AA015 Topic 2 2023 - 2024
AA015 Topic 2 2023 - 2024
AA015 Topic 2 2023 - 2024
Topic 2:
Basic Accounting Concepts
The contents
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2.1 Financial Reporting
Framework in Malaysia
What is the financial reporting framework and used in
Malaysia ?
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2.1 Financial Reporting
Framework in Malaysia
The difference in accounting framework among Generally Accepted
Accounting Principles (GAAP), Malaysian Private Entities Reporting
Standard (MPERS) and Malaysian Financial Reporting Standards (MFRS)
GAAP
• Reporting entities are generally divided into two sectors – public sector and
private sector.
MPERS
•The MASB develops and publishes a separate Standard to be applied to the
general purpose financial statements of private entities.
•The MPERS is based on the IASB’s International Financial Reporting Standard
for Small and Medium-sized Entities (IFRS for SMEs) revised in May 2015.
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2.1 Financial Reporting
Framework in Malaysia
What is SME?
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2.1 Financial Reporting
Framework in Malaysia
The difference in accounting framework among Generally Accepted
Accounting Principles (GAAP), Malaysian Private Entities Reporting
Standard (MPERS) and Malaysian Financial Reporting Standards (MFRS)
MFRS
• MFRSs set out recognition, measurement, presentation and disclosure
requirements dealing with transactions and other events and conditions that are
important in general purpose financial statements. They may also set out such
requirements for transactions, events and conditions that arise mainly in
specific industries.
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Accounting Concepts
Now Future
Going Concern
Economic Entity
The business is accounted for Reflects assumption that the
separately from other business business will continue operating in
entities, including its owner. the foreseeable future.
Consistency
Consistency means that a company
uses the same accounting
principles and methods from year to
year.
Materiality
Accountants are required to
accurately account for significant
items and transactions.
Objectivity
The financial statements of an
organization be based on solid
evidence.
Accounting Concepts
Prudence
Do not overestimate the amount of assets and revenues or
underestimate the amount of liabilities and expenses.
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❖Economic Entity
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❖Economic Entity
Example:
The company purchases a car for his wife by using money
from the business’ operations. He had recorded the purchases
as a business’ assets. Besides that, all the expenses such as
fuel oil were recorded as business expenses.
Solution:
The company does not comply the economic entity
concept. The purchase should be recorded as drawing
because the transaction was a personal transaction.
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Going Concern
• The business will continue to operate long enough to carry out
its’ existing objectives. It means that the entity will remain in
operation for the foreseeable future.
• Most resources such as supplies, land, building and equipment
are acquired to be used rather than to sell.
Example:
The company purchases a car with a cost of RM20,000 with the
estimated useful life for 10 years . The market value for that car is
RM25,000. It is suggested that the car should be depreciated for 5
years because the business is expected to be liquidated in a short
period.
Conclusion:
The suggestion is rejected because it is contrary to the going
concern concept. The vehicle should be recorded at the value of
RM20,000 and must be depreciated for 10 years because the
business must be assumed to continue for a long time
(foreseeable future).
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Consistency
• Consistency means that a company uses the same
accounting principles and methods from year to year.
• When financial information has been reported on a
consistent basis, the financial statements allow
meaningful analysis of trends within a company over a
period of time.
Example:
The company uses a straight line method in depreciating
the fixed asset of the company. The company decides to
change to declining balance method.
Conclusion:
It does not comply with consistency concept because
the method should be used from year to year. Any
changes should be disclosed in the notes to the
financial statements.
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Accounting Period
• Time period covered by financial statements is known
as accounting period.
• Time period assumption means business activities can
be divided into specific period such as a month, a
quarter and a year in order to enable comparison of
business performance over time.
Example:
The company established on 1 January 2022. The trade
closes the business account every 12 months at 31
December every year. Explain the concept involved.
Conclusion:
It is a normal condition when the business follows the
accounting period where the financial statements will be
issued every 12 months.
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Materiality
● Materiality relates to an item’s impact on a firm’s overall
financial condition and operations.
● An item is material when it is likely to influence the
decision of a reasonably prudent investor or creditor.
● To determine the materiality of an amount, the
accountant usually compares it with such items as total
assets, total liabilities and net income.
Example:
A company purchases a calculator at cost RM20 and it will
depreciate for 5 years over its useful life. Give your opinion.
Conclusion:
Although the proper accounting would depreciate the calculator
over its useful life, but this cost is considered immaterial. It will
not make a material difference on total assets and net income.
Therefore, the cost of the calculator is best declared as supplies
(current asset) rather than an equipment (fixed asset).
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Revenue Recognition
• Revenue is recognized in the period they are earned.
• When the merchandise has arrived to the buyer or when
services are rendered although cash has not been received.
• Criteria to recognize a revenue: -
• there is a change of ownership/title.
• buyers are willing to pay.
• the stability of the currency.
• buyers are able to pay.
• Example:
Mr. Tan is an entrepreneur of pottery. He has received 100
reservations for the porcelain vase on June 1, 2022 and has
received a payment of RM1,000. The booking was sent on June
15, 2022. When will the sales above be recognised? Give your
opinion.
• Solution:
Mr. Tan needs to recognise sales revenue of RM1,000 on 15
June 2022 because the change of ownership happens on that day.
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Expense Recognition
• Expenses are recorded in the accounting period in
which it has been involved for a business revenue.
• Expenses are recognized when they are incurred
even if payment has not yet been made.
• The goal - to find out the actual amount of revenue
and expenditure for a financial period.
• Example:
Puan Salina has recorded expenses of RM2,000 for
the utility in April 2022, although payment will only be
made in May 2022.
Explanation:
Puan Salina complies with the concept of expense recognition
as an expense of the current period should be recorded in the
current accounting period (regardless of whether it has been
paid or not).
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Full Disclosure
• The company should report the sufficient information
(ie: relevant, reliable, comparable) so that the external
parties can make a reasonable decision.
• Example:
Anita Business has made changes in stock valuation
method used. The company did not disclose the information
in the financial statements for the accounting period.
• Solution:
The situation does not comply with the concept of full disclosure
where a change made should be reported in the notes to the
accounts. The aim is to inform the user of changes in the
financial statements.
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Notes to the accounts are
the additional information
and explanations that
accompany the financial
statements.
• Example:
Bertam Indah Co. issues only receipt for cash transactions, but
for the return of goods from sales transactions, no source
document is issued. Give your opinion.
• Solution:
The Company does not comply with the concept of objectivity for
the return of goods from sales transactions. For all transactions
occurred which needs to be confirmed with the release of the
source document. In addition to the evidence it can also facilitate
the recording.
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Prudence
● The exercise of caution when making judgements
under conditions of uncertainty.
MASB, the Conceptual Framework for Financial Reporting (the Conceptual Framework), para. 2.16.
Prudence
● Example:
Inventory is recorded at the lower of cost or net
realisable value (NRV) rather than the expected selling
price.
(net realizable value = selling price - cost to sell)
● Solution:
This situation does comply with the prudence concept.
According to MFRS 102, Inventories shall be
measured at the lower of cost and net realisable
value.
● This would ensure inventory is not being overvalued, as
the figure of inventory directly impacts the “costs of
goods sold” figure, because “Cost of goods sold =
Beginning inventory + Purchases costs– Ending
inventory.”
Prudence
● Extra Example:
● Fair Value is defined as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
● Solution:
This business complies with the fair value
measurement concept. This is because market price
information is usually readily available for these types
of assets. Only in situations where assets are actively
traded, such as investment securities, companies will
apply the fair value measurement concept extensively.
2.3 Accounting Equation
Owner’s
Owner’s
Brown, 2019.
https://www.double-entry-bookkeeping.com/accounting-equation/the-accounting-equation/
2.3 Accounting Equation
Owner’s
Owner’s
Capital
+ Revenues _ Expenses _ Drawing /
Withdrawal
Brown, 2019.
https://www.double-entry-bookkeeping.com/accounting-equation/the-accounting-equation/
Assets
❖ Wealth / resources owned by the business.
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Assets
2. Current Assets
▪ Exist in one accounting period and can be
converted into cash within a year.
▪ Constantly of changing form and value.
▪ Example:
Inventory, Accounts Receivable, Bank, Cash,
Prepaid Expenses, Accrued Revenue etc.
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Liabilities
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Liabilities
2. Current Liabilities
● Example:
Accounts Payable, Expenses Payable,
Unearned Revenue etc.
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Owner’s Equity
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The elements involved in
Owner’s Equity:
❖ Capital
▪ Consists of assets in the business by the
owners.
▪ Impact: increase the owner's equity.
❖ Drawings / Withdrawals
▪ Owner issues asset (cash/merchandise/fixed
assets) for his personal use.
▪ Impact:reduce the owners' equity.
❖ Expenses
❑ This will reduce the owner's equity.
▪ Income / Revenues
❑ This will add value to the owner's equity.
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The elements involved in
Owner’s Equity:
❖ Expenses
● Cost incurred in the course of operating a business.
● It is based on expense recognition concept.
● Impact: reduce the owners' equity.
● 2 types of Expenses:
✔Operating Expenses
Example: Utilities , sales commissions, delivery expense
✔Non-Operating Expenses
Example: Interest expense, property taxes on the
administrative office building
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The elements involved in
Owner’s Equity:
❖ Revenues
● Income generated from the sale of goods or services to
customers.
● It is based on revenue recognition concept.
● Impact: increase the owner's' equity.
● 2 types of revenues:
● Operating Revenue (derived from business main
activities)
Example: Sales, service revenue
● Non-Operating Revenue (derived from non-core activity)
Example: Interest income, rental income, gains on
disposal of fixed asset
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Chart of accounts
Refer to pg. 5
https://drive.google.com/drive/folders/1iJ3apcF6pLdYxSyi-bg_-YFUUL3NHtE6
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Analysis of Transactions
● The accounting equation shows how assets,
liabilities and owner’s equity are related.
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Analysis of Transactions
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2.4 Double-Entry System
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2.4 Double-Entry System
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2.4 Double-Entry System
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EXTRA NOTES
1. Transaction Analysis
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Transaction Analysis
J. Scott, the owner, contributed $20,000
cash to start the business.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
2. Transaction Analysis
Purchased supplies paying $1,000
cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Transaction Analysis
Purchased supplies paying $1,000
cash.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
3. Transaction Analysis
Purchased equipment for $15,000
cash.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Transaction Analysis
Purchased equipment for $15,000
cash.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
4. Transaction Analysis
Purchased Supplies of $200 and
Equipment of $1,000 on account.
The accounts involved are:
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Transaction Analysis
Purchased Supplies of $200 and
Equipment of $1,000 on account.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
5. Transaction Analysis
Borrowed $4,000 from 1st American
Bank.
The accounts involved are:
(1) Cash (asset)
(2) Notes payable (liability)
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Transaction Analysis
Borrowed $4,000 from 1st American
Bank.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Transaction Analysis
The balances so far appear below. Note that the SOFP
Equation is still in balance.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Transaction Analysis
Rendered consulting services
receiving $3,000 cash.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
7. Transaction Analysis
Paid salaries of $800 to employees.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Transaction Analysis
Paid salaries of $800 to employees.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Transaction Analysis
J. Scott withdrew $500 from the
business for personal use.
1. Statement of Comprehensive
Income/ Profit or Loss
2. Statement of Owner’s Equity
3. Statement of Financial Position
4. Statement of Cash Flows
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Profit is the
difference
between
Revenues and
Expenses.
The Statement of
Owner’s Equity
explains changes in
equity from profit (or
loss) and from owner
investments and
withdrawals for a
period of time.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
The Statement
of Financial
Position
(SOFP)
describes a
company’s
financial
position at a
point in time.
Owner’s Equity in Balance Sheet
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
From Statement of Owner’s Equity
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
The Statement of Cash Flows identifies cash inflows and cash outflows over a
period of time.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007