topic 2 accounting business

8/4/2019 Topic 2 Accounting Business

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Accounting andBusiness

Topic

2


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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 Partnership Corporation


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Characteristics Proprietorship Partnership Corporation

Business entity yes yes yes

Legal entity no no yes

Limited liability no no yes

Unlimited life no no yes

Business taxed no no yes

One owner allowed yes no yes

*

* Proprietorships and partnerships that are set up as LLCs

provide limited liability.

Characteristics of Businesses

Exh.

1.8

*


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Corporation

Governed by: Companies Act 1965,Memorandum of Association & Article ofAssociation

Owners of a corporation are calledshareholders (or stockholders).

When a corporation issues only one class ofstock, we call it common stock (or capitalstock).


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Definitions of Income ,Expenses Assets,Liabilities and Equity, based on MASBFramework for the Preparation Presentation ofFinancial Statement.

Refer to FRS101 Presentation of FinancialStatementsat 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 benefitsduring the period in the form of inflows orenhancements of assets or decreases of

liabilities that result in increases in equity,other than those relating to contributions fromequity 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 theordinary activities of an enterprise when thoseinflows result in increases in equity, other thanincreases relating to contributions 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 thedisposal of assets, or the revaluation of financialinstruments, investment property and agriculturalassets, among other things


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EXPENSES

Expenses are decreases in economic benefits duringthe period in the form of outflows or depletions ofassets or increases of liabilities that result indecreases in equity, other than those relating to

distributions to equity participants.

Expenses include both expenses and losses.


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Probable future economic benefit obtained or controlledby a particular entity as a result of past transactions orevents

E.g.:1.Cash,

2.Accounts and notes receivable

3.Inventories

4.Prepaid items

5.Property, plant, and equipment

ASSETS


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Land

Equipment

Buildings

Cash

Vehicles

StoreSupplies

NotesReceivable

AccountsReceivable

Resourcesowned orcontrolled

by a

company

Assets


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Probable future sacrifice of economicalbenefit arising from a present obligation of aparticular 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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TaxesPayable

WagesPayable

NotesPayable

AccountsPayable

Creditors

claims onassets

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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Ownersclaims

on

assets

Revenues

OwnerInvestments

OwnerWithdrawals

Expenses

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; or

E.g.:

1. Accounts and notes receivable2. Inventories

3. Prepaid items

4. Cash

CURRENT ASSETS


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Operating Cycle

the time between the acquisition of assets for processing andtheir 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

PurchasesCollections

Sale

s


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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 permanentnature that are used in the normal business operations.

Intangible assets - long-term rights and privileges of anonphysical nature acquired for use in businessoperations. 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 afterthe 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 currentliabilities criteria.

E.g.:

Long-term debt

Long-term lease obligations

Deferred income tax liability

Pension obligations


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Timing Issue:

Cash-Basis AccountingVs

Accrual-Basis Accounting


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Cash-Basis Accounting

Revenues are recognized when cash isreceived.

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 theapplication 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 applied accordancewith 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 PrincipleExpress transactions and events in

monetary, or money, units

Now Future

Going-Concern PrincipleReflects assumption that the

business will continue operatinginstead of being closed or sold

Time PeriodThe economic life of business can bedivided into artificial time period forthe 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 prepared

at 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 CostAccounting information is based

on actual cost.

Revenue Recognition1. Recognize revenue when it is

earned.

2. Proceeds need not be in cash.3. Measure revenue by cash

received plus cash value of itemsreceived.

MatchingExpenses are matched against

revenues, and recorded in thesame period in which the related

revenues are earned

Accounting Principles

Full DisclosureReport enough information forusers to make knowledgeabledecisions about the company


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Accounting Principles

Matching

Principle

Full

Disclosure

Principle

Profit is recognized by matching

the income of the period with all

expenses incurred in earning such

income.

Financial statements should provide

sufficient / relevant information

to influence users decision making,

(e.g Acctg policies, methods,

Changes in policy)


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Accounting Constraints

ConservatismIncome and assets be reported at

their lowest reasonable amounts (i.e.minimizing the assets andunderstating 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 the

true 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)

topic 2 accounting business

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