Accounting

Concepts

ACC1063 PRINCIPLESOFACCOUNTING
NURUL AFZA BINTI ABD RASHID
Learning outcomes
At the end of this chapter, students should able to :

Define each accounting concept correctly.

Identify accounting concepts correctly.

Definition : Accounting Concept

Rules of accounting that should be followed in

preparation of all accounts and financial
statements.

Accounting concepts is the basic rules,

assumptions and principles which is considered
as the basis of recording of business transactions
and preparing the accounts
 Basic Accounting Concepts
Accounting Assumptions
Accounting Principles

Ø Business Entity
v Historical Cost Ø Going Concern
Monetary
v Objectivity Ø
Measurement
v Matching Ø Consistency
v Duality Ø Accounting period
Ø Realization

Accounting Constraints

q Conservatism/
Prudence

q Materiality
 Basic Accounting Concepts
1. Historical Cost
2. Objectivity
3. Matching
4. Duality
5. Business Entity
6. Going Concern
7. Monetary Measurement
8. Consistency
9. Accounting period
10. Realization
11. Conservatism/Prudence
12. Materiality
 Historical Concepts
The Cost Concept states that the business to be recorded
the assets at their original purchase price and the cost will
be the basis for all the subsequent accounting period.

The assets shown in the financial statements will not

record at present value rather it will be recorded at cost
price. The cost price may be changed subsequently by
charging depreciation.

Depreciation reduces the profit of each period. The prime

purpose of depreciation is to allocate the cost of an asset
over its useful life and not to adjust with the profit.

Rules of accounting that should be followed in

preparation of all accounts and financial statements.
Historical Concepts
 Objectivity
q Each transaction must be recorded based on evidence or verified and unbiased information.

q The accounting information must base on research and facts, not merely an opinion.

q The principle is aimed at making financial statements more relevant, reliable and can be
used to the future business performance.
Example of sources of
Document
 Matching
Definition:

The matching principle states that all expenses must be matched in the
same accounting period as the revenues they helped to earn. In
practice, matching is a combination of accrual accounting and the
revenue recognition principle.
 Matching
Example:

RM RM
Revenue 10,000 Revenue 10,000
(-) Expenses (8,000) (-) Expenses (18,000)
Net Profit 2,000 Net Loss (8,000)
 Accrual
Definition:

All expenses incurred to generate revenue must be reported within the

period in which the revenue is reported

ie: Expenses for the accounting period incurred must be recorded even
though/irrespective of whether they have been paid or not.

Revenue for the accounting period incurred must be recorded even

though/irrespective of whether they have been received or not.
Example 1: Example 2: Example 3:

Fatin Afrina bought a Habibullah bought a computer cost Faris ordered a computer
computer cost RM 4,500 RM 4,500 on credit from Syafiq. cost RM 4,500 and will
paying by cash received the computer in
April 2021. No payment
was made.

Bought on
Habibullah Syafiq
credit

Accrual Accrual
Duality
Definition:

q Dual aspect is the foundation or basic principle of accounting. It

provides the very basis of recording business transactions in the books
of accounts.
q This concept assumes that every transaction has a dual effects. i.e. it
affects two accounts in their respective opposite sides.
q Therefore, the transaction should be recorded at two places.
q It means, both the aspects of the transactions must be recorded in the
books of accounts.
q For example, Goods purchased for cash has two aspects which are
(i) Giving of cash (ii) Receiving of goods.
q These two aspects are to be recorded.
q Thus, the duality concept is commonly expressed in terms of
fundamental accounting equation:
 Example:
Ali bought computer cost RM 7,000 on credit from Jones.
Example 1:

Fatin Afrina bought a

computer cost RM 4,500
paying by cash from
Aqilah.
Cash Computer
Date Particular Amount Date Particular Amount Date Particular Amount Date Particular Amount
(RM) (RM) (RM) (RM)

2014
JAN 1
Computer 4,500
2014
JAN 1 Cash 4,500

DEBIT CREDIT DEBIT CREDIT

Accrual
 Syafiq Computer
Date Particular Amount Date Particular Amount Date Particular Amount Date Particular Amount Example 2:
(RM) (RM) (RM) (RM)

2014
JAN 1
Computer 4,500 2014
JAN 1
Syafiq 4,500 Habibullah bought a
computer cost RM
DEBIT CREDIT DEBIT CREDIT 4,500 on credit from
Syafiq.

Habibullah (Customer) Syafiq (Supplier)

Account Account
Receivable Payable

Bought on credit
 Business Entity
Definition:

The business’s transactions must be accounted separately from the owner’s

transaction. The transactions must be recorded from the business
viewpoint, and should not be mixed with the owners.

Eg:

Pay RM 100 electricity for the business’s office (business transaction)

Pay RM 50 personal’s telephone bill. (personal transaction).

 Business ty
Rental : RM 5,000 per month

How much rental that

need to be recorded in
First floor : Home the business account

Ground floor : Retail Shop

 Going
Concern

• Definition:

• Assuming all business entity will continue to operate indefinitely.

• That the business under consideration will remain existence for the
foreseeable future.
 Monetary
Measurement
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• Definition:

• All transactions are recorded in the country’s monetary

unit (RM).

• Transaction which cannot be valued in monetary terms

therefore it could not be recorded as an accounting
records.

• Eg: salary for employees RM 2,500 (monetary unit RM)

• Number of female employee is 15 (not monetary unit)

 Consistency

Definition:

The same accounting method will be used from one accounting period to
another accounting period.

Example:

Accounting method used to calculate depreciation, closing inventory.

Stralight line method.
 Consistency
STRAIGHT LINE METHOD (SLM)
DEPRECIATION

REDUCING BALANCE METHOD (RBM) SLM

 Acc ing Period
Definition:

Business activities can be divided into specific periods. For example a

month, a quarter or a year.

Eg:

One year ended 1/1/2014 – 31/12/2014 (1 year)

Half year ended 1/1/ 2014 – 30/6/2014 (6 months)

 Acc ing Period
Identify the Accounting Period for the following question:

1. 1 January 2020 - ______________________. (1 year)

2. 1 / 7 / 2020 - ________________________. (1 year)
3. _________________ - 30/ 9 /2021. ( 1 year)
4. 1 / 1/ 2021 - _______________ (semiannually).
5. 1 / 9 / 2021 - _______________ ( 1 year)
 Acc ing Period
Identify the Accounting Period for the following question:

1. 1 January 2020 - 31 December 2020. (1 year)

2. 1 / 7 / 2020 - 30 / 6 / 2021 . (1 year)
3. 1 / 10 / 2020 - 30/9/2021. ( 1 year)
4. 1 / 1/ 2021 – 30 / 6/ 2021 (semiannually).
5. 1 / 9 / 2021 - 30 / 8/ 2022 ( 1 year)
 Realization
• Definition:

• Profit is considered as
earned or realised at the
time when goods or
services are passed to the
customer and not when the
order for the goods or
services is received.

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 Con tism/Prudence
Definition:

Businesses must avoid overstating value of assets and revenue, and

understating liabilities and expenses when recording transactions.

Be cautious or “play safe” i.e. do not take profit unless you are pretty sure
of earning it, but you must write off loss even if you are not too sure in
incurring it.

Eg: Allowance For Doubtful Debts.

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tism/Prudence
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Example:

Allowance For
Doubtful Debts.
Con
 Materiality
Definition:

The relative importance or significance of an item or event. The question of

either the value is “material” or not.

Eg: Big firm may decide RM 1,000 as an error but not for small company.

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 Materiality
Revenue : Revenue :
RM 200,000 per day RM 1,000 per day

Fraud/Theft : RM 100 Fraud/Theft : RM 100

Material Material

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 Materiality
v If the losses/damage is giving a
high impact to company financial or
performance. So, the losses is
material to the company.

v Therefore, company need to

disclose the incident/losses in the
Financial Statements.

v As this is an important information

Material need to know by the user, especially
Loss/Damage : the shareholder.

RM 100,000 13