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CHAPTER 1: ACCOUNTING SCOPE & BASIC CONTENTS

The Differences between Book-keeping & Accounting:

BOOK-KEEPING	ACCOUNTING
routine process of accurately recording business transactions follows set of rules set out by the double entry system done by a book-keeper (person who keeps business records)	has wider scope than book-keeping uses recorded information from accounting records so that interested parties can make decisions studied by those aiming to become professional accountants

Book-keeping is a subset of accounting as it provides the information that accountants would have to use to make decisions.

Business Transactions:

involves the exchange of goods & services for a financial consideration
an exchange implies that at least 2 parties are involved
this can be either for cash or credit (i.e. the cash is provided at a later date)

Types of Business Units:

The business can either provide a service, make or buy goods with the aim of reselling them. Businesses can be classifed as follows:

Sole-Proprietor	Partnership	Private Company	Public Company
Owned by 1 person	Owned by 2- 20 people	Owned by up to a max. of 50 shareholders	No limits to the no. of shareholders
Capital can only be raised from the owner	Capital can only be raised from the partners	Capital can only be raised from the shareholders.	Capital can be raised from the stock market or from the shareholders
Auditing (check performed by external accountants) not required unless annual sales exceed S$500,000	Auditing (check performed by external accountants) not required unless annual sales exceed S$500,000	Auditing required	Auditing required at least twice a year based on the stock exchange requirements
Owner is solely responsible for the debts of the business - unlimited liability	Partners are solely responsible for the debts of the business - unlimited liability	Shareholders are regarded as separate from the company. Hence, company is responsible for all its debts - limited liability	Shareholders are regarded as separate from the company. Hence, company is responsible for all its debts - limited liability

Accounting Principles & Concepts

(a) Business/Accounting Entity Concept

assumes that the owner & the business are considered as 2 separate persons or entities
allows the introduction of capital or withdrawals by the owner to be recorded in the books of the business
e.g. Mr Goh owns & operates a mini-mart. Using the business/accounting entity concept, transactions involving the operations of the mini-mart are to be separated from Mr Goh's personal transactions.
This means that the mini-mart's transactions will be recorded in the accounting books of the business & not in Mr Goh's personal records
It allows the accounting equation to be used in analysing transactions

(b) Historical Cost

assumes that the value of transactions is recorded in accounting records on the date that the transaction occurs
e.g. Mr Goh's Cleaning Services bought cleaning supplies woth of S$500 on Monday. The book-keeper had decided to record this purchase only on Wednesday. Even if the cost of the cleaning supplies were S$480 on Wednesday, Mr Goh's Cleaning Services would still have to record the value of purchase at S$500 because that was the amount paid for.

(c) Going Concern

assumes that the business will continue operating indefinitely
this assumption supports the historical cost of a transaction
this means that items that are useful for a long time can be recognised as long-term assets
e.g. Mr Goh's trading firm purchased some computer hardware worth of S$20,000 for business use. The going-concern principle meant that this computer equipment would be recorded in the accounting books at S$20,000, & not at S$15,000, which was the price a second-hand store was willing to purchase for the used computer equipment

(d) Accounting/Reporting Period

this principle breaks up the continuous life of a business into equal periods of time so that the profit or loss (i.e. the performance) of a business can be determined
accountants assume that business operations "freeze" momentarily so that profit or loss can be calculated
the length of the accounting period can be a week, a month, quarterly (i.e. 3 months), half-a-year or 1 full year
this period is known as the financial period for the business & need not necessarily follow the calendar strictly
e.g. Mr Goh's trading firm was set up in Feb 2002. 12 months from the start of his operations is Jan 2003. This period between Feb 2002 & Jan 2003 is known as a financial year.

(e) Accrual Concept

revenue refers to the amount earned by a business as a result of carrying out its business activity
e.g. When Mr Goh's trading firm managed to sell a set of office table at S$200, this S$200 is considered as revenue to Mr Goh's trading firm
expenses refer to the amount that a business incurs in order to carry out its business
e.g. Before Mr Goh's trading firm managed to sell a set of office table, it had to be shipped to Singapore. The cost of S$50 incurred for shipping the office table to Singapore for selling is considered as an expense to Mr Goh's trading firm
revenue is recognised when it is earned even though payment has not been received
expenses are recognised when they are incurred even though the expense has not been paid yet

(f) Matching Principle

profit or loss for an accounting period is calculated when the revenue earned for that period is matched with the expenses incurred over the same period of time
e.g. The profit for Mr Goh's trading firm in selling a set of office table is S$150 (S$200 - S$50)

(g) Objectivity/Verifiability

there must be documentary proof or evidence to check that a transaction had occurred
this documentary proof is known as a source document
e.g. When Mr Goh arranged for the office tables ordered to be shipped to Singapore from Malaysia, the factory in Malaysia will issue Mr Goh with a Delivery Note & subsequently a Sales Invoice to prove that transaction has taken place

(h) Consistency

this principle means that once a business has adopted an accounting method, it will apply this method consistently from one reporting period to another
e.g. If all computer systems in the business are depreciated over a period of 3 years using straight-line method, an new computer system purchased will follow the existing depreciation method
the advantage is that the performance of a business entity can be compared over time
changing accounting methods from one accounting period to another would make it impossible for decision-makers to understand what is going on & thus make good decisions

(i) Conservatism/Prudence

refers to the tendency to be cautious when accounting reports are prepared
this attitude means that losses will be allowed for when they are expected to occur while gains would only be recognised if they are certain to happen