CHP 1: INTRODUCTION - THE CONTEXT AND PURPOSES OF FINANCIAL REPORTING

Sanisah Hanim Jiman

Please surf these following links ....

DIGITAL TRANSFORMATION: ARE YOU READY FOR EXPONENTIAL CHANGE?

EVOLUTION OF A PROFESSION - 8,000 YEARS OF ACCOUNTING


CRITICAL THINKING IN FINANCE , ACCOUNTING, AND BUSINESS

1.1 What is accounting?

What do you think of when you read or hear the word, ‘accounting’? What do you believe it means
or represents? If you have already attended some accounting classes or if you have spoken to someone who knows something about accounting, you will probably have a fairly good idea of what accounting is and what it is used for. If not, you may find it useful to have this knowledge before you start studying the subject. During the course , let’s see if you can gain that knowledge and learn what accounting is. Accounting can be defined as: The process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of that information.

 What is Accounting and Why is it Important For Your Business?

What is accounting?
What is Accounting?


1.2 Activities of the accounting process

Financial accounting is the branch of accounting that is concerned with:
  1.  Recording business transactions,
  2.  Preparing financial statements that report on how an entity (a business, charity, club, society, government department, etc.) has performed and, 
  3. Reporting on its financial position. It has many objectives, including letting people and entities know:  if they are making a profit or a loss;  what the entity is worth;  what a transaction was worth to them;  how much cash they have;  how wealthy they are;  how much they are owed; how much they owe; enough information so that they can keep a financial check on the things they do.
However, the primary objective of financial accounting is to provide information for decision making. The information is primarily financial, but it can include data on volumes, for instance
the number of cars sold in a month by a car dealership or the number of cows in a farmer’s
herd. So, for example, if a business recorded what it sold, to whom, the date it was sold, the price at
which it was sold, and the date it received payment from the customer, along with similar data
concerning the purchases it made, information could be produced summarising what had taken
place. The profitability of the business and the financial status of the business could also be identified, at any time. It is the primary task of financial accounting to take such information and
convert it into a form that is useful for decision-making. Financial accounting is, therefore, concerned with: recording data;  classifying and summarising data; communicating what has been learnt from the data. This is also the case for the other main branch of accounting, Management accounting, which is accounting undertaken to assist managers within a business to take effective decisions. You will learn about this branch of accounting in the 2nd Semester, Insya Allah.


1. 3 Users of accounting information

Possible users of financial accounting information include:
  • Managers. These are the day-to-day decision-makers. They need to know how well things are progressing financially and about the financial status of the business.
  • Owner(s) of the business. They want to be able to see whether or not the business is profitable.In addition they want to know what the financial resources of the business are.
  •  A prospective buyer. When the owner wants to sell a business the buyer will want to see such information.
  • The bank. If the owner wants to borrow money for use in the business, then the bank will need such information.
  • Tax inspectors. T hey need it to be able to calculate the taxes payable.
  • A prospective partner. If the owner wants to share ownership with someone else, then the would-be partner will want such information.
  • Investors, either existing ones or potential ones. They want to know whether or not to invest their money in the business.
  • Creditors. T hey want to know if there is any risk of not being paid what they are due.



For further reading.....
1. The history of accounting

Accounting began because people needed to:
  • record business transactions; and
  • know how much they owed others and how much others owed them.
It is known to have existed in one form or another for at least 10,000 years. (Records exist
which indicate its use at that time in Mesopotamia – modern-day Iraq.) There is also considerable
evidence of accounting being practised in ancient times in Egypt, China, India, Greece and Rome.
In England, the ‘Pipe Roll’, the oldest surviving accounting record in the English language, contains
an annual description of rents, fines and taxes due to the King of England, from 1130 to 1830.

Before a formal system like double entry bookkeeping could be developed and that all seven
existed when Pacioli wrote his treatise:
  • Private property. The power to change ownership exists and there is a need to record the transaction.
  • Capital. Wealth is productively employed such that transactions are sufficiently important to make their recording worthwhile and cost-effective.
  • Commerce. The exchange of goods on a widespread level. The volume of transactions needs to be sufficiently high to motivate someone to devise a formal, organised system that could be applied universally to record transactions.
  •  Credit. The present use of future goods. Cash transactions, where money is exchanged for goods, do not require that any details be recorded of who the customer or supplier was. The existence of a system of buying and selling on time (i.e. paying later for goods and services purchased today) led to the need for a formal organised system that could be applied universally to record credit transactions of this type.
  • Writing. A mechanism for making a permanent record in a common language. Writing had clearly been around for a long time prior to Pacioli but it was, nevertheless, an essential element required before accounting could be formalised.
  • Money. There needs to be a common denominator for exchange. So long as barter was used rather than payment with currency, there was no need for a bookkeeping system based upon transactions undertaken using a uniform set of monetary values.
  •  Arithmetic. As with writing, this has clearly been in existence far longer than accounting. Nevertheless, it is clearly the case that without an ability to perform simple arithmetic, there was no possibility that a formal organised system of accounting could be devised.

The larger the business, the greater the number of entries that were made. They were prepared
when they occurred and it could be some time before the next transaction with the same person
occurred. Even with these records in a Ricordanze, it became difficult to tell what total amounts
were owed and due. To address this problem, merchants started transferring details from the Ricordanze into another book and entries in that book were organised into what we now call ‘accounts’, one for each person or item.

This was the beginning of the system of double entry bookkeeping described by Pacioli. In his
system, a book called a Memorandum replaced the Ricordanze. The details recorded in it were
abbreviated, organised and transferred into another book called a Journal. Details from that book
were then further summarised and entered into accounts maintained in a third book called a
Ledger.

Accounting Revolution

2. Accounting in Islamic Perceptive

Islamic accounting in its modern context can be defined as the accounting process which provides the necessary. information to stakeholders enabling them to ensure that their. entity is continuously operating under Islamic or Shari'ah Law, while fulfilling its socio-economic objective.

Why do we need Islamic Accounting?
Shariah prohibits interest-based income or usury and also gambling, so part of what Islamic accounting does is help ensure companies do not harm others while making money and achieve an equitable allocation and distribution of wealth, not just among shareholders of a specific corporation but also among society.

Why Islamic Accounting is important?

In Islamic ethics, it is interpreted as being, first and foremost, accountability to God through making information freely available. Islamic accounting for Islamic finance ensures compliance of Islamic objectivity which fulfils the Maqasid al Shari'ah (goal of Islamic law)







 "THE GRADE IS A, THE NUMBER IS 4.00"
"KEUNGGULAN BUDAYA KITA"


Recommended text/reading:


Regards from me;
Sanisah Hanim Jiman

Tags
Reactions

Post a Comment

0 Comments