CHAPTER 2: Introduction to

Concepts & Conventions of

Accounting
(pg. 212 textbook)
 LEARNING
OUTCOMES
Able to explain each concept and relates to the business
situation.

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 1. Business / Economic Entity
2. Monetary/Money Measurement
3. Going Concern
CONCEPTS
& 4. Accrual-Based Accounting
CONVENTIO 5. Neutrality
NS
6. Materiality
7. Consistency
8. Comparability

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 Assumes that a business is separate and distinct from its
owner.
1. Business /
ECONOMIC
Entity
Items recorded in business books are limited to
transactions affecting the business only.

The records and reports of a business should not include

4 either the transactions or assets of another business or
the personal assets and transactions of its owner.
 • A business should only record an
accounting transaction if it can be
expressed in terms of money. This
means that the focus of
2. Monetary accounting transactions is on
quantitative information, rather
measurement than on qualitative information.
• The purchasing power of the unit
of measure used in accounting,
the RM, does not change.
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 A business will continue to operate in
the foreseeable future, using its assets to
carry on its operations and not offering
the assets for sale (except for stocks).

3. Going
Concern
The business enterprise will have a long
life, and that it will last long enough to
fulfill its objectives and commitments.

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 4. Accrual Based Accounting

Expenses for the Income are recorded in the

accounting period incurred accounting period when
must be recorded they are earned
irrespective of whether irrespective of whether
they have been paid or the money has been
not. received or not.

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 Information must be free from bias to be
reliable.
5. Neutrality

Neutrality is lost if the financial statements

are prepared in order to influence or affect
the user to make a decision in order to get a
8 predetermined outcome or result.
 Financial statements only need to include information
that will be significant (material) to their users.

A transaction is considered to be material if it

6. significantly affects the reported net income of the
business.
Materiality
For a large business, an expense of a few
thousand ringgits would not be material, but for a
smaller business it might be.

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 • refers to the principle that
companies should use the same
accounting methods to record
7. similar transactions over time.

Consistenc • In other words, companies

shouldn't bounce between
y accounting rules and treatments
to manipulate profits or
other financial statement
elements.
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8. Comparability

• Users must be able to compare an entity’s financial statements:

a) Through times to identify trends; and
b) With other entity’s financial statements to evaluate their relative
financial position and performance.

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