FINANCIAL

ACCOUNTING
FOR NON-ACCOUNTING
STUDENTS
7th EDITION

Copyright © 2023 by McGraw-Hill Education (Malaysia) Sdn Bhd All rights reserved.
 CHAPTER 2:
QUALITATIVE
CHARACTERISTICS
OF FINANCIAL
INFORMATION,
ACCOUNTING
ASSUMPTIONS
AND CONCEPTS
HIGHLIGHTS OF THE CHAPTER
Qualitative characteristics of financial information
1

Accounting assumption
2

Accounting concepts
3

4
QUALITATIVE CHARACTERITICS OF FINANCIAL INFOR-
MATION
FUNDAMENTAL CHARACTERISTICS –
RELEVANCE
Relevance Explanation Example

Predictive value Information has predictive value if it can be A business needs to assess
used in making predictions about the the ability of its customers in
eventual outcomes of past or current deciding to sell goods on
events. credit.
Confirmatory value Financial information provides feedback A business needs to assess
about (confirms or changes) previous the trend of its sales over the
evaluation. periods in deciding to buy
additional plant.
Materiality If material information is omitted, misstated A large business that has net
or obscured, it could reasonably be assets of RM20 million
expected to influence decisions made by recognises individual assets
the users. that cost less than RM2,000
An entity needs to specify its materiality as an expense.
level as it depends on the nature or size or
both.
Materiality is important in determining
whether an item is an asset or an expense.
FUNDAMENTAL CHARACTERISTICS –
FAITHFUL REPRESENTATION
Faithful Explanation
Representation
Completeness Complete information is necessary for a user to understand
the events or transactions being represented, including all
necessary descriptions and explanations. Thus, financial
information should disclose all relevant information for a given
accounting period.
The financial information is prepared:
Neutral i. without bias in the selection or presentation of financial
information, and
ii. is not manipulated to increase the probability that financial
information will be received favourably or unfavourably by
users
Neutrality is supported by the exercise of prudence.
Prudence is the exercise of caution when making judgements
under conditions of uncertainty. Prudence does not allow for
overstatement or understatement of assets, liabilities, income
or expenses.
Prudence is only known as conservatism.
Example
A complete representation of a group of
assets would include:
i. a description of the nature of the
assets in the group,
ii. a numerical depiction of all of the
assets in the group, and
iii. a description of what the numerical
depiction represents
A business is having liquidity problems.
The financial information is not neutral
if the information has been manipulated
so that the liquidity position of the
business looks good.
Allowance for doubtful is made at the
end of the year.
.
FUNDAMENTAL CHARACTERISTICS –
FAITHFUL REPRESENTATION
Faithful Explanation Example
Representation
Free from error There are no material errors or omissions In 20X1, it was discovered that:
so that financial information gives a true and a. revenue in 20X0 was overstated
fair view of the entity. by RM10m
b. general expenses in 20X0 was
understated by RM10.
The overstated revenue in the
previous must be corrected to
present a fair view of the entity as
the error is material. The correction
on the previous year equity must
be made. However, the
understated general expenses can
simply be corrected in the current
year as the amount is not material.
QUALITATIVE CHARACTERITICS OF FINANCIAL INFOR-
MATION
ENHANCING CHARACTERISTICS –
COMPARABILITY, VERIFIABILITY
Characteristics Explanation
Comparability Financial information will be more useful if it can
be compared with similar information about other
entities and with similar information about the
same entity for another period or another date.
Even though consistency is related to
comparability, consistency refers to the use of
the same methods for the same items over a
period of times or in a single period across
entities. Thus, comparability is the goal whereas
consistency helps to achieve that goal.
Verifiability Financial information must be able to be proven.
Verifiability means different knowledgeable and
independent parties could assure that a
particular event is a faithful representation.
Example
A business adopts straight line
method of depreciation for its
building. This depreciation method
should be consistently applied so
that the financial statements of the
business can be compared with
other businesses or over period of
time.
To prove the carrying amount of
inventories is correct, physical
stock take is carried out.
 ENHANCING CHARACTERISTICS –
TIMELINESS, UNDERSTANDABILITY
Characteristics Explanation Example

Timeliness Timeliness means information is available to Financial statements issued 2

users in time so that the information can
influence their decisions.
Older financial information is normally less
useful.
Understandability Financial information is prepared for users
who have a reasonable knowledge of
business and economic activities; and
review and analyse the information
diligently.
Thus, financial information should be
presented in a manner that is easily
understandable.
months after the reporting
period is considered to be timely
since the users can assess the
current performance of the
entity.
Qualitative information in annual
reports is presented in form of
graphical presentation
ACCOUNTING ASSUMPTION–
GOING CONCERN
Assumption Explanation
Going concern The entity is assumed to continue in
operation for the foreseeable future
or for an indefinite period of time.
The business is not expected to be
dissolved in the near future.
Example
XYZ acquired a building with expected
useful life of 25 years.
Based on this assumption, every year,
some amount will be shown as expenses
and the balance is shown as an asset.
Without this assumption, the cost of the
building will be treated as an expense
when the building is purchased.
ACCOUNTIN
G CONCEPTS
 Concepts Explanation Example

Accruals Revenue is recognised when it is XYZ sold goods for RM1,500 on 15

earned and expenses are recog- October 20X1 and the payment was not
nised when they are incurred regard- received until 31 October 20X1.
ACCOUNTIN less of the time of cash receipt or XYZ should recognise the revenue of
cash RM1,500 on 15 October 20X1 even
G CONCEPTS payment. though payment is not received at that
date.
– XYZ received an electricity bill of RM700
on 30 October 20X1. The bill was paid
ACCRUALS on 7 November 20X1.
XYZ should recognise the electricity
expenses of RM700 on 30 October
20X1 although the payment was only
made on 7 November 20X1.
 Concepts Explanation Example

Historical The entity may record its assets at their XYZ acquired an equipment for
ACCOUNTIN cost original cost, i.e., the acquisition cost of the RM5,000 at 1 January 20X0. The
assets. market value of the equipment at 31
G CONCEPTS Historical cost is favourable as:
a. It is definite and determinable
December 20X1 was RM2,500.
Based on this concept, the
– b. Accountants can provide objective and
verifiable data in their financial reports
equipment is shown at 31 Decem-
ber 20X1 as its historical cost of
c. Costs are measured on a cash or cash RM5,000 after deducting for
HISTORICAL equivalent basis
This is in line with prudence or conservatism
accumulated depreciation. The
market value of RM2,500 is ignored.
COST concept as it prevents overstating the value
of assets.
& Economic A business is treated as separate and distinct
entity from its owner(s).
XYZ started a business with
RM20,000.
or busi- The items recorded in the business's books The transaction is recorded as
ECONOMIC/ ness en- are limited to transactions affecting the
tity business only.
capital ie liability of business to its
owner.
BUSINESS Thus, the records and reports of a business
should not include either the transactions or
XYZ acquired goods for RM5,000.
The goods are the assets of the

ENTITY assets of another business or the personal

assets and transactions of its owner or
business and not of the owner.

owners.
 Concepts Explanation Example

Money All business transactions are recorded Purchase of goods of RM5,000,

measurement in terms of money ie the currency of a wages paid of RM2,000 and sales of
currency (RM as in the case of Malaysia) goods worth RM10,000 are expressed
The assumptions for this concept are: in monetary terms.
a. money is the common denominator
ACCOUNTING b. monetary unit provides an Honesty of staff and good working
appropriate basis for accounting environment are not recorded by the
CONCEPTS – measurement and analysis
c. monetary unit is the most effective
business because these factors
cannot be measured in monetary
MONEY means of expressing changes in
capital and exchanges of goods and
terms even though they affect the
business performance.
services to interested parties
MEASUREME The records of the transactions are kept
in the monetary units rather than in the
NT Periodicity
physical units.
The economic activities of a business can For external reporting purposes, a
& be divided into regular time periods,
namely monthly, quarterly or yearly.
statement of profit or loss is prepared
for a period from 1 January 20X1 to
For reporting purposes, financial 31 December 20X1.
PERIODICITY statements are normally prepared on a
yearly basis.
However, for management purposes,
they will be more frequently prepared
such as on a quarterly or monthly basis.
.
 Concepts Explanation Example

Matching Revenue and its related expenses XYZ acquired a machine that had an
ACCOUNTIN are recognised in the same reporting estimated useful life of 10 years. It should
period. charge or allocate the cost of the machine to
G CONCEPTS Dual aspect Every business transaction has a
depreciation expense for 10 years
XYZ acquired a machine worth RM5,000 for
– dual effect ie it affects two different
accounts in the opposite sides.
cash. The machine account is debited and
bank account is credited. RM5,000 will be
It means to record a transaction, an recorded in both accounts
MATCHING, account is debited, and another
account will be credited with the
DUAL same amount.

ASPECT Realisation Revenue is recorded when it is

realized.
Revenue has been realized when
& the sale of goods has been made
and cash or right to receive cash
REALISATIO has been created.
In 20X1, XYZ received an order worth
RM10,000 to supply goods to a customer.
During the year, XYZ had delivered the goods
worth RM7,500. The customer paid RM5,000
for the goods delivered.
XYZ should record its revenue when it is
realised. Thus, the revenue to be recorded is

N RM7,500 regardless of the payment received

from the customer. Sale is not yet made when
order is received.
Thank you
Any questions?