Chapter8 Basic Accounting and Financial Management

OFPS Entrepreneurship 3e All Rights Reserved
Oxford Fajar Sdn. Bhd. (008974-T), 2013 1 1

6
Chapter
BASIC ACCOUNTING AND

FINANCIAL MANAGEMENT
LEARNING OUTCOMES
AT THE END OF THIS CHAPTER, YOU WILL BE ABLE

TO:
Define the accounting system and understand how it differs
from bookkeeping.
Differentiate between financial accounting and
management accounting.
Explain the basic concept of accounting.
Define the accounting equation
Identify the accounting elements
Understand financial statements: income statement and
balance sheet
6.1 DEFINITION OF ACCOUNTING
Accounting can be defined as a process of

identifying, classifying, recording and
summarizing business transactions in
monetary terms. Then, the results can be
interpreted and communicated to interested
parties to enable them to make informed
decisions.

6.2 ACCOUNTING AND
BOOKKEEPING

6.3 MANAGEMENT ACCOUNTING
AND FINANCIAL ACCOUNTING
DIFFERENCES
Characteristic Financial accounting Management accounting
User report is utilized by external users report is used by external users
Legal requirement statutory requirement for public listed management accounting report is
companies optional for organization
Scope Provides information about the whole of the Focus on one part or several parts
organization of the organization
GAAP and FRS Financial reporting must follow GAAP and Management accounting reporting
FRS and conform with legal requirement is not subject to the legal
requirement, FRS and GAAP
principles
Timeframe The report contains past information, e.g. The report delivers information
historical cost which is expected to occur in the
future such as forecasted sales
Frequency Normally, the report will be produced on The report will be produced more
semi-annual or annual basis frequently, such as daily, weekly or
monthly

MANAGEMENT ACCOUNTING
AND FINANCIAL ACCOUNTING
Similarities
Characteristic Description
Use basic Both gather information by applying basic
accounting process accounting process
Objective Both aim to deliver relevant information to
the interested users of the organization in
assisting them to make decisions.
Controlling and Both processes are used for the purpose
performance of controlling and performance evaluation
evaluation purposes

6.4 BASIC ACCOUNTING CONCEPTS
Basic Accounting Concepts

6.5 BASIC ACCOUNTING EQUATION
Assets = Owners' Equity + Liabilities
Owners' Equity = Assets Liabilities
Liabilities = Assets Owners' Equity

6.6 ELEMENTS OF ACCOUNTING

ASSETS
Fixed Assets (Non Current Asset):

These assets have physical existence, such as
land, buildings, office equipment, machinery and
motor vehicles.
Current Assets
These assets are either cash in-hand, deposits in
the bank or items that are expected to be
converted into cash within one year, e.g. stocks
and debtors.
BACK
LIABILITIES
Long-term Liabilities
Long-term liabilities refer to amount owing by the
business on a long-term basis, which is more than
one year, such as loans and mortgages.
Current Liabilities
Current liabilities are amount owing by the
business for a short-term basis and are expected
to be repaid within one year, such as bank
overdrafts, trade creditors and sundry creditors.
BACK
OWNERS EQUITY
Capital
Capital refers to resources supplied by the owner
to the business, such as money, motor vehicles
and buildings.
Drawings
Drawings can be defined as any business
resources that are taken out by the owner from
the business for personal purposes or use.
BACK

REVENUES
Business Revenue Sources
BACK
EXPENSES
Business Expenses
BACK

6.7 FINANCIAL STATEMENTS
The main objectives of these statements are to

provide information regarding the financial
position, performance and cash flows of a
business to entrepreneurs.
Its main components are:
Income Statement
Balance Sheet

INCOME STATEMENT
It comprises two main accounts, which are:

Trading account
Profit and loss account

TRADING ACCOUNT
Trading Account:
Ascertaining the
Gross Profit

PROFIT AND LOSS ACCOUNT
Profit and loss account is prepared to calculate

the net profit of a business for a particular
accounting period.
The formula used to determine net profit is as
follows:
Gross Profit + Revenues Expenses = Net Profit

BALANCE SHEET
Balance sheet is a statement that discloses the

total of assets, liabilities and owner equities of a
business for a particular financial period
Capital Employed = Owners' Equity + Long Term Liabilities
Working Capital = Current Assets Current Liabilities

SUMMARY
Accounting system can be defined as a process used to

interpret and communicate so as to enable entrepreneurs to
make informed decisions.
Management accounting is also called internal accounting
Financial accounting focuses on the provision of information
to external parties outside the organization.
Accounting concepts relate to some assumptions underlying
the preparation of the financial statement.
Financial statements are a structured financial representation
of the financial position of a business including Income
Statement and Balance Sheet.


Chapter8 Basic Accounting and Financial Management

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Oxford Fajar Sdn. Bhd. (008974-T), 2013 1 1

BASIC ACCOUNTING AND

AT THE END OF THIS CHAPTER, YOU WILL BE ABLE

Accounting can be defined as a process of

OFPS Entrepreneurship 3e All Rights Reserved

OFPS Entrepreneurship 3e All Rights Reserved

OFPS Entrepreneurship 3e All Rights Reserved

OFPS Entrepreneurship 3e All Rights Reserved

Basic Accounting Concepts

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Assets = Owners' Equity + Liabilities

Owners' Equity = Assets Liabilities

Liabilities = Assets Owners' Equity

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OFPS Entrepreneurship 3e All Rights Reserved

Fixed Assets (Non Current Asset):

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Business Revenue Sources

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The main objectives of these statements are to

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It comprises two main accounts, which are:

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OFPS Entrepreneurship 3e All Rights Reserved

Profit and loss account is prepared to calculate

Gross Profit + Revenues Expenses = Net Profit

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Balance sheet is a statement that discloses the

Capital Employed = Owners' Equity + Long Term Liabilities

Working Capital = Current Assets Current Liabilities

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Accounting system can be defined as a process used to

OFPS Entrepreneurship 3e All Rights Reserved

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