Accounting Principles 1
1. Velmurugen Subramaniam- SCSJ-0011612
2. Kimberly Dudley Anne- SCSJ-0007708
3. Thevagi Thangavellu- SCSJ-0011768
Introduction to Accounting Principles
Accounting is the art of recording, summarizing, reporting, and analyzing financial
transactions .The purpose of accounting is to identify, record, and communicate the
economic events of an organization to interested users. It is a method of organizing one‟s
revenue and expanses in a systematic way.
Type of Accounts
The five account types
Double-entry accounting uses five account types to record all the transactions that can
possibly be recorded in an accounting system. There are sub-types of the following list, but
all financial transactions can be recorded using these five types of accounts. The five account
types are the following:
Balance sheet accounts:
-Things of value that are owned and used by the business.
2. Liabilities -Debts that are owed by the business.
-The owner's claim to business assets.
Profit and loss accounts:
4. Revenue - The amounts earned from the sale of goods and services.
- Costs incurred in the course of business.
The Basic Accounting Equation
The accounting equation for a sole proprietorship is:
Assets = Liabilities + Owner’s Equity.
The accounting equation for a corporation is:
Assets = Liabilities + Stockholders’ Equity.
Making a profit is the most important. Some might say the only objective of a business. Profit
measures success. It can be defined simply: Revenues - Expenses = Profit. So, to increase
profits we must raise revenues, lower expenses, or both. To make improvements we must
know what's really going on financially at all times. We have to watch every financial event
without any kind of optimistic filter.
Equation for Profit.
Revenue – Expanses = Profit.
Loss happens when the expanses are more than revenue which leads revenue to the negative
The Accounting Cycle
Before elaborating further about the steps taken to construct a systematic accounting cycle,
here is a clear definition of accounting cycle based on an online source known as
investopedia. Investopedia explains thataccounting cycle is a methodical set of rules to ensure
the accuracy and conformity of financial statements. Computerized accounting systems have
helped to greatly reduce mathematical errors in the accounting process, but the uniform
process of the accounting cycle also helps reduce mistakes.
To construct an accounting cycle, firstly it requires collecting and analyzing data from
transactions and events following by putting transactions into the general journal.Posting
entries to the general ledger will be the third steps following by preparing an unadjusted trial
balance, adjusting entries appropriately, preparing an adjusted trial balance, organizing the
accounts into the financial statements, closing the books, preparing a post-closing trial
balance to check the accounts which is the final step also known as "bookkeeping cycle".It‟s
important that you realize when the steps occur. Steps 1 through 3 occur often throughout the
accountingtime period. Steps four through 10 occur only at the end of the accounting period.
The accounting process partially starts with analyzing the transactions. The company first
looks at the source documents which describe the transactions and events occurred for the
given year. Source documents can be either hard copy or electronic (softcopy). Some
examples of source documents include bank statements, checks, and purchase orders. After
analyzing the transactions, events and source documents, the company is now ready to
complete step 2, journalize. When the company journalizes the accountant applies the rules of
double-entry accounting. We should take into consideration that double-entry accounting
means that each transaction must be recorded in at least two accounts or that the debits must
equal the credits which means a tally or balanced.
After applying the rules of debits and credits, the accountant should then record the
transactions in a journal, or journalize. A journal is a complete record of each transaction. It‟s
easy to remember, because journal entry has the word journal in it. The third step in the
accounting cycle is to post. This sounds complicated but it‟s actually very easy. Posting
involves transferring information from the journal to the ledger. A ledger is simply a
collection of all accounts – it shows all of the number detail about a company‟s accounts. In
this posting example, notice how the journal entry that includes a debit to cash and credit to
common stock is posted to the ledger with a debit of $25,000 in the cash account and a credit
of $25,000 in the common stock account. When we post, we are simply transferring the
debits and credits from the journal to the ledger.
To verify that the business firms debits is equivalent to the credits, an unadjusted trial
balance is prepared. A trial balance is a list of all accounts and their balances at a point in
time or the given year. This is the fourth step of the accounting cycle. The information used
in a trial balance comes from the ledger. The account balances from the ledger is used to
create the trial balance. Hence we call this trial balance an unadjusted trial balance because it
is prepared before the adjusting entries.
This is an example of the trial balance, notice how the account balances are listed in the
appropriate debit and credit column. The purpose of the trial balance is to verify that the
debits equal the credits ,it does not guarantee that no errors were made. Moving on to the fifth
step in the accounting cycle is to prepare adjusting entries. Adjusting entries involve entering
or listing in an asset or liability account balance to its proper amount and updating the
corresponding revenue or expense account. Adjusting entries are recorded in the general
journal and then posted to the ledger. All adjusting entries are made at the end of the
accounting time period.
After the adjusting entries have been posted, the accountant prepares another trial balance.
This trial balance is called the adjusted trial balance because it is prepared AFTER the
adjusting entries. This trial balance is used to verify that the debits equal the credits and also
is used to prepare the financial statements. Now that the adjusted trial balance has been
prepared the next step is to prepare the financial statements.
The financial statements must be prepared in a very specific order. The order for the
financial statements is, income statement, statement of retained earnings, balance sheet, and
then statement of cash flows. This order is important because information provided in the
income statement is used in the statement of retained earnings, and information from the
statement of retained earnings is used in the balance sheet.
Step eight in the accounting cycle is to prepare the closing entries. Closing entries are
prepared after the financial statements are completed. The purpose of closing entries is to
prepare the accounts for recording transactions and events for the next period. Step nine, and
for many companies the last step in the accounting cycle, is to prepare a post-closing trial
balance. A post-closing trial balance should only contain the debit and credit balance for
permanent accounts, because these are the only accounts that are remaining after the closing
process. Once again the purpose of this trial balance is to ensure that the debits equal the
credits and that all temporary accounts have a zero balance. For many companies this is the
last step in the accounting cycle, the company is now ready to start the new accounting
However, some companies, complete one more step in the accounting cycle, step 10, or
reversing entries. Reversing entries are optional. These entries reverse certain adjustments in
the next period.
Users of Accounting Information
The users of accounting information is basically divided into two broad categories of
interested parties of users namely the external users and the internal users. The external users
are the parties outside the reporting entity or a business company who has an interest in
accounting information. The type of external users includes investors such as the owners who
uses accounting information to purchase an item, sell or keep decisions related to shares and
bonds. Creditors, such as supplierand bank who utilize accounting information to conduct
lending decisions. Taxing authorities, such as the internal revenue service who requires
accounting information to determine a company‟s tax liabilities and finally customers, who
may need accounting information to decide which products to buy from which companies.
Internal users on the other hand are parties inside the reporting entity or business firm who
are interested in accounting information. Types of internal users include, a company's senior
and middle management, who use accounting information to run the business. An
employee uses accounting information to determine a company's profitability and profit
Type of Business in Malaysia
The basics of setting up a business entity in Malaysia aren‟t so difficult to understand. First,
start with Types of Business in Malaysia. There are three different types of business in
Malaysia to choose from which are the Sole Proprietorship (also known as Sole Trader),
Partnership business entity and Limited Company (SDN. BHD. or Sendirian Berhad or BHD.
or Berhad). The Sole Proprietorship business entity in Malaysia is owned solely by one
individual, as his/her liability is unlimited. Unlimited liability means is that, if a business fails
or is declared bankrupt, creditors can sue the sole proprietor‟s owner for all debts owed to
respective merchants. This means personal assets, personal income and employment income
are all liable. There are several advantages of a Sole Proprietorship Business Entity which is
less paperwork & additional formalities (registration is easy, fast and fewer documents are
needed), price of entity formation is much cheaper and is not required by the Malaysian
government to be audited, not required to disclose financial statements to the public and easy
to convert into limited company (SDN BHD). Next, is the “Partnership” business entity is a
joint-entity holder with two or more persons to carry out a legal business in Malaysia. The
Companies Commission of Malaysia requires that partnership entities MUST comprise of at
least two members and a maximum twenty members. Partners in partnership business
entities are also bounded by unlimited liability. Generally, the Sole Proprietorship &
Partnership business entity is similar to each other in many ways. However, there are some of
differences include the own partnership agreements are to be made or set to default, governed
by Malaysia‟s Partnership Act 1961. Sole Proprietors are owned by one owner whereas
Partnerships are owned by two or more.
Lastly, is about the Limited Company (SDN BHD or BHD). Sendirian Berhad (SDN BHD)
is a private limited company, where it prohibits any invitation to the public to subscribe to
any of its shares, deposit money with the company for investment or subscription. Minimum
members in a private limited company are two and maximum is fifty. Berhad (BHD) is a
public limited company where its shares can be offered to the public for fixed periods and
any other forms of subscription. The minimum amount of members‟ (shareholders) are two
and maximum of unlimited amount of members. There are three (3) types of limited
companies in Malaysia which is Limited by Shares, Limited by Guarantee and Unlimited
company with or without share capital. First, Companies Limited by Shares is where liability
of members‟ contribution to this company is limited to the amount specified on their unpaid
shares. Should the company becomes insolvent or goes into liquidation; members are not
obligated to pay off the company‟s debts if and unless any one of the members gives a
personal guarantee. Also, members‟ personal assets, employment and personal income are
not liable to any of the company‟s debts. This type of business entity is the most common one
in Malaysia. Second is, Companies Limited by Guarantee. In a limited company‟s
Memorandum and Articles of Association, members‟ liability is limited to the amount they
„guarantee‟ or undertake during winding up. In which the amount is specified in the
Memorandum, agreed and signed by all members. In many cases, companies limited by
guarantee are often registered by non-profit organizations, public societies and clubs. Third,
Unlimited Companies are no different from sole proprietorship and partnership business
entities. One of the only differences is that they have a special article of association and are
free to return capital to its members.
Statement of Financial Position of Sole Trader X at 30 June 20x1
Non current assets
Licence to operate
Land and buildings
Fixtures and fittings
Less: allowance for doubtful receivable
Cash at bank
Cash in hand
EQUITY AND LIABILITIES
Initial capital introduced
Total cumulative comprehensive income at 1 July 20x0
Less: Cumulative withdrawals at 1 July 20x0
Total equity at 1 July 20x0
Total comprehensive income in
The current period
Withdrawals in the current year
Total equity at 30 July20x1
Non current liabilities
Total equity and liabilities
Statement of Comprehensive Income for the year ended 30 June 20x1
Cost of sales
Purchases of inventory
Delivery costs inwards
Delivery costs outwards
Discounts allowed to customer
Irrecoverable and doubtful debts
Telephone and internet
Wages and Salaries
Profit for the period before tax
Other comprehensive income:
Revaluation gain on property
Total comprehensive income in the period
It is easier for business to be conducted with the help of accounting. It systematically
organizes the structure of incoming and outgoing of revenue/expanses as well as preventing
from mistakes or misconduct of money by irresponsible people.