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Chapter Learning Outcomes
Chapter 3: At the end of this chapter, you should be able to:
Components in Financial Reporting
• Explain the components in financial reporting.
and Presentation of Financial • Discuss the recognition of economic transaction
Statements into accounting record.
• Describe the purpose of financial reporting.
• Describe the accounting standard related to the
presentation of financial reporting.
Prepared by: • Applies accounting principles and assumptions
Dr. Sharinah Puasa in accounting records and reports.
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Components in FR Recognition of Economic Transaction
• Asset
• Liability and Owner’s Equity
• Expenses
• Revenue
Transaction is recorded in accounting record
when it is happened or there is a transfer of
goods/services or transfer of risk/rewards
between parties.
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Asset Liability
• Bought and held by the Fixed Asset
• Economic obligations
business to generate income • Property, Plant and Equipment Long-term Liability
and make profit (PPE) (debts) payable to
• Motor Vehicle • Long-term Loan
• Economic resources that are outsiders
expected to be of benefit in • Intangible asset
the future
• Anything that the Short-term Liability
• Anything that belong to the
Current Asset company owe other/ • Trade payable
• Cash
company including the
• Bank
loan from bank/ • Accrual
physical item i.e: car or • Dividend payable
stock/inventory OR individual • Inventory supplier/ employee
that owe money/services to • Receivables benefit.
the company • Investment
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Elements of Financial Statements:
Equity Financial Position
• Value of owner’s interest or investment in the • Resource controlled by the entity
• Result of past events
business by deducting the total liabilities from Assets • Future inflow of economic benefits
the total assets of the business • Examples: cash, receivables, building, plant and machinery
• The owner’s equity can be divided into four • Present obligation of the entity
• Arising from past events
components: • The settlement results in an outflow of resources embodying
Liabilities
❑ Capital – increase owner’s equity future economic benefits
• Examples: trade payables, note payables, loans, advances and
❑ Drawings/dividend – decrease owner’s equity bonds
❑ Revenues (income) – increase owner’s equity • The residual interest in the assets of the entity after deducting
all its liabilities
❑ Expenses – decrease owner’s equity Equity • Referred to as the net asset value (assets – liabilities) of the
entity
• Examples: ordinary shares, retained earnings and revaluation
reserve
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Revenue Expenses
• Anything gain from our core business. Anything spend
• It means that, if our core business is • without any physical outcome, i.e: electricity
consultation services, thus any consultation bill; OR
served will be considered as revenue.
• with physical outcome but less than RM500
• But, if cases like sale off our fixed asset i.e:
car, that will be classified as other income. or RM1,000 – depends on company policy. i.e:
stationery.
• The treatment of other income is the same as
revenue. Credit if there are increment (+) and
Debit if there are decrement (-).
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Elements of Financial Statements:
Income Statement Financial Statements
Revenue
Arises from the
ordinary activities of an Purpose: FS provides financial information that
entity Expenses include position and performance of an entity,
Arise from the ordinary activities of
Examples: revenue
the entity which can be used by a wide range of users to
from sales of goods,
revenue from rendering support decision making process.
of services, fees, Examples: cost of sales, salaries,
interest, dividends, wages, utilities and depreciation
royalties and rents
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Example of Financial
Financial Statements Statements (IS & BS)
1. Income Statement / Statement of Comprehensive Income
- summarizes the results of operating activities of the company
2. Balance Sheet / Statement of Financial Position
- presents the financial position of the company on a particular date.
3. Statement of Changes in Equity (SOCE)
- presents the changes in permanent shareholder accounts.
4. Statement of Cash Flows
- discloses the changes in cash during a period.
5. Notes to the Financial Statements
- supplies additional significant information about the company’s
financial position and performance. Comprising a summary of significant
accounting policies and other explanatory notes including accounting
assumptions and estimations used in preparing the financial reports,
accounting standards applied, contingent liability and any significant
events etc.
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SOCE
The
Company ABC Statement
Statement of Changes in Equity
For the year ended Dec 31, 20XX
Total
of cash
Ordinary Retained Shareholders'
Share Capital Earnings Equity Flows
Balance at Jan 1, 20XX $ XX $ - $ XX
Issue of ordinary shares XX XX
Net income 1,111 1,111
Less: Dividends (xxx) (xxx)
Balance at Dec 31, 20XX $ XX $ XX $ XX
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Qualitative Characteristics of Fundamental Qualitative
Useful Accounting Information Characteristics (Relevance)
Predictive value
Can be used to predict
future outcomes
Relevance
Confirmatory value
Information that is Provides feedback about
relevant is capable previous evaluation
of changing the
decision made by Material
users In terms of amount and
nature
Omission or
misstatement of
information affect users
decision
FINANCIAL ACCOUNTING AND REPORTING 1 All Rights Reserved
GA20203 Financial Accounting © Oxford Fajar Sdn. Bhd. (008974-T), 2015 2– 18
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Fundamental Qualitative
Enhancing Qualitative
Characteristics
Characteristics
(Faithful Representation)
Complete • Enables users to understand the similarities and
differences
Includes all information necessary Comparability
• Comparable between periods, companies, industries
for users to understand the and countries
business standing
Faithful
• Different knowledgeable and independent observers
representation Neutral Verifiability could reach consensus, although not a complete
Information should agreement.
Information is not slanted,
represent the actual weighted, emphasized,
situation of a business deemphasized or manipulated • Information should be made available in time to
or entity Timeliness influence decision-making.
Free from error • The older the information, the less useful it is.
No errors in the information or • Classifying, characterizing and presenting information
omission of information clearly and concisely to make it understandable.
No error in the process used to Understandability • The users of financial information are assumed to be
produce the information knowledgeable users.
FINANCIAL ACCOUNTING AND REPORTING 1 All Rights Reserved FINANCIAL ACCOUNTING AND REPORTING 1 All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T), 2015 2– 19 © Oxford Fajar Sdn. Bhd. (008974-T), 2015 2– 20
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Common Documents in Economic Principles and Assumptions
Transaction of Accounting
Quotation Only document that involve with
exchange of product/service or
cash will be consider as Revenue Recognition Principle
Invoice accounting transaction and thus 1. Recognize revenue when it is
signalling the beginning of the earned. Cost Principle
Bill accounting cycle 2. Proceeds need not be in cash.
3. Measure revenue by cash received
Accounting information is based
on actual cost. Actual cost is
→ record in journal entry.
plus cash value of items received. considered objective.
Credit Note Exchange Transactions
(Business enter exchange transactions Full Disclosure Principle
Debit Note signaling the beginning of the accounting Matching Principle A company is required to report
cycle) A company must record its expenses the details behind financial
statements that would impact
Receipt incurred to generate the revenue
reported. users’ decisions.
Note: Check out Chapter 2 slides for details
explanation of source documents.
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Accounting Assumptions
Going-Concern Assumption Monetary Unit Assumption
Reflects assumption that the
business will continue operating
instead of being closed or sold.
Express transactions and events in
monetary, or money, units. - THE END -
Business Entity Assumption Time Period Assumption
A business is accounted for Presumes that the life of a company
separately from other business can be divided into time periods,
entities, including its owner. such as months and years.
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Question 1
Identify the category & report of accounts listed as follows
(i.e. revenue, expenses, asset, liability & equity AND the
report where the account should be included):
Tutorial Chapter 3 •
•
Service revenue
Salary
•
•
Building
Accrued Salary
• Depreciation • Sales
• Cash • Maintenance & Repairs
• Prepaid expenses • Inventory
• Account Receivable • Electricity & Utilities
• Account Payable • Unearned Revenue
• Equipment • Accumulated depreciation
• Prepaid Rent • Preferred Share
• Bad debt expense • Allowance for doubtful debt
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Question 2
Illustration: Encik Osman opens his own law office, Osman Associates, on 1 January
2023. During the first month of operations, the following transactions occurred:
January Transactions
1 Invested RM40,000 in cash in the business.
3 Borrowed RM20,000 from a bank.
7 Purchased office equipment worth RM10,000 on credit.
10 Rendered legal services to clients for cash, RM2,000.
15 Received a cheque, RM3,000, for services to be rendered next month.
17 Paid monthly expenses by cheque: salaries, RM2,000; utilities, RM300; telephone,
RM100; rent, RM1,000.
20 Owner withdrew RM200 cash from the business for his own use.
22 Rendered legal services to client on credit, RM1,000.
28 Pay RM3,000 for insurance premium with coverage of 12-month starting February 2023
to January 2024.
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