Every business entity and organization must require some form of accounting. It is a systematic process on the measurement and communication of financial information about an economy entity. Accounting just like painting a picture or solving a puzzle. Instead of numbers and calculation, we can learn many things from accounting, and it can actually to be fun and interesting. From this assignment, we are writing and discussing about the basic of accounting. The topics covered in this assignment are accounting equation, profit determination, accounting cycle, users of accounting information, business ownerships and also format of financial statements. Upon the research from different ways, we deeply understand and gain much about the golden rules of accounting.
2.1 Accounting Equation
Accounting equation is the basic of double-entry book keeping system. The earliest development of bookkeeping began from 1340 in Genoa, Italy and Venetian monk Luca Pacioli is the first who published bookkeeping work in 1494. During 16th century, addition accounting works which consist of the early formula and concept of income, liability and asset, had published in Italian, English, French, Italian, Dutch and German. The requirement of accounting work becomes further redefined during the Industrial Revolution and the mid-19th century.[http://autocww2.colorado.edu/~toldy3/E64ContentFiles/EconomicsAndBusiness/AccountingAndBookkeeping.htm (history of bookkeeping)] Until mid-20th century, it becomes a vital part of accounting system which used to record day-to-day financial transaction into the ‘daybooks’ that formed by receipt, payment, sales, purchases and the preparing trial balance and ledgers.[ https://en.wikipedia.org/wiki/Bookkeeping (bookkeeping)]
Accounting equation express the relationship between assets, liabilities and equity in business and how these three elements relate to each other.[ http://www.accountingcoach.com/accounting-equation/explanation (accounting equation)] The accounting equation is: Assets = Liabilities + Equity. Assets are the resources that are owned by an entity. Assets include cash, bank, building, inventories, account receivable, land and so on. Liabilities are the amount owed to an entity such as bank loan, bank overdraft, account payables and income taxes payables. Liabilities is opposite of assets. Equity is the amount that owner put money into entity. The business earns profit as the equity increases.[ http://www.cliffsnotes.com/more-subjects/accounting/accounting-principles-i/principles-of-accounting/the-accounting-equation (elements in accounting equation)]
The accounting equation can show the effect of transaction owner’s assets, capital and liabilities and let the owner to know either success or failure the business. It also helps the owner to figure out various ratios like liability to total asset and current assets to fixed assets in order to help owner to make an importance decision and continue to run business.[ http://www.publishyourarticles.net/knowledge-hub/accounting/what-are-the-advantages-of-accounting-equation/507/ (advantages of accounting equation)]
2.2 Profit Determination
Profit is the measure of profitability on total amount gained from business activity which calculated according to Generally Accepted Accounting Principles (GAAP) and includes all the explicit expenses of doing business.[ http://www.investopedia.com/terms/a/accountingprofit.asp (definition of profit)] The equation of profit determination is using the revenue of business, the income gained from goods sold or services[ http://www.investorwords.com/4254/revenue.html (meaning of revenue)] to minus the explicit expenses, outflow of money consumed on business. [ http://study.com/academy/lesson/accounting-profit-definition-formula.html (equation of profit determination)] The business is considered making a loss when the expenses more than the revenue.
The profit determination equation is helpful for determination the ratio between the net profits to expenses and also the net profit to business expenses. When company generate more profit means that they can have more funds to expand their business. The company can have more cash flow to meets their expenses as they can meet their debt obligation when maturities date due. Higher profit ratio provides company a good credit rating that allows them to obtain loan easier. For example, they may borrow loan from bank with a lower repayment interest rate.[ http://smallbusiness.chron.com/benefits-making-profit-38877.html (benefits of profit)] On the other hand, the profit does not represent the company as a whole. It is not a complete picture as it only shows the health of the business. Even the comprehensive income statement stated that the company has high profit, but we cannot ensure that the company is exactly in good condition .There are many area that we need and must analysis whether a company is good or bad. Also, we cannot predict that current situation will exactly same as the past. Profit usually was historical record from past year .We cannot ensure that the profit for the coming year will be the exactly same as the pass.[ http://www.ehow.com/info_8571777_advantages-disadvantages-profit-loss-statement.html (downs of profit)]
2.3 Accounting Cycle
Accounting cycle is described as a collective process which recording and processing all the accounting events and business transactions of an entity. The accounting cycle is including 7 steps. They are: collect source documents, record on the 7 books of prime entry, posting to the 3 ledgers, prepare draft trial balance and financial statements, adjustments, adjusted trial balance and financial statements, and end in the closing entries. [ http://www.investopedia.com/terms/a/accounting-cycle.asp (accounting cycle)]
The business transaction starts with source documents such as invoice, credit note, debit note, cheque counterfoil, cash bill and other. The source documents are going to record on the 7 books of prime entry including cash book, petty cash book, general journal, sales journal, purchases journal, return inwards and outwards journal. By using the computerized system, we should enter coding of source documents in the journals or books of prime entry only. For the manual bookkeeping, the double entry system is used to record into the 7 books of prime entry. The next steps are posting on the 3 ledgers which are general ledger, sales ledgers and purchases ledger. After complete the ledgers, all debit items and credit items in the general ledger are balanced on the trial balance. Then, the items are posting into two financial statements; they are statement of profit or loss and the statement financial position. Afterward, the adjustments are carrying to confirm the true and fairness in the financial statements, and posting to the general ledger. By using the computerized system, we need to adjust on the computer program only. Finally, the entries are closing to restart the accounting cycle again next time. [ http://www.accountingverse.com/accounting-basics/accounting-cycle.html (accounting cycle process)]
The manual accounting and computerized accounting are different. The manual accounting emphasize on the collecting and recording. The manual accounting can complete using the paper journal and ledger by hand. The manual accounting is more using in the small business. Adverse, the computerized accounting though 4 process, including collecting, recording, summarizing and communicating. The computerized accounting only to enter the transaction on the computer program and it can automatic to post to account.[ http://smallbusiness.chron.com/advantages-manual-vs-computerized-accounting-4020.html
http://www.accountingcoach.com/blog/accounting-cycle (manual accounting and computerized accounting)]
2.4 Users of Accounting Information
””Accounting information is useful support of decisions and communicating financial information on business entity to satisfy the needs of various users to make better financial decisions.[ http://accounting-simplified.com/financial/users-of-accounting-information.html (Accounting Information)] The users fall into two categories, they are internal users and external users.[ http://accountingstudy.com/accounting-courses/financial-accounting-terms-dictionary/accounting-information-users.htm (categories of users)]
””Internal users are someone inside the company and directly related in the daily operation of company. [ http://study.com/academy/lesson/external-and-internal-users-and-uses-of-accounting.html (internal users)] They are owners, management and employees. Owners require accounting information such as annual report and financial statement to analysis the profitability and financial position of their funds for the future action. Management needs the accounting information which helpful for their decision-making and activities control to protect the business from fraud, mismanagement.[ http://www.freembanotes.in/finance/accountancy/10-who-are-the-users-of-accounting-information (management)] Employees require information about the stability and profitability of employers such as future prospects, job security and retirement benefits that the business provide to them. [ http://www.freembanotes.in/finance/accountancy/10-who-are-the-users-of-accounting-information (employees)]
””External users are groups outside the organization who interested in accounting information include investors, customer, finance providers, suppliers and government.[ http://simplestudies.com/introduction-to-accounting.html (external users)] Investors get accounting information as they concern about risk and return of investments in order to decide whether they should continue to invest or not.[ http://www.freembanotes.in/finance/accountancy/10-who-are-the-users-of-accounting-information (investor)] Accounting information like the life span of a company required by customers is purposed to assure the stable of goods supply in long term.[ http://accounting-simplified.com/financial/users-of-accounting-information.html (customer)] Finance providers who give money to support a business like bank and financial institutions need the accounting information for estimation the ability of the borrower on the loan and interest payment.[ http://uk.businessesforsale.com/uk/articles/buying-a-business-process-guides/Types-Of-Finance-Providers (financial providers )] Suppliers who provide raw materials and services in credit term require the accounting information to know the ability of the company to clear the debts of owing due.[ http://pakaccountants.com/courses/financialaccounting/users/ (suppliers)] Account of taxation, labor, corporate laws and financial reports are the accounting information that government interested to analysis the betterment of economic and assess the amount of tax to be paid in order to deal and solve the economic problems like inflation.[ http://www.yourarticlelibrary.com/accounting/users-of-accounting-information/49976/ (government)
2.5 Types of Business in Malaysia
””All the business owners are required to register their business with the Companies Commission of Malaysia (CCM) under the Companies Act 1965 and also with the Registration of Businesses Act 1956.[ http://malaysia.angloinfo.com/working/starting-a-business/ (registration)] There are three types of business entities to form: sole-proprietorship, partnership and limited company.
””Sole-proprietorship is the most common form of ownership which owned and run by a single individual without employees. It means all the profits earned are accrued to owner and the profits can be used to increase the value and growth of business. Owner is being the own boss as needs consult nobody on any decisions. It makes owner grow and being independence, and also feeling righty proud on achievement. Sole-proprietorship is the cheapest to set-up and simplest to start or end[ http://www.risscorporateservices.com/types-of-business-entities.html (sole proprietorship)] as there is less equipment and procedures or rules needed. There is no legal distinction between the business and owner as they considered as one entity in the law.[ Ramesh S Balakrishnan LLB (Hons), DL 2014 Edition, ACCA Study Test Paper F4 Corporate and Business Law (Malaysia), BPP Learning Media Ltd (pg 178)] Hence, there are no special taxes on business because the profits are considered as personal. But, it will bring the risks of personal loss and unlimited liability due to the same legal entity. Working alone will cause limited financial resources and limited growth in business. Similarly, the business may face the problem on lack of financial controls. The structure of sole- proprietorship is not requiring financial statement may makes the owner being lax on financial matters.[ https://www.boundless.com/business/textbooks/boundless-business-textbook/types-of-business-ownership-6/sole-proprietorships-48/disadvantages-of-sole-proprietorships-242-4550/ (lack of financial controls)] Moreover, the business is high dependence on the owner. The business has limited life span as the business ended when the owner dies or retires. Also, the owner has to spend long time on business and it may make owner no other life outside work.
””The Companies Commission of Malaysia requires that the partnership entities must incorporate of at least two and a maximum twenty individuals [ http://www.klmanagement.com.my/blog/type-of-business-entities-in-malaysia/#sole (number of partners)] who have common intention to carry business and taking share of management and profits. The two most common partnerships are general and limited partnerships. General partner is responsible to operate the business and assume the debts and other obligations. Limited partners are served as investors only as they are responsible for the losses on the amount capital they invest and no control over the business.[ http://www.entrepreneur.com/encyclopedia/partnership (types of partnerships)] A partnership has more financial resources and increased ability to raise funds. The more partners there are, the more money they can put into the business.[ http://blog.thecompanywarehouse.co.uk/2010/03/01/advantages-and-disadvantages-of-partnership/ (capital of partnership)] It allows better flexibility and potential for the business growth. The shared knowledge, skills and managements between the partners can make a good business team too. [ http://thompsonhall.com/advantages-and-disadvantages-of-business-entities-mn-business-lawyer/ More partners, it means more brains discuss the business ideas and solving problem. A partnership also is the tax treatment it enjoys as there are no special taxes and the profits taxed are measured as personal income.[ http://www.entrepreneur.com/encyclopedia/partnership (tax treatment)] Also, it has longer survival. Nevertheless, a partnership is subjected to unlimited liability and liable for the actions of other partnership obligations. Sharing risk means sharing profits, but it may cause conflict between partners because profit division may not evenly. Hence, partnership business can be complicated as marriage because sometimes it will end unhappily due to the disagreements among partner. [ http://quickbooks.intuit.com/r/employees/5-warning-signs-that-your-business-partnership-is-failing/ (disagreements among partner)] But, the termination of partnership is difficultly as it requires the agreement of all the partners and a lot of procedures and legal.
””Company is the most complex form and formal of business. In Malaysia, companies are incorporated under Company Art 1965 and the most popular type of companies is limited company by share. It having a share capital and their name obtained ‘Sdn Bhd’ or ‘Sendirian Berhad’ according to Section 22(4) of the Act. [ http://www.smeinfo.com.my/index.php?option=com_content&view=article&id=892&Itemid=894 (Companies Act 1965)] It has legal personality separated from its constituent members which the owners and management are separated in organization and it also liable for crime and tort.[ Ramesh S Balakrishnan LLB (Hons), 2015, ACCA Study Test Paper F4 Corporate and Business Law (Malaysia), BPP Learning Media Ltd (pg 202)] With this set management structure, the owners have limited liabilities and the management can be centralized and make the business more efficiently.[ http://smallbusiness.chron.com/advantages-disadvantages-forming-corporation-3896.html (structure of company) ] Furthermore, the company has perpetual life and it will not dissolve even though one or more owners die or retire.[ http://blog.thecompanywarehouse.co.uk/2010/02/03/advantages-and-disadvantages-of-a-limited-company/ (Separate Entity)] However, there are many procedures and legal rules to follow for incorporation and the initial cost to set up a company is much expensive. A company has more complex and restrictive rules on the formalities and running the company, and it lead to extensive paperwork.[ http://smallbusiness.chron.com/advantages-disadvantages-forming-corporation-3896.html (disadvantage of conpany)] Besides, the double taxation will occur in company business as the profits incomes are taxed twice, which taxed at both the company and personal levels.[ http://www.inc.com/encyclopedia/double-taxation.html (double taxation)
http://www.investopedia.com/terms/d/double_taxation.asp (double taxation)] Furthermore, conflict between the stockholders will make the company decision slower, disrupt the business operation, and result in lost business and customers.[ http://smallbusiness.chron.com/advantages-amp-disadvantages-conflict-organizations-40821.html (conflict)]
2.6 Format of Financial Statements
””Financial Statements is a formal record of the summarized financial activities of a business, a person, or other entity at the end-product of the accounting cycle.[ https://en.wikipedia.org/wiki/Financial_statement (financial statement)] The purpose of financial accounting is to provide accounting information such as expenses, revenue and profit. It is beneficial for users to make economic decisions in the future.[ https://en.wikipedia.org/wiki/Income_statement (purpose of financial statement )] The two types of financial statements are Statement of Profit or Loss (SPL) and Statement of Financial Position (SFP).
””Statement of Profit or Loss (SPL) is also known as ‘Income Statement’ which summaries the revenue and expenses of an organization during a specific period.[ http://www.investopedia.com/terms/p/plstatement.asp (SPL definition)] It is the most common used in financial statement. The components of the Statement of Profit or Loss are revenue, cost of goods sold, expenses, income, gross profit and net profit. The Profit Determination Equation and profitability of organization is shown in the statement to determine and predict the performance financial of the past and future, and estimate the cash flows on the generating future.
””Statement of Financial Position (SPF) is also known as the ‘Balance Sheet’ which summary the financial balances of the business. It’s also summarizing the assets and liabilities of an individual or organization at a specific time.[ https://en.wikipedia.org/wiki/Balance_sheet (SPF definition)] The components of Statement of Financial Position are assets, liabilities, and equity. The purposes of this statement are evaluating the company’s current situation and allow the key decision maker to make some modification and changes as needed. Investors and creditors use these statements to know how efficiently the resources to be used and how effectively it can finance them to present a good investment.[ http://www.myaccountingcourse.com/financial-statements/balance-sheet (purpose of SPF)]
As a business study student, this coursework have provided us an opportunity and good experience to learn and understand more about business study. There is an old saying, ‘enlarge one’s view by reading’. We have understood that reading brings us everything as we learn much about truth and knowledge that we can live a better life in our own ways. Besides, internet can be described as the largest pool of knowledge as we gain a lot of update useful information that can turn out helpful in our goal. Also, this coursework have encouraged the high sense of responsibility and team work spirit among the members. It provides a chance for us to share knowledge and ability. By sharing of these qualities, many knotty problems are smoothly solved. Lastly, we feel proud of taking this subject as it is essential for students who willing involved themselves in venture area in future and we gained a lot more than we had expected!
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