Cash flow statement

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2.4 ELEMENTS OF FINANCIAL STATEMENTS

To meet this objective, the financial statements provide elements as shown in

Figure 2.8: Elements of financial statements

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The following are the details of the elements.

(i) Fixed Assets

(ii) Current Assets

(i) Current Liabilities

(ii) Long-Term Liabilities

(c) OwnerÊs Equity

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Owners' equity for each business structure is different where:

2.5 QUALITATIVE CHARACTERISTICS OF

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Figure 2.9: Seven characteristics of accounting information

These characteristics will be discussed further in the next subtopics.

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All the mentioned information, quantitative and/or qualitative, is relevant as it

How are external users of a financial statement ensured of the reliability of

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Figure 2.10: How reliable is the accounting practice?

External users, to some extent are assured of the trustworthiness of the

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It is a requirement that a company must provide the previous yearÊs information

An example is methods for depreciating non-current assets. There are several