Accounting Concept and Practice: Accounting A Malaysian Perspective 5e

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.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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).
• 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
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.
Generally Accepted
Accounting Principles (GAAP)
Principles Assumptions Constraints

(5) (4) (2)
6
5 Accounting Principles
Historical cost Objectivity
Matching
Revenue
Full-disclosure
recognition
7
• Historical cost principle
requires companies to
account and report based
Historical cost on acquisition costs rather
than fair market value for
most assets and liabilities.
8
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 shown on the next slide.
Under the cost concept, Harun Publishers records the purchase

of the building on February 20, 2016, at the purchase price of
RM150,000.
The other amounts listed above have no effect on the accounting

records
• 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.
• financial and accounting
information needs to be
independent and free from
bias. This means that
Objectivity
financial reporting like a
company's
financial statements need
to be based on evidence
and not opinions.
• 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
Matching
when a product is
produced, but when the
work or the product
actually makes its
contribution to revenue.
• companies may not record
revenue until (1) it is
realized or realizable and
(2) when it is earned. The
Revenue flow of cash does not have
recognition any bearing on the
recognition of revenue.
This is the essence of
accrual basis accounting.
• It requires that all material
information has to be
disclosed in the financial
Full-disclosure statements either on the face
of the financial statements or
in the notes to the financial
statements.
4 Accounting Assumptions
Economic entity
Going concern
Time period
Monetary-unit
16
Economic entity
• a business or an
organization and its owners
are treated as two
separately identifiable
parties
• It is necessary to record the
business's transactions
separately, to distinguish
them from the owners'
personal transactions
Going concern
• a business that functions

without the threat of
liquidation for the
foreseeable future
• the entity has neither the
intention nor the need to
stop its operations.
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
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
Not to overstate or give false Strong or impactful to change a
impression decision
20
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?
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
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 (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.
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 an statement of profit or loss for the year ended April

30, 2018.
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.
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.
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.
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.
part.
Statement of Cash Flows
• A statement of cash flows is a summary of the cash

receipts and cash payments for a specific period of
time.
o It consists of three sections:
1. operating activities
2. investing activities
3. financing activities
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.
Investing Activities
• The cash flows from investing activities section

reports the cash transactions for the acquisition and
sale of relatively permanent assets.
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.
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.
part.
Example Exercise Statement of Cash Flows
(slide 2 of 2)
Financial Statements Preparation Order
Financial Statements—Statement of Profit or Loss
(continued)
Financial Statements—Statement of Owner’s
Equity
from Statement of Profit or Loss
to the statement of financial position

(continued)
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
)
Financial Statements—Statement of Cash
Flows
This amount should match Cash on

the statement of financial position
(concluded
)
Financial Statement Interrelationships
Business Transaction
• An economic event that initiates accounting

process of recording it in a company's accounting
system.
• A business event (activity) which can be

measured in monetary unit. It must be recorded in
business book (or system) of account.
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.
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.
part.
Example Exercise Accounting Equation (slide 2 of 2)
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.
Transaction A
• On November 1, 2017, Ismail Idris deposited

RM25,000 in a bank account in the name of
NetSolutions.
Transaction B
• On November 5, 2017, NetSolutions paid RM20,000

for the purchase of land as a future building site.
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.
Transaction D (slide 1 of 3)
• 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.
• 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.
Transaction E (slide 1 of 2)
• 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.
Transaction E (slide 2 of 2)
• On November 30, 2017, NetSolutions paid the

following expenses: wages, RM2,125; rent, RM800;
utilities, RM450; and miscellaneous, RM275.
Transaction F
• On November 30, 2017, NetSolutions paid creditors

on account, RM950.
Transaction G
• On November 30, 2017, Idris Ismail determined that

the cost of supplies on hand at the end of the month
was RM550.
Transaction H
• On November 30, 2017, Idris Ismail withdrew

RM2,000 from NetSolutions for personal use.
Summary of Transactions for NetSolutions
Types of Transactions Affecting Owner’s
Equity
Example Exercise Transactions (slide 1 of 2)
Selva Delivery Service is owned and operated by Joe Salva. The following
selected transactions were completed by Salvo 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:
part.
Example Exercise Transactions (slide 2 of 2)

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Example Exercise

Accounting Concept and

• LO1: Understand the Generally Accepted Accounting

• Financial accountants follow generally accepted accounting

• Accounting principles and concepts are developed from

o the standard framework of guidelines for

Principles Assumptions Constraints

Historical cost Objectivity

• Under the cost concept, amounts are initially

Under the cost concept, Harun Publishers records the purchase

The other amounts listed above have no effect on the accounting

• The cost concept also involves the objectivity and

• a business that functions

• a firm's operating cycle is divided into

The time period principle is the concept

On August 25, Mamat Repair Service extended an offer

• What are they?

• The statement of profit or loss reports the revenues

The revenues and expenses of Chickadee Travel Service for the

Prepare an statement of profit or loss for the year ended April

• The statement of owner’s equity reports the changes

Using the statement of profit and loss for Chickadee Travel

• A statement of financial position is a list of the

Using the following data for Chickadee Travel Service as

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

• The cash flows from operating activities section

• The cash flows from investing activities section

• The cash flows from financing activities section

A summary of cash flows for Chickadee Travel Service

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

from Statement of Profit or Loss

to the statement of financial position

This amount is compared to the net

From the statement of owner’s equity

This amount should match Cash on

• An economic event that initiates accounting

• A business event (activity) which can be

• The resources owned by a business are its assets.

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

• A business transaction is an economic event or

• On November 1, 2017, Ismail Idris deposited

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

• On November 10, 2017, NetSolutions purchased supplies

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

• A business earns money by selling goods or services

• On November 18, 2017, NetSolutions received cash

• Revenue from providing services is recorded as fees

• During the month, NetSolutions spent cash or used

• On November 30, 2017, NetSolutions paid the

• On November 30, 2017, NetSolutions paid creditors

• On November 30, 2017, Idris Ismail determined that

• On November 30, 2017, Idris Ismail withdrew

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