Example Exercise

TOPIC

Accounting Concept and

2 Practice

Accounting
A Malaysian
Perspective
5e
Learning Objectives

• LO1: Understand the Generally Accepted Accounting

Principles.
• LO2: Explain the Generally Accepted Accounting Principles.
• LO3: Understand the Types of Financial Statements.
• LO4: Describe the Types of Financial Statements.
• LO5: Understand Business Transactions.
• LO6: Understand and Demonstrate the Accounting Equation.

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Generally Accepted Accounting Principles

• Financial accountants follow generally accepted accounting

principles (GAAP) in preparing reports.
• Within the U.S., the Financial Accounting Standards Board
(FASB) has the primary responsibility for developing
accounting principles.
• The Securities and Exchange Commission (SEC), an agency
of the U.S. government, has authority over the accounting and
financial disclosures for companies whose shares of ownership
(stock) are traded and sold to the public.
• Many countries outside the U.S. use generally accepted
accounting principles adopted by the International
Accounting Standards Board (IASB).

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Generally Accepted Accounting Principles

• Accounting principles and concepts are developed from

research, practices, and pronouncements of authoritative
bodies such as the Malaysian Accounting Standards Board
(MASB).
• Principle functions of MASB:
o To issue new accounting standards
o To review or adopt existing accounting standards
o To contribute directly to the international development of financial
reporting
o To undertake public consultation in the determination of its standards
and other technical pronouncements
o To continually improve the quality of financial reporting in Malaysia

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Generally Accepted Accounting Principles

o the standard framework of guidelines for

financial accounting used in any given jurisdiction;
generally known as accounting standards or
standard accounting practice.
o These include the standards, conventions, and rules
that accountants follow in recording and
summarizing and in the preparation of
financial statements.

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Generally Accepted Accounting Principles

Assumptions Constraints
Principles
(andaian) (Kekangan)
(5)
(4) (2)

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Accounting Principles

Historical cost Objectivity

Matching

Revenue
Full-disclosure
recognition

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Accounting Principles

• Historical cost principle

requires companies to account
and report based on acquisition
Historical cost costs rather than fair market
value( nilai pasaran adil) for
most assets and liabilities.

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Cost Concept (slide 1 of 3)

• Under the cost concept, amounts are initially

recorded in the accounting records at their cost or
purchase price.
• Harun Publishers purchased a building on February
20, 2016, for RM150,000. Other amounts related to
this purchase are:

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Cost Concept (slide 2 of 3)

Under the cost concept, Harun Publishers records the purchase

of the building on February 20, 2016 for how much?

RM150,000.

The other amounts listed above have no effect on the accounting

records.
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Cost Concept (slide 3 of 3)

• The cost concept also involves the objectivity and

unit of measure concepts.
o The objectivity concept requires that the amounts recorded
in the accounting records be based on objective evidence.
 Only the final agreed-upon amount is objective enough to be
recorded in the accounting records.
o The unit of measure concept requires that economic data be
recorded in dollars.

o Objective: boleh dikira

o Subjective: tak boleh dikira

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Accounting Principles

• financial and accounting

information needs to be
independent and free from bias.
This means that financial
reporting like a company's
Objectivity financial statements need to be
based on evidence and not
opinions.

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Accounting Principles

• Expenses have to be matched

with revenues as long as it is
reasonable to do so. Expenses
are recognized not when the
work is performed, or when a
• Matching
product is produced, but when
the work or the product actually
makes its contribution to
revenue.

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Accounting Principles

• companies may not record

revenue until (1) it is realized or
realizable and (2) when it is
earned. The flow of cash does
Revenue not have any bearing on the
recognition recognition of revenue. This is
the essence of accrual basis
accounting.

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Accounting Principles

• It requires that all material

information has to be disclosed
in the financial statements
either on the face of the
Full-disclosure financial statements or in the
notes to the financial
statements.

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4 Accounting Assumptions

Economic entity

Going concern

Time period

Monetary-unit

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4 Accounting Assumptions

• a business or an organization
Economic entity
and its owners are treated as
(entity berasingan)
two separately identifiable
parties
• It is necessary to record the
business's transactions
separately, to distinguish them
from the owners' personal
transactions

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4 Accounting Assumptions

• a business that functions

Going concern
(berterusan beroperasi) without the threat of
liquidation( bankrupt) for the
foreseeable future
• the entity has neither the
intention nor the need to stop its
operations.

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4 Accounting Assumptions

Time period • a firm's operating cycle is divided

into separate accounting periods that
can be reported on in a manner that is
timely

The time period principle is the

concept that a business should report
the financial results of its activities
over a standard time period, which is
usually monthly, quarterly, or annually

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2 Accounting Constraints

Conservatism Materiality

when in doubt on how to record or Report only those that are considered
report or when two different significant. Insignificant amounts need not
acceptable methods could be used, be recorded and reported
choose the one that won’t overstate
assets or profits Strong or impactful to change a
decision
Not to overstate or give false
impression

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Example Exercise Cost Concept

On August 25, Mamat Repair Service extended an offer

of RM125,000 for land that had been priced for sale at
RM150,000. On September 3, Mamat Repair Service
accepted the seller’s counteroffer of RM137,000. On
October 20, the land was assessed at a value of
RM98,000 for property tax purposes. On December 4,
Mamat Repair Service was offered RM160,000 for the
land by a national retail chain.
At what value should the land be recorded in Mamat
Repair Service’s records?

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part.
Current Development in MFRS
Financial Statements

• What are they?

• A set of statements that explained about the
profitability, equity or ownership, financial position
or status, and cash operations of an entity.
• These statements are prepared based on the recorded
transaction, which are intended for users of financial
information.
• It consists of four main statements.
Statement of Profit or Loss and Other
Comprehensive Income (slide 1 of 2)

• The statement of profit or loss reports the revenues

and expenses for a period of time, based on the
matching concept.
• The matching concept is applied by “matching” the
expenses incurred during a period with the revenue
that those expenses generated.
• The excess of the revenue over the expenses is called
net income, net profit, or earnings. If expenses
exceed revenue, the excess is a net loss.

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Example Exercise Statement of Profit or Loss (slide 2 of 2)

The revenues and expenses of Chickadee Travel Service for the

year ended April 30, 2018, follow:

Prepare the statement of profit or loss for the year ended April
30, 2018.

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part.
Statement of Owner’s Equity (slide 1 of 2)

• The statement of owner’s equity reports the changes

in the owner’s equity for a period of time.
• It is prepared after the statement of profit or loss
because the net income or net loss for the period must
be reported in this statement.

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Example Exercise Statement of Owner’s Equity (slide 2 of 2)

Using the statement of profit and loss for Chickadee Travel

Service, prepare a statement of owner’s equity for the year
ended April 30, 2018. Adam Che Lini, the owner, invested an
additional RM50,000 in the business and withdrew cash of
RM30,000 for personal use during the year. The capital of Adam
Che Lini was RM80,000 on May 1, 2017.

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part.
Statement of Financial Position (slide 1 of 2)

• A statement of financial position is a list of the

assets, liabilities, and owner’s equity as of a specific
date.
• The account form of a statement of financial position
lists the assets on the left and the liabilities and
owner’s equity on the right. It resembles the basic
format of the accounting equation.

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Example Exercise Statement of Financial Position
(slide 2 of 2)

Using the following data for Chickadee Travel Service as

well as the statement of owner’s equity, prepare a
statement of financial position as of April 30, 2018.

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part.
Statement of Cash Flows

• A statement of cash flows is a summary of the cash

receipts and cash payments for a specific time period.
o It consists of three sections:
1. operating activities
2. investing activities
3. financing activities

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Statement of Cash Flows: Cash Flows from
Operating Activities

• The cash flows from operating activities section

reports a summary of cash receipts and cash
payments from operations.

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Statement of Cash Flows: Cash Flows from
Investing Activities

• The cash flows from investing activities section

reports the cash transactions for the acquisition and
sale of relatively permanent assets.

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Statement of Cash Flows: Cash Flows from
Financing Activities

• The cash flows from financing activities section

reports the cash transactions related to cash
investments by the owner, borrowings, and
withdrawals by the owner.

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Example Exercise Statement of Cash Flows
(slide 1 of 2)

A summary of cash flows for Chickadee Travel Service

for the year ended April 30, 2018, follows:

The cash balance as of May 1, 2017, was RM72,050.

Prepare a statement of cash flows for Chickadee Travel
Service for the year ended April 30, 2018.

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part.
Example Exercise Statement of Cash Flows
(slide 2 of 2)

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Financial Statements Preparation Order

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Financial Statements—Statement of Profit or Loss

(continued)

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Financial Statements—Statement of Owner’s
Equity

from Statement of Profit or Loss

to the statement of financial position

(continued)

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Financial Statements—
Statement of Financial Position

This amount is compared to the net

cash flow on the statement of cash
flows

From the statement of owner’s equity

(continued
)
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Financial Statements—Statement of Cash
Flows

This amount should match Cash on

the statement of financial position

(concluded
)
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Financial Statement Interrelationships

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The Accounting Equation (slide 1 of 4)

• The resources owned by a business are its assets.

• The rights of creditors are the debts of the business
and are called liabilities.
• The rights of the owners are called owner’s equity.
• The equation Assets = Liabilities + Owner’s Equity
is called the accounting equation, which expresses
the relationship between what is owned and what is
owed by an entity.
Owned = Owed
• It is the basis upon which the double entry accounting
system is constructed.
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The Accounting Equation (slide 2 of 4)

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The Accounting Equation (slide 3 of 4)

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The Accounting Equation (slide 4 of 4)

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Example Exercise Accounting Equation (slide 1 of 2)

Joe Nga is the owner and operator of You’re A Star, a

motivational consulting business. At the end of its
accounting period, December 31, 2017, You’re A Star
has assets of RM800,000 and liabilities of RM350,000.
Using the accounting equation, determine the
following amounts:
a. Owner’s equity as of December 31, 2017.
b. Owner’s equity as of December 31, 2018, assuming
that assets increased by RM130,000 and liabilities
decreased by RM25,000 during 2018.

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part.
Example Exercise Accounting Equation (slide 2 of 2)

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part.
Business Transactions and the Accounting
Equation

• A business transaction is an economic event or

condition that directly changes an entity’s financial
condition or its results of operations.

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Transaction A

• On November 1, 2017, Ismail Idris deposited

RM25,000 in a bank account in the name of
NetSolutions.

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Transaction B

• On November 5, 2017, NetSolutions paid RM20,000

for the purchase of land as a future building site.

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Transaction C

• On November 10, 2017, NetSolutions purchased supplies

for RM1,350 and agreed to pay the supplier in the near
future.

• The liability created by a purchase on account is called an

account payable.
• Items such as supplies that will be used in the business in
the future are called prepaid expenses, which are assets.

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Transaction D (slide 1 of 2)

• A business earns money by selling goods or services

to its customers. This amount is called revenue.
• On November 18, 2017, NetSolutions received cash
of RM7,500 for providing services to customers.

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Transaction D (slide 2 of 2)

• Revenue from providing services is recorded as fees

earned.
• Revenue from the sale of merchandise is recorded as
sales.
• Other examples of revenue include rent, which is
recorded as rent revenue, and interest, which is
recorded as interest revenue.
• An account receivable is a claim against a customer,
which is an asset.

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Transaction E

• During the month, NetSolutions spent cash or used

up other assets in earning revenue. Assets used in this
process of earning revenue are called expenses.
• On November 30, 2017, NetSolutions paid the
following expenses: wages, RM2,125; rent, RM800;
utilities, RM450; and miscellaneous, RM275.

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Transaction F

• On November 30, 2017, NetSolutions paid creditors

on account, RM950.

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Transaction G

• On November 30, 2017, Idris Ismail determined that

the cost of supplies on hand at the end of the month
was RM550.

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Transaction H

• On November 30, 2017, Idris Ismail withdrew

RM2,000 from NetSolutions for personal use.

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Summary of Transactions for NetSolutions

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Types of Transactions Affecting Owner’s
Equity

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Example Exercise Transactions (slide 1 of 2)

Selva Delivery Service is owned and operated by Joe Salva. The following
selected transactions were completed by Selva Delivery Service during
February:
1. Received cash from owner as additional investment, RM35,000.
2. Paid creditors on account, RM1,800.
3. Billed customers for delivery services on account, RM11,250.
4. Received cash from customers on account, RM6,740.
5. Paid cash to owner for personal use, RM1,000.
Indicate the effect of each transaction on the accounting equation elements
(Assets, Liabilities, Owner’s Equity, Drawing, Revenue, and Expense). Also
indicate the specific item within the accounting equation element that is
affected. To illustrate, the answer to (1) follows:

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part.
Example Exercise Transactions (slide 2 of 2)

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