Basic Accounting

Concepts
TOPIC 2
 CONTENTS
2.1 GAAP ;CLO1
(Generally Accepted Accounting Principles)

2.2 Accounting Concepts ;CLO1

2.3 Accounting Equation ;CLO1, CLO3

2.4 Double entry system ;CLO1,CLO3

2.1 Generally
Accepted Accounting
Principles
Objective
1. as a guidelines standards
2. This is an ongoing process,
accounting principles change to
reflect changes in the business
ernvironment.
3. The different opinions between
the Accountants can be solved by
referring this Recognized set of
Standards is called generally
accepted accounting principles
(GAAP)
4. The report must be recorded in the
Financial Statements and it must be
completed and easy to understand in
order to make a comparison.
2.2 Accounting Concepts

 Materiality
The History Concept
 Revenue Recognition
Monetary Measurement
 Expenses Recognition
Economic Entity (Matching concept)
Going Concern  Full disclosure
Consistency  Objectivity
Accounting period  Fair value measurement
 CASE STUDY
Historical Cost Concept
The company purchases a car
- The acquired from supplier with a cost price
assets and services RM20,000 at 21 August 2014.
should be recorded at The market value increases up to
RM25,000 on the next day. What
their actual cost
is the cost should be recorded by
the company? Why?

- The cost is a reliable :

Conclusion
measure and can be ● The value should be
approved and should recorded as RM20,000
continue reporting the because cost is a reliable
historical cost of an asset measure.
over its useful life
Monetary Measurement
Concept CASE STUDY

A transaction occured in The

- Money is the organization but the value
common denominator in cannot be determined.
business. Expressing
transactions and events in
monetary units is crucial Conclusion
to the use of financial The transaction must be
statements for business recorded in the monetary unit
communications. concept and the value must not
change with the inflation
situation.
- Accounting generally
assumes a stable
monetary unit. Example of
monetary units are the
dollar in the United States.
Economic Entity
Concept
- The activities of the
entity be kept separated
and distinct from the
activities of the owner and
of all other economic
entities such as the owner
of the entity, supplier,
customer .
- The entity needs to be
evaluated separately and
the transaction of different
entities should not be
CASE STUDY
The company purchases a car for his
wife by using money from the business’
operations. He had recorded the
purchases as a business’ assets. Besides
that, all the expenses such as fuel oil
was recorded as business expenses..
Conclusion
The company does not follow the
Separate Entity Concept . The
purchase should be recorded as
drawing because the transaction was
the personal transaction.
Going Concern
Concept
- The enterprise will
continue in operation long
enough to carry out its
existing objectives. It
means that the entity will
remain in operation for the
foreseeable future.
- Most firm recourses such
as supplies, land,
buildings and equipment
are acquired to use rather
than to sell
CASE STUDY
The compay purchases a car with a cost of
RM20,000 with the estimated useful life for
10 years . The market value for that car is
RM25,000. It is suggested that the car
should be depreciated for 5 years because
the business is expected to make a clearance
in a short period.
Conclusion
The suggestion is rejected because it is
contra with the Going Concern Concept.
The vehicle should be recorded as the value
of RM20,000 and must be depreciated for 10
years because the trade must be assumed to
operate for the period that cannot be
expected.
Consistency Concept
- Consistency means
that a company uses the
same accounting
principles and methods
from year to year.
- When financial information
has been reported on a
consistent basis, the
financial statements permit
meaningful analysis of
trends within a company.
CASE STUDY
The company uses staight line method
in depreciating the fixed asset of the
company.The company decides to
change to declining balances method.
Conclusion
It does not follow the rules of the
consistency because the method should
be used from year to year. Any changes
should be disclosed in the notes to the
financial statements.
Accounting Period
Concept
- Time period covered
by financial statements is
known as accounting
period.
CASE STUDY
The company has established at
1 January 2013. The trade closes
the business account every 12
months at 31 December every
year. Explain the concept
involved.

Conclusion
- Time period assumption That is normal condition when
means business activities the trade follow the Accounting
can be divided into period where the financial
specific period such as a statements will be held every 12
month, a quarter and a months.
year in order to enables
comparison of business
performance over time.
Materiality Concept
Materiality relates to an
item’s impact on a firm’s
overall financial condition and
operations.
An item is material when it is
likely to influence the decision
of a reasonably prudent
investor or creditor.
To determine the materiality of
an amount, the accountant
usually compares it with such
items as total assets, total
liabilities and net income.
CASE STUDY
A company purchases a calculator
at cost RM20 and it will depreciate
for 5 years over its useful life.
Give your opinion.
Conclusion
Although the proper accounting
would depreciate the calculator
over its useful life, but this cost are
considered immaterial. It will not
make a material difference on total
assets and net income.
Revenue Recognition
Concept
- Revenue is recognized
in the period they are earned.
- When the merchandise has
arrived to the buyer or when
services are rendered even
cash receivable
- Criteria: -
-there is a change of
ownership/title.
-buyers are willing to pay.
-the stability of the currency.
-Buyers are able to pay.
CASE STUDY
Azmal is an entrepreneur pottery. He
has received 100 reservations porcelain
vase on January 1, 2013 and has
received a payment of RM1,000. The
booking was sent on January 15, 2013.
When the sales above should be
recognized? Give your opinion.
Conclusion
En. Azmal need to recognize sales
revenue of RM1,000 on 15 January
2013 because of a change of ownership
at that date.
Expense Recognition
Concept
- Expenses are recorded
in the accounting period in
which it has been involved for
a business revenue.
- Expenses are recognized
when they are incurred even if
payment has not been made.
- The goal - to find out the
actual amount of revenue and
expenditure for a financial
period.
CASE STUDY
Pn. Tina has recorded expenses of
RM2,000 for the utility in December
2012, although payment will only be
made in January 2013.
Conclusion
Pn. Tina adhere to the concept of
expense recognition as an expense of
the current period should be recorded
in the current accounting period.
Full Disclosure CASE STUDY
Concept
Farida businesses have made changes
in stock valuation method used. The
company did not disclose the
- The company information in the financial statements
should report the for the accounting period.
sufficient information
(ie: relevant, reliable, Conclusion
comparable) so that
external parties can The situation does not comply with the
make a reasonable concept of full disclosure where a
decision. change is made it should be reported in
the notes to the accounts. The aim is to
inform the user of changes in the
financial statements.
Objectivity Concept CASE STUDY

KZB basic business is only issued a receipt

for cash transactions, but for the return of
goods sales transactions no source document
All accounting data is issued. Give your opinion.
must be evidence of valid
and reliable to support
transactions occur. Conclusion
The Company does not comply with the
concept of objectivity for the return of goods
The goal - to prevent
sales transaction for all transactions that
accountants in giving occurred needs to be confirmed with the
subjective and inaccurate release of the source document. In addition
opinion. to the evidence it can also facilitate the
recording. That is normal condition when
the trade follow the Accounting period where
the financial statements will be held every 12
months.
Fair Value
Measurement The fair value in the Statement of
concept Financial Position will give a relistic
position of a business or may indicate
the risks that the business may
encounter
- The value or
amount reported in the
financial statements
should be evaluate at
market value if the
Accordingly, the financial statements
original value at the
provide a current situation of the
historical cost value is
business and will help investors
no longer showing a
making the right decision or judgement
fair value
 2.3 ACCOUNTING
EQUATION

ASSETS = LIABILITIES + OWNER’S

EQUITY
Capital- drawing+
revenue- expenses
 Assets
Wealth / resources owned
Exist in one accounting
by the business period and can be converted
into cash within a year.
ASSETS Constantly of changing form
Assets that have a and value.
life of more than one Example: - Inventory,
year.
NON
CURRENT Accounts Receivable, Cash,
CURRENT
ASSETS
ASSETS Bank

TANGIBALE INTANGIBLE LONG TERM

ASSETS ASSETS INVESTMENT

can be seen fixed deposits for

can not be physically.
physically. more than a year, the
Example: Trademarks,
Example: buildings, purchase of bonds
patents, copyrights
vehicles, equipment
 LIABILITIES
DEFINITION
Debt / business obligation to be
paid by business entity to
another party
Liabilities divided into 2 types
Non-current liabilities
Debt to be settled within a period
exceeding one year.
Example: - Long-term loans,
mortgage
Current liabilities
Debt due in less than a year.
Example: - Accounts payable,
expense payables, unearned
revenue
 The elements involved in
OWNER’S owners' equity:
EQUITY
CAPITAL
Consists of assets in the
Owner’s claims on the business by the owners.
business. They include:

Capital invested by the DRAWING

owner into the business. Owner issuing asset (cash or
merchandise) for its own use.
The net profit result of the
business activities. PROFIT
Income/ Revenue
Expenditure
 Revenues
● All income from the sale of
goods or the provision of services
based on the concept of revenue
recognition.
2 types of revenue: -
● Revenue of Business
Example: - Sales, service revenue
● Revenue of Non Business
Example: - Interest income, rental
income, gains on sales of fixed
assets
Expenses
● Expenses use up assets or create
liabilities in the course of
operating a business. Expenses
decrease equity.
2 type of expenses:
● Operating expenses
Example:- Utilities , sales
commissions, delivery expense
● Non operating expenses
Example:- property taxes on the
administrative office building
ANALYSIS OF TRANSACTIONS
The accounting equation shows how
assets,liabilities, and owner’s equity are
related. Assets appear on the left side of the
equation, and the liabilities and owner’s equty
appear on the right side.
EXAMPLE 1
Start the new business with cash RM 1,000.

ASSET LIABILITY OWNER’S

= + EQUITY

Cash Capital
+RM 1,000 +RM 1,000

Increases of Increases of
assets EFFECT equity
EXAMPLE 2
Owner withdraws RM 100 cash from the business for its own
used.

ASSET LIABILITY OWNER’S

= + EQUITY

Cash Drawing
-RM 100 -RM 100

Decreases Decreases
of EFFECT of
assets equity
EXAMPLE 3
Received RM 3,000 cash from Maybank for business loan.

ASSET LIABILITY OWNER’S

= + EQUITY

Cash Loan
+RM 3,000 +RM 3,000

EFFECT

Increases of Increases of
assets liability
EXAMPLE 4
The business pays loan RM 100 with cash.

ASSET LIABILITY OWNER’S

= + EQUITY

Cash Loan
-RM 100 -RM 100

EFFECT
Decreases Decreases
of of
assets liability
EXAMPLE 5
Business performs a service for YY Agency in credit RM
2,000.

ASSET LIABILITY OWNER’S

= + EQUITY

Account Service
Receivable Revenue
+RM 2,000 +RM 2,000

Increases of Increases of
assets EFFECT Owner’s
equity
Example 6
Business pays RM 290 for utilities expenses

ASSET LIABILITY OWNER’S

= + EQUITY

Cash Utility
-RM 290 expenses
-RM 290

decreases decreases of
of EFFECT Owner’s
assets equity
 2.4Double- Entry
Accounting
DEBIT = The left side of the account
Accounting uses the double-
entry system, which means CREDIT = The right side of the account
that we record the dual
effects of each transaction. Title of account

As a result, every transaction DEBIT CREDIT

affects at least two accounts.
It would be incomplete to
record only the giving side,
or only the receiving side, of
a transaction.
Rules of Debit and Credit
THANK
YOU