ACC 406

INTERMEDIATE FINANCIAL ACCOUNTING AND

REPORTING

CH APTER 2:
ACCOUNTI NG CO NCE PT S
AND CO NVENTI ONS

Prepared by: Afaf Izzati Nafhah binti Radzi

LESSON OUTCOME

Student should be able to explain

each concept and relate to the
business situation
INTRODUCTION
• 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.
 BASIC ACCOUNTING CONCEPTS:

Money
Business measurement/
Going concern Materiality
entity
Monetary

Accrual based
Neutrality Consistency Comparability
accounting

Accounting
Historical cost
period
GOING CONCERN
 Financial statements are prepared assuming that a
business entity will continue to operate in the foreseeable
future without the need or intention on the part of
management to liquidate the entity or to significantly
curtail its operational activities
 BUSINESS ENTITY
• 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 personal transaction of the owner are not recorded. E.g. : A car
purchased by the owner for personal use is not recorded in the
books of Account.
• 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.

Drawing

Capital
 MONEY MEASUREMENT/MONETARY
• In accounting, we record only those transactions which are
expressed in terms of money.
• The transactions are recorded in common monetary unit
(RM).
• In other words, a fact which can not be expressed in
monetary terms, is not recorded in the books of accounts.

Innovation
Skill
Honesty
Experience
Attitude
Teamwork
 MATERIALITY
• An item is said to be ‘material’ if it is sufficiently important to affect our judgment
of the true position of the firm.
• All important financial information that would sway the opinion of a financial
statement user should be included in the financial statements.
• The degree of materiality differs from one entity to another.
• The size and the type of business will affect the decisions as which items are
material.
• E.g. : A default by a customer who owes only RM1,000 to a company having net
assets of worth RM10 million is immaterial to the financial statements of the
company.
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.
• E.g.: A company is facing serious liquidity problems. Management
may decide to window dress the financial statements in a manner
that improves the company's current ratios in order to hide the
gravity of the situation.
ACCRUAL BASED ACCOUNTING
• Revenues and expenses are recorded when they occur
and not when the cash is received or paid out.

• 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.
CONSISTENCY
• This concept states that the methods used in the financial statements
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.

• E.g.: If a business chooses to use a 10% straight line method of

depreciation on a yearly basis, that method must be used until the
expiry of the asset’s useful life.
 COMPARABILITY
• Comparability is one of the key qualities which accounting information
must possess.
• Accounting information is comparable when accounting standards and
policies are applied consistently from one period to another and from one
region to another.
• The characteristic of comparability of financial statements is important
because it allows us to compare a set of financial statements with those of
prior periods and those of other companies.
• We can compare 20X2 financial statements of ExxonMobil with its 20X1
financial statements to know whether performance and position improved or
deteriorated.
 ACCOUNTING PERIOD
 The final accounts are prepared at a regular interval
o n e y e a r.

 The one-year (12 month) period also referred as the

financial year or financial period, it does not
n e c e s s a r i l y f o l l o w t h e c a l e n d a r y e a r.

 For internal management purpose, the final accounts

m a y b e p r e p a r e d ; m o n t h l y, q u a r t e r l y o r y e a r l y.
 HISTORICAL COST

This concept assumes that the business transactions are recorded

based on their cost at the time of purchase.

2016
2015

CURRENT PRICE
RM 1,000,0000

PRICE AT PURCHASE DATE

RM 600,0000
THANK YOU