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Concepts and Conventions

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Hadi Hariz
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22 views

Concepts and Conventions

Uploaded by

Hadi Hariz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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ACCOUNTING

CONCEPTS AND
CONVENTIONS
INTRODUCTION
 Accounting concepts are derived and developed
over years from business customs and accounting
practices

 As guides in the preparation and presentation of


financial statements
WHY ACCOUNTING
3
STANDARDS EXIST?
 To have a uniform financial statements as it serve
various types of users.
 To reduce the possibilities of very large variations
in financial reporting.
 For comparability purposes.
 To show ‘true and fair view’ of an organisation.
 ENTITY CONCEPT

 The business is regarded as an entity or a unit by


itself.

 This entity is exists as an entity that is separate from


its owner.

 The business can own assets, can have liabilities or


enter into transactions.
 The financial statements of Ali Enterprise report only
the economic activities of the business and do not
included economic activities of Ali, the owner.
 GOING CONCERN

 The business is always assumed to be a going


concern, that is to operate for an indefinite period of
time.

 The business is therefore not expected to be closed


in a short period of time.
 PERIODICITY

 Financial transactions are maintained on a periodic


basis.
 When accountants prepare financial statements, they
assume that the life of the business can be divided into
time periods.

 The assets, liabilities, and owner's equity are


measure at a given point in time, which is usually
done at least on an annual basis.
 MONEY MEASUREMENT

 The accounting information only involved the


transactions or facts that can be measured in a
monetary value.

 This is to get a standard measurement to make


comparison between the financial position of the
businesses.
 HISTORICAL COST

 All transactions of a business are recorded at the


original cost at the time the purchase was made.

 The cost is constant in the accounting records and


the changes of time will not influence the original
cost.
 MATERIALITY

 The accounting treatment of an item depends on its


impact on the firm’s performance and financial
position
 An amount is considered material if it has a
significant effect upon the income or the financial
position of a business
 Trivial matters are to be disregarded and all important
matters are to be disclosed
 The same item may be material to one firm but immaterial
to another
 The cost of an eraser is recorded as an expense rather than
an asset
 CONSERVATISM (PRUDENCE)

 In times of uncertainty,
 Revenues and assets should not be overstated
 Expenses and liabilities should not be understated
 Potential losses as a result of a lawsuit against the firm must
be reported and accounted as an expense
 Potential gains when asset value increases are not reported
until it is actually sold and gain is realized
 CONSISTENCY

 Accounting methods used to determine income and


valuation of assets must be consistently applied
 An accounting policy or method, once adopted should
be consistently followed in subsequent periods to allow
comparison to be made
 Change is only made under strict circumstances
 The straight line method used to depreciate an asset should
be used from one period to another

 Comparability
 Consistency helps to achieve comparability
 DUALITY

 Every transaction has a double (dual) effect on the


position of the business as recorded in the accounts.
 This concept is the foundation of the double-entry
bookkeeping system
 When an asset (car) is bought, another asset (cash or
bank) is decreased
 MATCHING

 Expenses are recognized in the same accounting period


when the related revenues are recognized
 Expense must be matched with the revenue they
generate
 Reporting revenues for a period without reporting the costs
of producing those revenues, for instance, would result in
overstated profits.
 ACCRUAL

 Revenue is recorded when earned, expenses are


recorded when incurred

 Income is counted when goods are delivered or


services performed, and expenses are counted when
goods and services are received

 To record a transaction, you don’t have to wait to


actually receive (see) or pay out the money
 REALIZATION

 Revenue is earned when goods are delivered and services


are performed

 Revenue is recognized not when cash is received


 NEUTRALITY

 Financial statements are NOT prepared in a way to


favour groups of users (managements, owners,
creditors, etc) over other groups.

 The information is prepared to be helpful to all


POP QUIZ 1
 RM Express Bhd. has traditionally depreciated its furniture and
equipment using straight line method. This year it has adopted the
reducing balance method without advising its shareholders about the
change. This is violating ___________ concept.

 Last year, a manufacturing company purchased a shophouse at a cost


of RM1million. This year it is valued at RM2.5million. However, the
company continues to record in its book the value of the shophouse at
RM1million. This is in line with ____________ concept.

 Mona Agency did not record damage of goods due to


floods in its financial report even though it involved 50%
of its inventories. This overrides the _______________.
POP QUIZ 2
 Syarikat Melly Bhd. Is a registered public company dealing
housing development. The company took a bank loan worth
RM5million from Maybank repayable within 10 years.
However, after a period of 12 years this company fails to repay
its loan. The bank has decided to confiscate all the personal
properties of the shareholders. This is against the
____________ concept.

 A supermarket owner sells all kind of groceries. He records all


the purchases and sales in the accounting books in term of RM.
This is in accordance with the __________ concept.

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