Topic 2 Accounting Business Noriah

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/


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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)

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Topic 2 Accounting Business Noriah