L01 Intro To Accounting W Exercise
L01 Intro To Accounting W Exercise
L01 Intro To Accounting W Exercise
Learning Objectives
At the end of the lecture you should be able to:
• state the nature and purpose of accounting.
• describe how accounting information help users in their decision making.
• describe the nature of business.
• describe the types of business organisation by ownership.
• explain accounting assumptions and principles underlying the preparation of financial reports.
• apply the accounting assumptions and principles in different business scenarios.
Reference Warren, Reeve, Duchac, Fung, Cheong, Fadhlina, Ooi – ‘Accounting: An Asian
edition’, third edition, Singapore: Cengage Learning, Chapter 1 p. 8 - 12
1. What is Accounting?
Definition
Accounting is that discipline which measures and records financial and other information
about an entity, and reports and interprets that information to interested parties to enable them
to make appropriate decisions.
Bookkeeping is usually associated with the physical recording of the monetary transactions
of a business and tends to be mechanical – and at times repetitive. Accounting, on the other
hand, has a much wider interpretation (see definition above)
B A: Accounting
A
B: Bookkeeping
Individuals need some simple form of accounting to deal with their personal financial matters.
Business firms and other organisations need accounting systems to provide information (via
financial reports / statements) on profitability and financial position of the firms to various
interested parties.
• Historical cost
Assumes that business transactions are recorded in terms of their cost at the time the
transaction occurred.
• Accounting period
It assumes that the indefinite life of a business is divided into arbitrary time periods. This
period is generally one year for reporting to external parties, but can be varied for internal
reporting.
• Principle of Consistency
The principle requires that the accounting methods adopted should remain unchanged from
period to period so that accounting reports for consecutive periods have greater
comparability.
• Principle of Disclosure
All information and explanation necessary for interpretation of reports and statements
should be conveyed to users.
• Principle of Materiality
The principle means that the treatment of an item depends on its importance and
accounting significance. It depends on the judgement of the accountant and the size of the
business. For example, cents are ignored or rounded to the nearest dollar, and even dollars
may be rounded to the nearest ten or hundred dollars in published accounting reports.
2. Alan Cafeteria bought a refrigerator for $800 from a neighbourhood shop. The same
refrigerator would cost $960 at most departmental stores. Alan decided to put in his
accounting records, the cost at $800.
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3. A fire destroyed the warehouse of a shoe manufacturer last week. The company has to report
its financial position at the end of this month. The manager does not want to disclose the
incident in the financial reports because he fears that it will reflect badly on the financial status
of the company.
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4. Dr Fickle is a general practitioner in private practice. Over the weekend, he invited some of his
friends for BBQ at his new house. He intends to show the full costs of the BBQ in the
accounting records of his medical practice because he claims that it is perfectly all right since
it is against his own profits.
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5. In submitting the current year’s sales figures to management for budgeting purpose for the
coming year, the accountant decides to report it as $1,200,500 instead of the actual figure of
$1,200,510.45.
_________________________________
6. If a hotel is suing a guest for setting its room on fire and its lawyer indicates the case will be
won (by the hotel) and estimates the amount of settlement, the amount is not recorded.
On the other hand, if the hotel is a defendant in a lawsuit and its lawyer indicates the hotel will
lose the lawsuit and most likely will pay a stated amount, this “expense” is recognised and
recorded immediately.
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7. Simple Co. Pte Ltd reports the revenues earned and expenses incurred on a monthly basis for
internal management review. It also prepares an audited annual income statement that covers
the 12 month-period ended 31 December for submission to the Accounting and Corporate
Regulatory Authority.
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8. A business excludes such relevant information as the prime location of its retail outlets, quality
of service, morale of employees and health of owner from the accounting records as these
could not be quantified in terms of money.
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Please refer to Appendix 1 for full answers. (Appendix 1 will be released through LMS on last day of
week to assist in preparation of tutorial)
• Relevance
• Reliability
• Materiality
• Comparability
• Understandability
• Owners / Investors
- Investing decisions
• Management
• Planning, co-ordinating and controlling
• Creditors
• Credit, lending decisions
• Government
• Tax, economic decisions
• Customers
• Concerned with continued existence of firm (honouring of warranties)
• Manufacturing
- A manufacturing firm converts raw materials into products to be sold to trading firms.
- A retailer buys goods from the wholesaler and sells goods to the final consumers.
- E.g.: Departmental store, provision shop, minimart
• Service
- A service business provides services to the public for which a fee is charged.
- E.g.: Solicitor, accounting firm, transport company, airline
• Sole proprietorships
• Partnerships
• Corporation or companies
• Statutory bodies
• Co-operatives
~ End of Lecture 1 ~