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Introducing Accounting - Purpose, Information, Statements and Ledgers

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1.0 Introduction Our accounting class has been started one month ago. However, we have a new foreign student, who no zero accounting background, joins in our class. Since our lecturer has finished chapter one to three, he cannot catch up with the syllabus. Therefore, he seeks our assistance, to guide him. So, we have decided to provide him the knowledge that we have leant so far. 1.1 Purpose of Accounting Accounting is the process of recording, classifying, summarizing, reporting business transactions and interpreting their effects on the affairs of a company. It serves as the language of the business, to communicate the affairs with the users. Doing proper accounts is very important for a few reasons. First of all, accounts provide financial information of a business entity in a systematic manner. It certifies the accuracy of records by preparing financial statements like trading accounts and balance sheet. The management use the information provided to measure the financial performance of the business over the accounting period. The information is also very vital for them to make economic decisions regarding the entity operation. In addition, accounts keep track of cash inflows and outflow. Transaction recorders who are bookkeepers and decision makers like stockholders and managers have to make budgets, projections, financial reports, highlight areas of profitability or loss according to the accounts, to provide factual information about the financial position of the entity. This is done to maximize profit. Furthermore, accounts can provide information to governments. Tax authorities need the accounts to review or evaluate tax returns. Some government departments use the accounts information to check that whether the business entity is following government rules and regulation or not. 1.2 Users of Accounting Information There are many users of accounting information. Users of accounting information fall into two categories which are external users and internal users. The internal users are including the managerial accounting from inside of the business. ...read more.


The owner of Lucky S.W. Trading is Mr. Ng See Wah. Lucky S.W. Trading is a manufacturing factory which manufactures socks. They produce different kinds of socks such as school socks and football socks; they also produce armband. They produce the school socks with 3 types of size which have small size, medium size and free size. Lucky S.W. Trading will sell their products to the wholesaler. Wholesaler will promote their products to the other people. They will pack their products with different kind of brand before they sell to wholesalers. 2.2 Accounting Concepts and Conventions used by the Companies 2.2.1 Business Entity Concept This concept states that unit or entity is treated different and distinct from the owner. The purpose of this concept is to make sure that personal and private transactions of owners are separated from the business. This concept is used by Mega Trax Plastic Industry (Seremban) Sdn. Bhd. as the owner personal fixed assets like house and car are not recorded into the business accounts. In addition, goods taken out for personal use will be recorded as drawings. The accountants of this company, Mrs Lim says the benefit of using this concept is the accounts' profit and loss is reported very objectively. 2.2.2 Accrual Concept The accrual concept states that when service is received, expenses are recognized instead of when payment is made. Lucky S W Trading has trade payable and other payable in the financial statement of balance sheet as current liabilities. (refer to Appendix) This shows that this company has accrued expenses in their business. According to Malaysia labour law, employer should help the local employees to pay Sosco and Employee Provident Fund (EPF). The Social Security Organization (SOCSO) provides social security protection by social insurance including medical and cash benefits, provision of artificial aids, to reduce the sufferings and provide financial protection to the family. EPF is a compulsory scheme in Malaysia with aim to provide a measure of security for old age retirement to its member. ...read more.


In addition, the convention of consistency helps them to get more accurate figures. 2.3 Accounting Concepts and Conventions that are not used by the Companies 2.3.1 Convention of disclosure This convention states that all accounts have to be honestly prepared and all material facts have to be disclosed. Financial statement needs to include all their related foot notes and other disclosures. Mega Trax Plastic (Seremban) Sdn.Shd and Lucky S.W Trading are not using this convention. This can be seen in the balance sheet provided by the Lucky S.W Trading in the Appendix. There is no footnote or disclosure in the balance sheet. Accountant of Mega Trax Plastic (seremban) Sdn.Bhd, Mrs.Lim also says that they do not disclose material facts in the balance sheet. 2.4 Recommendation The companies are being recommended to use the convention of disclosure as it is very important in preparing accounts. If there is a change in accounting method of provision for depreciation or provision for doubtful debts, all the important facts should be disclosed, as all the relevant data is essential to user's understanding of the entity's financial status. Otherwise, the financial statements would be incomplete, unreliable and misleading. Therefore, any changes in the accounting policies, method and procedures need to be fully presented in the accounts in order to achieve the purpose of accounting. 2.5 Conclusion This assignment has given us the opportunity to gain more knowledge in accounting. It helps us to understand better on the basic knowledge of accounting such as the users of accounting, recording of journal and ledger, preparing the profit and loss and balance sheet and the accounting concepts and conventions. From the interviews, our group members have learnt that how a company uses the accounting concepts and accounting conventions in preparing the accounts and the reasons of using it. We were surprised that a company can actually practice almost all of the accounting concepts and conventions in the accounts. Besides, we also have learnt that the important of using the accounting concepts and conventions so as to prepare a reliable and understandable accounts which fulfill the purpose of accounting. 2. ...read more.

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