Chapter6.ppt

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OFPS Entrepreneurship 3e
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 1

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Chapter
BASIC ACCOUNTING AND
FINANCIAL MANAGEMENT
6

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LEARNING OUTCOMES
AT THE END OF THIS CHAPTER, YOU WILL BE
ABLE TO:
 Define the accounting system and understand how it
differs from bookkeeping.
 Differentiate between financial accounting and
management accounting.
 Explain the basic concept of accounting.
 Define the accounting equation
 Identify the accounting elements
 Understand financial statements: income statement and
balance sheet

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6.1 DEFINITION OF ACCOUNTING
 Accounting can be defined as a process of
identifying, classifying, recording and
summarizing business transactions in
monetary terms. Then, the results can be
interpreted and communicated to interested
parties to enable them to make informed
decisions.

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6.2 ACCOUNTING AND
BOOKKEEPING
ACCOUNTING: Identifying,
Classifying, Recording,
Summarizing, Interpreting,
Communicating
BOOKKEEPING:
Identifying
Classifying
Recording

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6.3 MANAGEMENT ACCOUNTING
AND FINANCIAL ACCOUNTING
DIFFERENCES
Characteristic Financial accounting Management accounting
User report is utilized by external users report is used by external users
Legal requirement statutory requirement for public listed
companies
management accounting report is
optional for organization
Scope Provides information about the whole of the
organization
Focus on one part or several parts
of the organization
GAAP and FRS Financial reporting must follow GAAP and
FRS and conform with legal requirement
Management accounting reporting
is not subject to the legal
requirement, FRS and GAAP
principles
Timeframe The report contains past information, e.g.
historical cost
The report delivers information
which is expected to occur in the
future such as forecasted sales
Frequency Normally, the report will be produced on
semi-annual or annual basis
The report will be produced more
frequently, such as daily, weekly or
monthly

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MANAGEMENT ACCOUNTING
AND FINANCIAL ACCOUNTING
Similarities
Characteristic Description
Use basic
accounting process
Both gather information by applying basic
accounting process
Objective Both aim to deliver relevant information to
the interested users of the organization in
assisting them to make decisions.
Controlling and
performance
evaluation purposes
Both processes are used for the purpose
of controlling and performance evaluation

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6.4 BASIC ACCOUNTING CONCEPTS
Basic Accounting Concepts

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6.5 BASIC ACCOUNTING EQUATION
Assets = Owners' Equity + Liabilities
Owners' Equity = Assets – Liabilities
Liabilities = Assets – Owners' Equity

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6.6 ELEMENTS OF ACCOUNTING
ELEMENTS
OF
ACCOUNTING
ASSETS LIABILITIES
OWNER’S
EQUITY
REVENUES EXPENSES

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ASSETS
 Fixed Assets (Non Current Asset):
– These assets have physical existence, such as
land, buildings, office equipment, machinery and
motor vehicles.
 Current Assets
– These assets are either cash in-hand, deposits in
the bank or items that are expected to be
converted into cash within one year, e.g. stocks
and debtors.
 BACK

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LIABILITIES
 Long-term Liabilities
– Long-term liabilities refer to amount owing by the
business on a long-term basis, which is more
than one year, such as loans and mortgages.
 Current Liabilities
– Current liabilities are amount owing by the
business for a short-term basis and are expected
to be repaid within one year, such as bank
overdrafts, trade creditors and sundry creditors.
 BACK

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OWNER’S EQUITY
 Capital
– Capital refers to resources supplied by the owner
to the business, such as money, motor vehicles
and buildings.
 Drawings
– Drawings can be defined as any business
resources that are taken out by the owner from
the business for personal purposes or use.
 BACK

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REVENUES
Business Revenue Sources
 BACK

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6.7 FINANCIAL STATEMENTS
 The main objectives of these statements are to
provide information regarding the financial
position, performance and cash flows of a
business to entrepreneurs.
 It’s main components are:
– Income Statement
– Balance Sheet

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PROFIT AND LOSS ACCOUNT
 Profit and loss account is prepared to calculate
the net profit of a business for a particular
accounting period.
 The formula used to determine net profit is as
follows:
Gross Profit + Revenues – Expenses = Net Profit

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BALANCE SHEET
 Balance sheet is a statement that discloses the
total of assets, liabilities and owner equities of a
business for a particular financial period
Capital Employed = Owners' Equity + Long Term Liabilities
Working Capital = Current Assets – Current Liabilities

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SUMMARY
 Accounting system can be defined as a process used to
interpret and communicate so as to enable entrepreneurs to
make informed decisions.
 Management accounting is also called internal accounting
 Financial accounting focuses on the provision of information
to external parties outside the organization.
 Accounting concepts relate to some assumptions underlying
the preparation of the financial statement.
 Financial statements are a structured financial representation
of the financial position of a business including Income
Statement and Balance Sheet.

Chapter6.ppt

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Chapter6.ppt