Fundamentals of Accounting Quick Notes

➢ Chapter 1 Introduction to Accounting

❖ Definition of Accounting
o Accounting: The process of recording, classifying, analysing, interpreting, and
communicating financial information about an organisation or its stakeholders
o It involves set of principles and standards that guide the recording and reporting
of financial information. These principles and standards known as Generally
Accepted Accounting Principles (GAAP) to ensure that financial information is
consistent, comparable and reliable.
o Certified Public Accountants (CPAs) - accountants that are specially trained by
passing a test and are certified as highly competent in the field of business
accounting.
o Definition of Accounting (under different institutes)
1. Malaysian Institute of Certified Public Accountants (MICPA) - the theory
or system of organising, maintaining and auditing the books of a firm; art of
analysing the financial position and operating results of a business house
from a study of its sales, purchases, overheads, etc.
2. American Institute of Certified Public Accountants (AICPA) - the process
of identifying, measuring and communicating economic information to
permit informed judgement decisions by uses of the information.
3. Financial Reporting Standards Council (FRSC) - A service activity. Its
function is to provide quantitative information, primarily financial in nature,
about economic entities that is intended to be useful in making economic
decisions.
❖ Processes of Accounting
o There are (3) processes: identifying, measuring and communicating
o It involves some Economic/Business activity - when buying or selling
1. Identifying - recognising the business transaction (a form of
economic/business activity) that took place
2. Measuring - deciding what amount of money is involved in the business
transaction
3. Communicating - the process of recording, classifying, summarising and
interpreting the business transaction
o In general, it is the process of organising the information gathered and distributing
it to potential users for them to make informed decision-making
1. Recording - the process of writing the business transactions in
chronological order in the business’ journal in accordance with the generally
accepted standard accounting rules and regulations.
 2. Classifying - the process of grouping similar business transactions into their
relevant group (asset, liability, capital, revenue and expense).
3. Summarising - the process where the financial statements are prepared.
4. Interpretation - the process where the profitability, liquidity and solvency of
the business is analysed.
❖ Purpose of Accounting
o To provide information that are useful to the users for decision making. For
example, for the information to be useful, the following must exist:
1. The information is readily obtained
2. The information is up to date
3. The information must be accurate
4. The information must be easy to understand
o It is with this useful information that the users will be able to make decisions
whether to expand their business, to extend credit to their buyers or to invest in
other businesses
❖ Users of Accounting
o Users of accounting can be classified into internal users and external users.
o Internal users:
▪ Internal users are from the business itself for example the owners,
managers and employees of the business.
▪ Owners: need accounting information to decide whether to expand the
business or to invest in other businesses. To compare with their competitors.
▪ Managers: need accounting information to draw up their business plan for
the following year. Also, they want to see the performance of each of its
business units.
▪ Employees: accounting information would be able to provide them with
information on the ability of the business to continue to pay them their
salaries. Also to use this accounting information of the business to negotiate
an increase in their salaries and better benefits.
o External users:
▪ External users are from outside the business. For example, potential
investors, government authorities, lenders, trade unions, academics,
students, suppliers and customers.
▪ Potential investors: To know which company they should invest in. Using
the accounting information, they would decide to invest in the best
company that suits their amount of investment, and the risk they are willing
to take.
▪ Government authorities: Assist in the tax assessment as well as the
collection of these taxes
 ▪ Lenders: the accounting information provide them with information such as
the ability of the company to pay back their loans and meet the regular
interest payments
▪ Suppliers: It helps them in deciding whether to extend their credit to the
company to make prompt payment.
▪ Trade unions: It will help them not only put forward a proposal for
collective agreements for an increase in salary but also proposed for better
benefits for their members.
▪ Academics/Students: It provides them with the data they need to use in
their studies of the business activities.
▪ Customers: To have interest to know whether the business or company
would be able to continue to supply goods or services to them and if the
company will continue to exist.
❖ Accounting Concepts / Conventions
o Accounting concept/convention: the general understanding of the methods of
recording the financial transactions and the organisation of the bookkeeping that
are used by accountants.
o It is with these concepts or convention that consistency in financial reporting can
be maintained across different business or companies
o Going concern:
▪ This principle assumes that the business will continue to operate into the
future. The business and its assets are not expected to be sold off soon.
o Accruals:
▪ This concept requires the financial statements to reflect the economic events
that have occurred during a reporting period, regardless of when the cash is
received or paid.
▪ For example business earns a credit sale RM500 in August 2023 but has yet
to receive the cash. Business still has to record the sales in August 2023
o Historical cost:
▪ This concept, the assets should be recorded at their original cost. This will
help to maintain consistency and comparability in financial statements and
reduces the subjectivity of accounting estimates.
o Business entity:
▪ This concept states the accounting records of a business should only be for
the business alone.
▪ Anything relates to the owner’s personal transactions should not be
recorded in the business’s accounting records. This explains that the
business and the owner are two separate entities.
o Prudence:
 ▪ This concept is also known as conservatism. It requires the accounts to be
recorded with a fair degree of caution. This business should not be
anticipating profits or gains before it is certain.
▪ The assets of the business should also be not overvalued. (Like expecting
the assets will bring profit when you don’t know it will)
o Consistency:
▪ This concept states that the business should be consistent in its selection of
accounting methods.
▪ For example, if a business already selected using reducing balance method
to calculate the depreciation of the machinery, they should use it
continuously.
▪ This will ensure that comparability for financial statements is in order so that
a true and fair view is shown.
o Materiality:
▪ In this concept, information is to be a material If it would impact a user’s
decision-making process of the financial statements
▪ For example, if a business earns a few thousand dollars in revenue from a
small and insignificant customer, that information may not be considered a
material and not reported separately due to the info will be less likely to
affect a user’s decision-making.
▪ This concept is important in accounting as it helps to ensure financial
statements are relevant and useful to the users. Though this concept may be
very subjective
▪ For example, information considered a material by a small company may
not be a material for a large company
o Duality:
▪ This concept ensures that the accounting equation remains in balance. The
accounting equations states that assets = liabilities + capital/equity
▪ It allows for accurate and complete financial reporting. By recording two
transactions in two accounts, provides a clear and complete picture of
financial position of the business
o Realisation (also Revenue Recognition)
▪ This concept refers to the process of recording revenue earned by a
business in its financial statements. As stated by GAAP, revenue should be
recognised when it is earned and realised.
▪ In other words, revenue recognition occurs when a business completes the
delivery goods or services to a customer and receives payment for them. It
is at this point that the business will recognise the revenue associated with
the transaction in its financial statements
❖ Types of Accounting
 o The are (6) types of accounting: Financial Accounting, Auditing, Taxation, Cost
and Management Accounting, Forensic Accounting and Government
Accounting
o ★Financial Accounting
▪ The process of preparing financial statements, such as income statement
and statements of financial position from the happenings of the business
transactions.
o ★Management Accounting
▪ Activities that gather and prepare information intended for management for
the purposes of planning, controlling, decision-making, performance
evaluation and managing the organisation.
o ★Cost Accounting
▪ The process of gathering the operating cost information which will help
managers in identifying, measuring and controlling expenditure.
o Auditing
▪ The activity of examining results
o Taxation/Tax Accountants
▪ Responsible for calculating individual or business tax for the purpose of tax
assessment.
o Government Accounting
▪ It is also known as public sector accounting. It includes accounting for
legislative bodies and government departments.
o Forensic Accounting
▪ The latest branch of accounting which involves the application of knowledge
and accounting standards in the court of law.
❖ Forms of Business Organisation
o In Malaysia, there are three (3) common forms of business organisations namely
sole proprietorship, partnership, and limited company (public/private)
o Sole proprietorship:
▪ A single individual owns and operates the business
▪ Easiest to set up
▪ Minimal regulatory requirements
▪ Owner will be personally liable for all the debts and obligations of the
business
▪ Sole proprietor will keep all the profits made in the business and will only
need to pay individual tax by filling in Form B (Residents Who Carries on
Business) to Lembaga Hasil Dalam Negeri Malaysia (LHDN)
▪ Sole proprietor is the only person alone that will shoulder all the decision-
making and risk-taking involved in the business
 ▪ If the business runs into financial difficulties and other problems, the sole
proprietor is alone facing these
▪ In worst cases, the sole proprietor must sell personal property to get
through the difficulties and may result in bankruptcy
▪ Sole proprietor tends to remain a small business

▪ Strengths / Advantages:
▪ Easily formed and dissolved, low incorporation cost (low cost)
▪ Can solely enjoy the profit as there is no need to share with others
▪ Have full authority to run the business
▪ Does not depend on other people
▪ Not many regulations to adhere to
▪ Not charged with special income tax
▪ Can be easily dissolved and the cost is minimal
▪ Weakness / Disadvantages:
▪ Unlimited liability - for example if your business goes bankrupt, you can't
pay your bank, trade payable or people you owe money to. Hence they will
take any of the personal possessions you have in the shop or your home to
make whatever it is you owe them
▪ Limited capital - for example you are only able to input RM5000 into your
business so that how much you have in your business
▪ Owner needs to give full commitment to the business - have to be at your
business 24/7 to ensure everything is going smoothly
▪ Limited life - a sole trader won't probably extend to 10-15 years for their
business
o Partnership:
▪ A business owned by two or more individuals (≤20 in Malaysia), who will
share profits and losses
▪ Partnership is easy to set up and have unlimited liability
▪ Partners may choose to follow the basic agreement as being outlined in the
Partnership Act 1961 (Revised 1974) or draw up their agreement on their
rights, capital and appropriation of the business’s profit and loss
▪ In partnership, partners can gather more capital and resources than sole
proprietorship
▪ To succeed, a good relationship between partners is very crucial. Not only a
diverse set of skills between partners is important for the partnership to
succeed
▪ The workload of running the business is shared among the partners rather
than just on one person. Business risks also shared.
 ▪ Since business decisions must go through all partners, the decision-making
process will be prolonged.
▪ When one partner makes a bad decision, it will affect other partners
▪ Any profits made in the partnership will need to be shared among the
partners unlike sole proprietorship which profits are all taken by themselves

▪ Strengths / Advantages:
▪ Easily formed
▪ Can bring in other expertise
▪ Can increase the capital - for example for sole traders only one person
could bring in RM5000 but for partnership there is more than one person in
the business so if there are two people total there will be RM 10000.
▪ Not many regulations to adhere to
▪ Not charged with special income tax
▪ Partners can work together for the benefit of the business
▪ Weakness / Disadvantages:
▪ Unlimited liability although at least a partner has limited liability.
▪ Profits need to be shared among the partners
▪ Possibility of misunderstanding among the partners
▪ Rules to dissolve the partnership depend on certain conditions
o Limited company:
▪ There are (2) types of companies Private Limited Companies and Public
Limited Companies

o Private Limited Company:

▪ A private limited company or Sdn. Bhd. Is a separate legal entity from its
owners, and its shareholders are liable for the debts of the company to the
extent of their capital contributions
▪ Ownership: Shares of a private limited company are usually held by a few
individuals, such as family members or close associates. These shares can’t
be sold on the stock market.
▪ Limited Liability: Just like PLCs, shareholders in a private limited company
are only responsible for the company’s debts up to the amount they
invested.
▪ Less Regulation: Private limited companies face fewer regulations than
public companies, meaning they don’t have to disclose as much financial
information.
▪ Control: The owners of a private limited company have more control over
business decisions since the ownership is concentrated among a small
group.
 ▪ Example:
▪ Local Bakery: If a family runs a bakery and registers it as a private limited
company, only they can own shares. They can make decisions without
needing to report to outside investors.
▪ The number of shareholders is between 2 and 50 persons only.
▪ The shares can only be sold to other individuals by invitation and are
circulated among members.
▪ The company cannot be listed on the Malaysian Stock Exchange.
o Public Limited Company:
▪ Like private, but it can offer its shares to the public and raise capital through
the sale of stock
▪ Both companies are more complex forms of business as opposed to sole
proprietorship and partnership
▪ More regulatory requirements and reporting obligations
▪ Reporting obligations must be submitted to the Registrar of Companies, an
agency which is responsible for the collection of data relating to the
companies
▪ Before reports are made available to the public online or by visiting the
registrar of Companies' offices, financial statements must be audited by
qualified external auditors
▪ Private limited company provides limited liability protection to its owners as
well as privacy of their financial data from the public
▪ In Malaysia, companies are formed under the Companies Act 2016 and must
be registered with the Companies Commission of Malaysia, if the listed
company in the Malaysian stock exchange must adhere to the regulations
set by the Securities Commission.
▪ The number of shareholders is a minimum of 7 persons to an unlimited
number of people.
▪ The shares can be sold to any member of the public.
▪ The company can be listed on the Malaysian Stock Exchange

▪ Advantages:
▪ Limited Liability: Shareholders' assets are protected; they can only lose
what they invested.
▪ Professional Management: Shareholders can appoint directors to manage
the company, allowing for more professional oversight.
▪ Ease of Ownership Transfer: Shares can be bought and sold easily,
facilitating changes in ownership.
▪ Attracting Investment: Issuing shares can help raise capital by attracting
more investors.
 ▪ Disadvantages:
▪ Complex Setup and Administration: Setting up a limited company requires
following strict legal procedures and may necessitate professional advice.
▪ Public Disclosure: Financial information must be made public, which can
lead to a loss of privacy compared to sole traders and partnerships.
▪ Regular Filing Requirements: Continuous administrative work is needed to
comply with filing regulations, which can be time-consuming and costly.
▪ Costs: Auditing, compliance, and legal requirements may be more
expensive in simpler business structures.

❖ Elements of Financial Statements

o Financial statements are a set of reports that provide valuable information about a
company’s financial performance and position
o These statements are prepared according to accounting standards and principles.
The main elements of financial statements are assets, liabilities, equity/capital,
revenue and expenses.
o Assets:
▪ Economic resources owned by a company that has a measurable value. It is
also expected to provide future economic benefits.
▪ A few examples of asset are cash, account receivables, inventory, property,
plant and equipment
o Liabilities:
▪ Obligations of a company to pay money or provide goods or services to
other parties
▪ Examples of liability include accounts payable, loans payable and accrued
expenses.
o Equity/Capital:
▪ It represents the ownership interest of the owners or shareholders in a
company. It’s the residual interest in the assets of an entity after deducting
liabilities. It includes common stock, preferred stock and retained earnings.
o Revenue:
▪ The amount of money earned by the company from the sale of goods or
services
▪ It is recognised when earned, regardless of when the cash is received. This
includes sales, rent received, commissions received, and interest received.
o Expenses:
▪ The costs incurred by a company in the process of generating revenues.
▪ Examples of expenses are salaries, rent, depreciation, bad debts and utilities
❖ Accounting Equation:
o It is a fundamental concept in accounting that states the assets of a business must
equal the sum of its liabilities and owner’s equity/capital.
o Assets = Liabilities + Owner’s Equity/Capital
o It is important as it ensures that the final records of a company are balanced and
that its financial position can be easily understood
o It is also the foundation of double-entry accounting, which requires that every
transaction have an equal debit and credit entry
o For example, if a company purchases new machinery with cash for RM25,000, it will
be recorded as an RM25,000 debit to the machinery account and a credit of
RM25,000 to the cash account.
o This transaction would not affect the balance of the accounting equation, as the
company assets would increase by RM25,000 (the machinery), and its liabilities and
equity/capital would remain unchanged.

QUESTION 1

Melina is a fashion designer who, after graduation with a degree in fashion, obtained a
very good job as designer in a lingerie company. She has decided that she would like to
leave her job and set up in business with an old friend from college who also trained as
a designer. Melina has heard that it is more sensible to set up as a limited company
because it would mean that she and her friend would not be personally liable for the
debts of the business. However, she says she is sure that there must be some strings
attached and would like you to tell her about any disadvantages in limited company
status.

Sample Answer from the student

For limited companies, the financial information of the activities of the company needs
to be available to the public on a regular basis.

Financial statements must be audited by qualified external auditors before they can be
issued to the public.

Setting up a company requires adherence to a set of strict formal legal requirements

and regular filling of financial information with the Registrar of Companies; this involves
additional administration and the public have access to information which would remain
strictly private in a partnership or sole trader organisation.

Suggested Answer

Melina has been correctly informed; shareholders in a company are not personally liable
for the debts of the company. This is a great advantage over the alternative form of
business organisation, the partnership.

However, it is also correct to say that there are some penalties attached to limited
company status. It is more administratively complicated to form a limited company than
it is to form a partnership. But the difficulties should not be overstated; a company
registration specialist would set up a limited company. Once a company is established
there is an on-going obligation to submit financial information on a regular basis to the
Registrar of Companies.
 The additional administrative responsibilities in a limited company are, in most cases, far
outweighed by the very substantial benefit of limited liability.

Question 2

Jacob, a bank manager, is looking at an application for a loan from Barden Bellas
Limited, a local company. The company has included a copy of its most recent annual
accounts which are for the year ending 31 December 2016. The accounts show that a
modest profit has been made in the year. It is now March 2018.

Required:

i. What type of information will Jacob be looking for from the annual accounts to
help him make a decision on whether or not to lend the money?

ii. How relevant is the accounting information which the company has provided to
Jacob’s decision?

iii. Is Jacob entitled to request any further information?

Student’s answer

Q2 (i)

• How much money will be borrowed?

• What will the money be used for?
• Where will the money to repay the loan come from?
• How quickly can the loan be repaid?

Q2 (ii) Irrelevant, the annual report is outdated, has a gap of 2 years

Q2 (iii) Jacob can advise the applicant to submit another report to further support his
loan application

Suggested Answer

(i) Jacob, as a potential lender to the company, will be principally concerned with the
ability of the business to make regular repayments of the loan, and to meet regular interest
payments. He will need to know whether the profit of the company is sufficient to cover the
interest on the loan. Also, he will be interested in the company’s other borrowings: has it
overstretched itself?

(ii) Annual accounting statements lose relevance progressively as they become out of date.
The statements which the company has provided are fifteen months old. A great deal can
happen to a company in fifteen months, and more recent, relevant information will be required
to assist Jacob in his decision. The company may not be able at this point to supply the annual
accounts for the year ended 31 December 2017, because they are not yet finalised. However, it
would be reasonable to expect that they would be available before too long.

(iii) Jacob is entitled to request whatever information he likes. He is not obliged to make the
loan to the company and if the directors refuse to give him additional information Jacob will
almost certainly refuse to make the loan. Lenders and potential lenders are often in a strong
position to request information such as monthly management accounting information

➢ Chapter 2 Income Statement

❖ What is an income statement?
o One of the (3) important financial statements (Income, SOFP, Cash) used for
reporting a business's financial performance over a specific accounting period.
o Income statement focuses on the revenues, expenses, profits and losses of a
business during a particular period
o It shows the business’s income and expenditures which shows whether the
business is making a profit or loss for a given period
o The income statement is interpreted with the balance sheet and cash flow
statement, which helps the users to understand the financial health of the
business
❖ Purpose of Income Statement
o Income statement (aka profit or loss) provides valuable information to business
owners whether they can generate profit by increasing revenue, decreasing
costs, or both
o It is not only used by the internal users (such as business management and the
board of directors) of the business but also external users (such as investors,
creditors (enough cash flow to pay off loans or take out new loans) and
competitors (determine the success strategies of a business)
❖ Elements of an Income Statement
o The income statement prepared by a business may vary depending on the
different types of business. The most common different types of business are
service and retail

o The heading of the income statement should start with the name of the
business, followed by the name of the financial statement and end with the
period in which the reported amounts occurred (could be monthly/yearly).

o Remember: S.RI | C.O.P.RO.CI.CL.GP | AI.DR.RR.DIP | E.CO.BAD.IPD.DEP.NP |

o Net sales revenue:
▪ The first amount shown on the income statement (sales) of a business
offering services or a retailer
 ▪ Sales are the main operating revenues for companies selling goods
whereas revenues are generally the main operating revenues for
companies offering services
o Cost of Sales
▪ Cost of sales (aka Cost of Goods sold) for a retail business, or the cost of
services provided for a service business
▪ It refers to the direct cost incurred in producing goods sold by a
company or delivering the services offered
▪ It represents expenses directly related to the production or provision of
those goods or services
▪ In a retail business, the cost of sales includes:
1. The cost of purchasing inventory or goods from suppliers
2. Additional costs directly related to getting those products ready for sale, like
transportation, storage, packaging and taxes
❖ Format of Income Statement
❖