Week 1

Introduction to Accounting and Business

Learning Objectives
1. What is accounting?
2. Difference between bookkeeping and accounting
3. Main users of accounting information and what
accounting information they interested in
4. Types of business forms
5. Accounting principles

P1
THE HISTORY OF
ACCOUNTING
Accounting began because people needed to :
•Record business transactions
•Know if they were being financially successful
•Know how much they owned and how much they
owed
•MAIN REASON?
WHAT IS ACCOUNTING?
Accounting is the process of :
•recording,
•classifying (sorting into orderly and meaningful
categories),
•summarizing the business transactions and
•interpreting the results (financial data is analyzed and
used to assist in more effective decision making.
DIFFERENCES BETWEEN
BOOKKEEPING AND ACCOUNTING
ACCOUNTING BOOKKEEPING

•Recording •Recording
•Classifying •Classifying
•Summarizing •Summarizing
•Interpreting
USERS OF ACCOUNTING
INFORMATION
• Current Investors
• Potential investors
EXTERNAL USERS
• Creditors
• Supplier/Bankers
• Regulators/Govt
• Owners • Customers
• Managers
• Employees
INTERNAL USERS
External Users:
Individuals and organization outside a company who wants
financial information about the company.

Example :
Direct financial interest:
•Investors - current & potential - who use accounting
information to make decision to buy, hold or sell the stock
•Creditors (suppliers/bankers) use accounting information to
evaluate the risk of granting credits or lending money

Indirect financial interest:

•Government use accounting information for taxes and
others regulatory requirements.
•Public (customers) interested in whether a company will
continue to honor products warranties and support its product
line
Internal Users:
Those individuals inside a company who plan, organize and
run the business.

Example:
•Owners interested in profits earned, financial stability and
business growth

•Managers need accounting information to guide it in

business planning, organizing and control

•Employees interested in business stabilities to know

whether the owners can pay increased wages and benefits
 FORMS OF BUSINESSES
• Sole Proprietorship – business with single or sole
owner, who most often is also the manager of the
business.

• Partnership – business organization that is made up

of two or more individuals or owners, who jointly own
the business
• Professional partnership 2 - 50
• Non professional partnership 2 – 20
• Unlimited liability - can claim over personal asset

• Companies – organizations which have many

owners called shareholders or stockholders.
• Limited liability – can claim over company asset only
ACCOUNTING PRINCIPLES
 Economic entity concept – assumption that a
business is separate and distinct from its owner and
from every other owner
 Going concern concept – assumption that a business
will continue to operate in the foreseeable future
using its assets to carry on its operations and not
offering the assets for sale
 Stable dollar concept – assumption that transactions
can be measured in terms of monetary value (US
dollar/RM), assumption that purchasing power of unit
of measure used in accounting (RM) does not change
 Historical concept – assumption that assets and
services and liabilities be taken into the accounting
records at cost
 Accounting period concept – assumption that all
economic activities of a business can be divided into
regular time periods (monthly, quarterly, yearly)
 Conservatism / Prudence concept – assumption that
any foreseeable losses should be recorded in the
current year whereas foreseeable profit will be
recorded when it is actually realized, report the lowest
value for assets whereas the highest value of liabilities
 Consistency concept – assumption that consistent
basis or methods is used
 Matching / Accrual concept – assumption that all
expenses must be recorded irrespective whether have
been paid or not, all revenues must be recorded
irrespective whether have been received or not, profit
is considered earned when goods/services are passed
to the customers and not when customer receive the
order
 Dual concept – assumption that double entry concept
for every transaction is involved, one represented by
assets and the other by the claims against the assets
 Full disclosure – assumption that accounting
reports contain all relevant and significant financial
information including the fact of other events which
might be relevant to the users (eg : changes in
accounting methods)
 Materiality – assumption that decision of what is
material in accounting depends on business
transaction, surrounding (eg : cost of a computer)
 Objectivity – assumption that financial statement
must contain relevant and reliable information
based on objectively determined facts, written
documents, invoices, contracts