Lecture 1

Conceptual Framework
In Your Textbook...

Wood, F., and Sangster, A. (2018).

Business accounting 1. (14th ed.). New
York: Pearson Education.
• Chapter 10: Accounting Concepts and
Assumptions
Learning Objectives

1. Explain the definition of accounting.

2. Explain the various users group of
accounting information and their needs.
3. Explain the various form of business
categories.
4. Explain Basic accounting concepts used
in preparing the financial statements.
 What is Accounting?
• Accounting can be defined as
– the process of recording, reporting, and interpreting
financial information
– to permit informed judgments and decisions by users
of the information.
• Vs. Book-keeping – involves only the recording of
data.
• Accounting is concerned with the uses which
accountants might make of the bookkeeping
information given to them.

UTAR/FBAF1023/Topic1 4
Identification
Recording
Reporting
Interpreting
What is Accounting?
Flows of Accounting process

The accounting process includes

the all the functions of bookkeeping.

LO 1 Explain what accounting is.

 What does Accounting record?
• Transactions:
– Refer to any economic event or activity
– that affects the financial condition of a
business
– must be entered into the accounting records.
• Two types of transactions:
1. – for which immediate
payment is made.
2. – for which payment is
postponed to a future date.
Purpose of Accounting
• To ______________________ about business
organizations to various interested parties
________________.
• Accounting information is used by:
1. External users
e.g. investors, government, creditors, taxing
authorities, general public
2. Internal users
e.g. managers, business owners, shareholders

Looking at the examples above, how do you think we

differentiate external users from internal users?
Who Use Accounting Data?

rs ?
se
U

Business Stakeholders
A business stakeholder is a person or
entity with an interest in the economic
performance of the business.
Internal Users
1.Government
& taxing
1.Owner authorities
2. Manager 2.Investors

3.Shareholder

3.Labor
Unions
4.Employees

4.Creditors
/ Bankers
External
Users
Owner

• To decide whether to expand, continue or

close down the business.

Example question asked by Owner:

Manager
• To make decision on the operation of a
firms

Example question asked by Manager:

Shareholder

To buy, remain or sell out the shares.

Example question asked by shareholder:

Employees
• To determine ability to pay salaries
and other employment benefits, job security and
.
career prospects
.

Example question asked by employees:

 External Users

1.Government
& taxing 2.Investors
authorities

3.Labor 4.Creditors/
Unions Bankers
 Government & Taxing authorities

To administer and enforce laws on

companies.
Example question asked by Government:

Example question asked by Taxing authorities:

 Investor

• To evaluate what income they can expect

from their investment.

Example question asked by Investor:

 Labor unions
• Definition
– an organization of workers formed for the
purpose of advancing its members' interests
in respect to wages, benefits, and working
conditions
• Bargains with the employer on behalf of
union members (employee) and
negotiates labor contracts with employers.

Example question asked by labour unions:

 Creditor / Bankers

• To determine borrower’s ability to meet

scheduled payments by evaluating
borrower’s financial position and
prediction of future operations.
Example question asked by Creditors/ Bankers:
 The Process of Providing
Information

STAKEHOLDERS
Identify Internal: External:
1 stake-
holders.
Owners,
managers,
Customers,
creditors,
employees government

Assess
stakeholders’
2 informational
needs.
 The Process of Providing
Information

Record Design the

economic Accounting accounting

4 data about
business
Information
System
3 information
system to meet
activities stakeholders’
and events. needs.
 The Process of Providing
Information
STAKEHOLDERS
Internal: External:
Owners, Customers,
managers, creditors,
employees government

Prepare

5
accounting
reports for
stakeholders. Accounting
Information
System
 Who Uses Accounting Data?
Common Questions Asked User
1. Can we afford to give our
employees a pay rise?

2. Did the company earn a

satisfactory income?

3. Do we need to borrow in the

near future?
4. Is cash sufficient to pay
dividends to the stockholders?

5. What price for our product will

maximize net income?

6. Will the company be able to

pay its short-term debts?
Nature of a Business
• A business is an organisation in which basic
resources (inputs) are assembled and
processed to provide goods or services
(outputs) to customers.
• Objective of most businesses – to maximise
profits (difference between revenue and
cost/expenses).
• Some businesses operate with an objective
other than to maximise profits.
Types of Businesses
1.

Product
Proton Cars, automotive parts
Intel Computer chips
Boeing Jet aircraft
Nike Athletic shoes and apparel
Coca-Cola Beverages
Sony Stereos and television
Types of Businesses
2.

Product
Jusco General merchandise
Toys “R” Us Toys
Tower Records Music & video records
Guardian Beauty & health products
Amazon.com Internet books, music, video
retailer
Types of Businesses
3.

Product
Disney Entertainment
Malaysia Airline Transportation
Hilton Hotels Hospitality and lodging
A Cut Above Hairdressing services
Maxis Telecommunication
There are three forms of
business organizations
A proprietorship Advantages
is owned by one • Ease in organizing
individual. • Low cost of organizing

Disadvantage
Joe’s • Limited source of
financial resources
• Unlimited liability
A partnership is
Advantages
owned by two or
more individuals. • More financial resources.
• Additional management
skills.

Joe and Marty’s Disadvantage

• Unlimited liability.
Unlimited Liability ?
• The _____________ of owner(s) of a
business
• __________________ and other liabilities
that the business accrues/owes
• regardless of how much the owner(s)
have personally ____________
Example :
• Two persons form a general partnership
and each invests RM10,000. Total capital
invested RM20,000.
• If the business later accrues RM100,000 in
liabilities,
• Both partners are equally responsible for
the RM80,000.
• If the business fail to pay, the PERSONAL
ASSETS of the partners may be seized to
REPAY debts.
 A corporation is
organized under Advantage
Company Law as a • The ability to obtain
separate legal entity. large amounts of
resources by issuing
shares.
J & M, Bhd. Disadvantage
• Double taxation.
Forms of Business Ownership
Proprietorship Partnership Corporation
Generally owned Owned by two Ownership
by one person. or more divided into
Often small persons. shares of stock
service-type Often retail and Separate legal
businesses service-type entity organized
Owner receives businesses under state
any profits, corporation law
Generally
suffers any unlimited Limited liability
losses, and is personal liability
personally liable
Partnership
for all debts.
agreement
“HOW” to record?
General Accepted Accounting
Principles
• Financial statements have to be prepared in
accordance to General Accepted Accounting Principles
(GAAPs).
• GAAPs are the standards and principles (i.e. rules,
practices and procedures) used in the preparation of
financial statements.
• International Accounting Standards Board (IASB)
issues the International Financial Reporting Standards
(IFRS).
• In Malaysia, the Malaysian Accounting Standards
Board requires companies to adopt the IFRS with
effective 1 January 2006.
Basic Accounting Concepts

• The accountant uses a number of

accounting concepts and conventions as
guides to accounting practice.
• These concepts have been derived over
the years from customs and general
accounting practices.
 Accounting Concepts

1.Accounting/Business 7.Consistency
Entity
8.Conservatism/Prudence
2.Going Concern
9.Accrual
3.Money Measurement
10.Matching Principle
4.Historical Cost
11.Materiality
5.Accounting Period
12.Full disclosure
6.Objectivity
Basic Accounting Concepts
1. Accounting/Business Entity
• For accounting purposes,
– the business is regarded as an
__________________________________
– which is different from its owners, creditors, employers,
customers and other persons.
• All of the dealings or ____________ of the business
are ___________________________
___________________ , as a separate entity.
• E.g.: drawings account opened to record withdrawal
by owner.
Example :
• On 30 April, Sean paid deposit for his
son’s new car using company cheque.
– According to the business entity concept, all
transactions recorded must be transactions for the
business ONLY.
– The car belongs to his son (personal transaction) and
cannot be treated as business transaction.
– Therefore, the company will record the amount paid
as withdrawal by owner separately in drawings
account.
Basic Accounting Concepts
2. Going Concern
• The business enterprise is assumed to have an
________________.
• The accountant will
– ________________________________ of the
resources in the business
– because he assumes that these resources will not be
sold but will be utilized by the business in its normal
operations.
• E.g.: Assets will be recorded at original cost
regardless the current market price
Example:
• P&C Sdn. Bhd. business cycle ends every 31
December and it is assumed to continue operating
in the future. On 31 Dec 2019, Co. recorded its
land at RM100,000 which is the same amount as it
was bought 5 years ago although the current value
of that land has increased to RM350,000.
– According to the going concern concept, the business is assumed to have
an indefinite life.
– Due to this, the co will ignore the land’s current value (RM350,000) but
will record the land at the original price (RM100,000).
– With the assumption that the asset (land) will be utilized by the business
in its normal operations as the co. will continue to operate in the future.
Basic Accounting Concepts
3. Money Measurement
• Money is used as the ________________ for
financial reporting.
• If the event ________________________
________________, it is not considered as part
of _______________________.
• E.g. of non accounting data
– motivational level of the staff, inefficient
management, poor working conditions.
 Example :
• On Dec 15, co. is hiring a new account
assistant and agreed to pay her a salary of
RM2,500 a month.
– Accounting data?/ non accounting data?

Record Don’t need to record

-because it can be measured in -because it cant be measured
monetary terms (RM) in monetary terms (RM)
 Continued,

• On Dec 31, co. paid salary RM2,500 to a

new account assistant.
– Accounting data?/ non accounting data?

Record Don’t need to record

-because it can be measured in -because it cant be measured
monetary terms (RM) in monetary terms (RM)
Basic Accounting Concepts
4. Historical Cost
• All transactions of a business entity are
recorded at the _____________ to the
enterprise.
• _____________________________ .
• This practice is based on the assumption
that the business is a going concern and is
not likely to be liquidated/closed/shut down.
Example :
• P&C Sdn. Bhd. records the office
equipment purchased according to its
original purchase price of RM5,000 that
stated in the source documents. According
to Historical Cost concept, the company
cannot record any other amount except
the original purchase price of the asset.
Basic Accounting Concepts
5. Accounting Period
• The ________________ is ______________units of
___________________for the purpose of preparing
financial reports.
• The period may be;
– a month ( 1 Jan – 31 Jan, 1 Feb – 28 Feb)
– a half-year ( 1 July- 31 Dec, 1 Jan – 30 June,
1 Nov- 30 Apr, 1 May- 31 Oct)
– a full year (1 Jan-31 Dec, 1 July-30 June, 1 Mar-28 Feb)
– or any other length of time
– depending on the volume and nature of the business.
• Purpose: to enable comparisons and analysis of the
business’s financial position over a period of time.
Example :
• Tab Corporation’s year ends every 31
December (1 Jan – 31 Dec)
– E.g.; 1 Jan 2019- 31 Dec 2019
– Transactions occurred within this period will be
recorded and reported in 2019’s accounting reports.
– If there is a transaction which does not fall within this
period(before 2019 or after 2019) but has been
recorded, that transaction must be adjusted.
Basic Accounting Concepts
6. Objectivity
• Any accounting information reported must
always be supported by
_______________________.
• Objective verifiable evidence?
– The evidence that a business transaction has
taken place and the details pertaining to that
transaction are contained in source documents.
– e.g. receipts, invoices, cheques, and vouchers.
Example :
• The accountant recorded the furniture
purchased by company based on the
information(amount, date, supplier name,
etc) written on the invoice.
– According to the objectivity concepts, there must
always be objective verifiable evidence.
– The transaction recorded by the accountant can be
considered as objective verifiable evidence.
– This is because the report is based on the information
obtained from the invoice which is the evidence for
the transaction.
Basic Accounting Concepts
7. Consistency
• The ______________________ should be
applied in each accounting period when
preparing financial reports.
• Purpose:
1. to ensure that the accounting reports of a
business are comparable from period to period.
2. to prevent misleading profits arising from
differing accounting methods, from being
reported.
Example:
• Zippi Sdn. Bhd. is applying Straight Line
method in the calculation of depreciation
for its assets, and such method will need
to be practiced similarly every accounting
period.
– According to the consistency concepts, the same
accounting method should be applied in each
accounting period when preparing financial reports.
– Therefore, Zippi Sdn. Bhd. has applying this method
and will consistently maintain the same method for its
life.
Basic Accounting Concepts
8. Conservatism/Prudence
• Due to uncertainty of future events,
___________________________ are
observed so that;
– income statement & assets are not overstated
– expenses & liabilities are not understated.
• The accountant will try;
– not to anticipate income
– but to provide for all possible losses.
Example :
• Daisy Sdn. Bhd. has allocated 2% of trade
debtors’ balance for the provision for
doubtful debt due to uncertainty about some
of its debtors’ ability to settle their debts.
– According to the prudence/conservatism concepts, a company
cannot report overstated income and assets and understated
expenses and liability.
– Therefore, Daisy Sdn. Bhd. might be facing some debtors who
cannot settled their debts and has allocated 2% for the provision for
doubtful debt.
– As a result, it has reported this doubtful debt as an expense which
will reduce its income so that they do not overstate income and
understate the expenses.
Basic Accounting Concepts
9. Accrual Concept
• Revenue reported when ___________
– (goods sold or services performed)
• Expense reported when ___________
– (used)
• Cash receipts/payment irrelevant
Example :
• TH Manufacturing Sdn. Bhd. received RM120,000 as annual
rental fees from the tenant of its building on 1 May 2019.
• Therefore, it is for 1 May 2019 – 30 April 2020 rental fees.
• The company’s year ends on December every year.
• In 2019’s annual reports, the co. will report RM80,000 as
rental revenue for 2019(May-Dec @ 8 months)
• the remaining balance RM40,000 which is for 2020(Jan-Apr
@ 4 months) will be reported as advanced rental revenue
(Unearned rental revenue).
- According to the accrual concepts, revenue will be reported when it is earned. Cash is
not relevant.
- Therefore, the co. cannot record RM120,000 as its rental revenue for 2019 because
some from the revenue belongs to 2020 even though cash is received in 2019.
- Only rental revenue for May-Dec 2019 has been earned and allowed to be reported in
2019’s annual reports. The remaining rental revenue is not earned and will be reported
as unearned rental revenue.
Basic Accounting Concepts

10. Matching Principle

• Revenue earned during an accounting
period has to be matched with the
expenses associated with earning that
revenue.

Sales made “Matched”

(earned)
during 1/1/19
– 31/12/19 Bills incurred during
1/1/19 – 31/12/19
 Example :
• At the end of the year, sales earned by Johnny
Sdn. Bhd. is RM25,000. During the year, the co.
has incurred RM15,000 for several expenses in
order to generate revenue for the business.
Therefore, the reported profit by the company is
RM10,000.
– According to the matching concepts, revenue earned must be
matched with the expenses incurred to generate that
revenue.
– The profit reported by the company shown that the company
has adopted matching concepts when it matched(deduct)
expenses incurred (RM15,000) with the revenue
earned(RM25,000).
Basic Accounting Concepts
11. Materiality
• Materiality is a concept relating to the
importance/significance of an amount,
transaction, or discrepancy.
• The principle that _____________________
_______________ in accounting, and all
important matters are to be disclosed.
• The assessment of what is material is a
matter of professional judgment.
Example :
• A box of paper clips which consist of 100 pieces
clips was bought at RM3 and it will be used up over
a period of time. The box of the paper clips is an
asset as long as nobody uses it. The cost should be
incurred when someone uses a paper clip.
• It is possible to record this as an asset and
expense every time someone used it.
• But, the price of paper clip is so small that is not
worth recording it in this manner.
– Since the box of paper clips is not a material item, it can be
disregarded as an asset.
– the box can be charged as an expense in a period it was
bought.
Basic Accounting Concepts
12. Full disclosure principle
The full disclosure principle states that
__________which may have imminent and
______________on the company's financial
status must be _________in the financial
statement.

Example of information to be disclosed:

-information on contingent liabilities (eg: pending
lawsuits, product warranty)
-incomplete transactions
-the policies the company uses to record and report
business transactions
Example:
• A $100,000 lawsuit filed against your company is a
contingent liability (or loss contingency). Your company
will have a liability and a loss only if your company is
found guilty. If your company proves that it is not guilty,
the contingent liability will not become an actual liability
and loss.
• Another example of a contingent liability is a product
warranty. If a company promised to replace a defective
unit at no cost to the customer within one year of
purchase, the company will have an actual liability only if
units are defective. If the company is certain that no
units will be returned as defective, the company will have
no liability and no warranty expense. These are not
transactions but must be disclosed in the notes to the
accounts.
Accounting reports, called
financial statements,
provide summarized
information to the owner.
 Financial Statements

• Statement of Comprehensive Income — A summary

of the revenue and expenses for a specific period of
time.
• Statement of Financial Position — A list of the
assets, liabilities, and owner’s equity as of a specific
date.
• Statement of cash flows — A summary of the cash
receipts and disbursements for a specific period of time.
 Cycle of
Accounting Record Process

Source Journal
Documents

Transactions
take place
Statement of Ledger
Financial Position

Statement of Trial Balance

Comprehensive
Income
Self- Exercise 1
1. Valuing closing stock at cost is an application of which concept?

a. Prudence
b. Consistency
c. Historical cost
d. Money measurement

2. Which of the following statements is not true?

‘The going concern concept can be ignored if ______’.

a. business closure is in the near future

b. the business is likely to fail in the forthcoming accounting period
c. parts of the business are likely to face closure
d. similar firms also have chosen to ignore the concept
Self- Exercise 1
3. Including private costs incurred in running a car as business costs
would violate the concept of:

a. Historical cost
b. Going concern
c. Consistency
d. Business entity

4. Combining the activities of Mei Ling (the owner) and Mills Sdn
Bhd would violate the

a. Cost principle.
b. Business entity
C. monetary unit assumption.
d. Consistency principle.
Self- Exercise 1
5. A business organized as a separate legal entity under state
law having ownership divided into shares of stock is a

a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.
 Self-Exercise 2
In each of the following events or transactions,
identify the relevant accounting concepts.
(a) At the end of the financial year, Company A recognized
stationery consumed but not yet invoiced as expenses.
(b) During the accounting period, Company B acquired a
new machine. The machine will be used by the
manufacturing department for 8 years. Depreciation
will be provided on a straight line basis so as to be
similar to the other machines owned by the company.
(c) As at the year end, Company C discovered that
debtors figures includes several debts which have been
outstanding for some time. The amount for doubtful
debts will be provided in the financial statements.
Continued self- exercise 2
(d) The owner of Company D takes goods from stock for his
own personal use. This event is not recorded in the financial
statements of Company D.
(e) Company E accounting period ends on 31 March every
year.
(f) Company F recognized the building acquired two years
ago at RM1.2 million, which is the value at the acquisition
date. The current market price of the building is now at RM1.5
million.
(g) As at the year end, Company G discovered that 10% of
its stock are obsolete. The amount of the obsolete stock
will be recognized in the financial statements.
Self-exercise 3
• Identify the appropriate concepts in each of
the following situations. The accounting year
ends on 31 December.
(a) Blue Enterprise acquired stock worth RM1,000 on 1
November 20X2. As at the Statement of Financial
Position date, the stock still unsold and reported
in the Statement of Financial Position at RM1,000.
(b) Red Enterprise stock as at 1 October 20X2 was
valued at RM10,000. As at 31 December 20X2,
company expects to sell this stock at RM15,000.
However, the expected profit of RM5,000 is not
recorded in the Statement of Comprehensive
Income.
Continued Self-exercise 3
(c) As at 31 December 20X2, the stock of Green
Enterprise is worth RM50,000. Due to stock
obsolescence, 50% of the stock will be sold at a
discount of 70%. The expected loss on the stock is
recorded in the Statement of Comprehensive Income
for the year ended 31 December 20X2.
(d) It is a company policy for Purple Enterprise to
provide depreciation on a reducing balance method
for all motor vehicles owned by the business.
The End