Introduction to Financial Accounting (ACC106)

CHAPTER 2: INTRODUCTION TO
CONCEPTS AND CONVENTIONS OF
ACCOUNTING
 Learning Outcomes
At the end of this chapter, students should be
able to:
 To identify all the accounting concepts.
 To be able to explain the accounting
concepts.
 To be able to relate the accounting
concepts and the business situation.
 ACCOUNTING CONCEPTS
AND CONVENTIONS
 The recording of transactions in the account
is based on certain assumptions
 These assumptions, known as accounting
concepts, give guidelines as to how
accounts should be prepared.
 These assumptions are important for
financial statements to be meaningful and
useful to users.
 ACCOUNTING CONCEPTS

1. Entity 2. Accounting 3. Going 4.

concept period concern Consistency

5. Accrual 6. Money 7. Materiality 8. Historical

concept measurement cost

9. Comparability 10. Neutrality

 1. Entity concept

 This concept implies that a business entity is a separate

unit from the owner of the business.
 The transaction of the business are recorded from of the
business, not the owner himself.
 The only time that the personal transaction of the owner
affect the business transactions is when the owner
injecting or withdrawing the contribution of capital.
 2. Accounting period

 The final accounts are prepared at a regular interval one

year.
 The one-year (12 month) period also referred as the
financial year or financial period, it does not necessarily
follow the calendar year.
 For internal management purpose, the final accounts
may be prepared; monthly, quarterly or yearly.
 3. Going concern

 This concept assumes that the life of the

business entity will go on indefinitely.
 The implication is that when a business is
formed, it is assumed to last forever.
 4. Consistency
• This concept states that the methods used in the financial
statements (such as depreciation and inventory valuation
methods) must be applied consistently from year to year.
• Organisations are not supposed to change methods
without any reason. Any changes must be for a good
reason and the effects of the change must be stated in
the financial statements.
 5. Accrual concept
 Revenues are earned only when sales are
made or services are provided, not when cash
is collected or received
 Expenses are recognized at the time they took
place or are incurred, not when they are
actually paid for.
 6. Money measurement

 This concept requires that the transactions to be

recorded in the accounts be recorded in a currency
(in the case of Malaysia, Ringgit and cent).
 Money is a common unit of measurement for
reporting uniform financial data and reports. This
concept is closely linked to the historical cost and
stable currency concepts.
 7. Materiality
 In accounting, an amount is considered material if it has
a significant effect upon the income or the financial
position of a company.
 Thus, the cost of a new building is a material amount
and must be depreciated over its useful life. The cost of
an eraser or paper clip is not material to that same
company although it may last for a long time.
 What is material to one firm may not be material to
another business. The cost of computer may be material
to sole proprietor business but not to huge business.
 8. Historical cost
This concept assumes that the business transactions are recorded
based on their cost at the time of purchase.
2017
2015

CURRENT PRICE
RM 1,000,0000

PRICE AT PURCHASE DATE

RM 600,0000
 9. Comparability
Users must be able to compare an entity’s financial
statements to identify;
• Trends
• Changes & performance
• Ex: currency
 10. Neutrality
 Information must be free from bias to be
reliable
 Neutrality is lost if the financial statements are
prepared so as to influence the user to make a
judgment or decision in order to achieve a
predetermined outcome.
Thank You