ACCOUNTING

ASSUMPTIONS
&
ACCOUNTING
CONCEPTS
Introduction

Let’s observe :

The ccounting assumptions and accounting

concepts
 ACCOUNTING
ASSUMPTIONS
➢ Accounting assumptions are the rules a business uses to dictate operating
procedures and remain in compliance with all relevant requirements and
regulations.

➢ The structure assumptions provide can help determine how to record

transactions and organize financial information correctly.

➢ If an assumption is untrue, that could mean that a business's records aren't

usable or in compliance with specific rules.

➢ An organization might have to adjust their information, processes or

procedures to comply with assumptions and produce accurate data and
reports.
 FUNDAMENTAL ASSUMPTION –
GOING CONCERN ASSUMPTION
“Financial statements are normally prepared on the assumption that the reporting
entity is a going concern and will continue in operation for the foreseeable future.

Hence, it is assumed that the entity has neither the intention nor the need to enter
liquidation or to cease trading.

If such an intention or need exists, the financial statements may have to be

prepared on a different basis.

If so, the financial statements describe the basis used.”

The Conceptual Framework of MASB

 FUNDAMENTAL ASSUMPTION –
GOING CONCERN ASSUMPTION

➢ An entity is assumed to continue in operation for

the foreseeable future or for an indefinite period of
time.

➢ The business is expected not to be dissolved in the

near future
 FUNDAMENTAL ASSUMPTION –
GOING CONCERN ASSUMPTION

What happens if a business is not in a going

concern?
➢ If a business is not a going concern, that means there is risk the business
may not survive the next 12 months.
➢ Businesses that are not a going concern may not have enough money to
survive!
 ACCOUNTING
CONCEPTS
➢ Accounting concepts are the basic rules and conditions that define the
parameters and constraints within which the accounting process operates.

➢ Accounting concepts are ideas, assumptions and conditions based on which a

business entity records its financial transactions and organizes its
bookkeeping.

➢ It helps a business interpret and integrate a financial transaction into the

accounting process.

➢ It is important for a business owners and accountants to understand basic

concepts to bring about consistency and uniformity in their accounting
process.
 ACCOUNTING CONCEPTS
Accruals

Historical
Realisation
cost

Economic Accounting Dual

entity Concepts aspect

Money
measurem Matching
ent

Periodicity
 1. ACCRUAL CONCEPT

➢ Accrual is a fundamental concept that guides how a business can record

cash or credit transactions.

➢ Under this concept, a business records a financial transaction in the period

it occurs. It does not consider whether the business pays or receives cash
at the time of the transaction, or if it pays cash after a certain period.

➢ For example, a company records a credit purchase at the time of purchase

rather than when it pays back the seller. This helps record and report
income, expenses, liabilities and receivables accurately.
 2. HISTORICAL COST CONCEPT

➢ The historical cost concept states that a business may record assets and
liabilities at their historical cost rather than their current market or sale
value.

➢ Historical cost means, recording of assets at their original cost, that is, the
acquisition cost of the assets.

➢ It helps to maintain consistent, reliable and verifiable financial information.

Including the current value of an entity can result in financial irregularities.
 2. HISTORICAL COST CONCEPT
Example:

Murni Enterprise purchased an equipment for RM5,000 at 1

January 2021. The equipment has an estimated economic life of
5 years. The market value of the equipment at 31 December
2022 was RM2,500.

Based on historical cost concept, the equipment is shown at 31

December 2022 at its cost of (RM5,000) after deducting
accumulated depreciation (RM5,000/5 years) x 2 years =
RM2,000).

The market value of RM2,500 is ignored.

 3. ECONOMIC ENTITY /
BUSINESS ENTITY CONCEPT

➢ The business entity, economic entity or separate entity concept assumes that a
business is independent of its owner.
➢ A business may not record its owner's personal expenses, income, liabilities and
assets.
➢ It aids in tracking a business's expenses, incomes and tax deductions without any
ambiguity.
➢ In addition, it safeguards a business owner's personal finances and helps build their
creditworthiness.
➢ It reflects cash flow and financial position more accurately.
➢ This clear distinction helps stakeholders and creditors take appropriate business
decisions based on a company's performance rather than the owner's financial
position.
 3. ECONOMIC ENTITY /
BUSINESS ENTITY CONCEPT

Example:

Camelia is the owner of Comel Enterprise. Comel Enterprise

started a business with capital of RM20,000. The capital is a
liability of a Comel Enterprise to its owner, Camelia.

Comel Enterprise purchased goods for RM5,000. The goods are

the assets for Comel Enterprise but not for Camelia.
 4. MONEY MEASUREMENT CONCEPT

➢ This is an accounting concept based on assumption, and it stipulates that

companies record only those transactions that they can quantify and
measure in terms of money.
➢ If they cannot assign a monetary value to a transaction, they do not record it
in their annual financial statement.
➢ Though these transactions affect a company's financial performance, they
may not find a place in financial statements, as monetising them can be
challenging.
➢ Some examples of non-monetary value include employee competence,
product quality, employee efficiency, market sentiment, business productivity
and stakeholder satisfaction
 4. MONEY MEASUREMENT CONCEPT

Example of transactions expressed in monetary term.

Purchased of an asset worth RM10,000; obtain loan from bank amounted to

RM20,000; and payment of salary to workers RM50,000.

Examples of transactions that cannot be measured in monetary terms:

The customer’s loyalty; an efficient employee; a good working environment.

 5. PERIODICITY CONCEPT

➢ The accounting period concept prescribes a timeframe within which a

business records and reports its financial performance for the purview of
internal and external stakeholders.
➢ An accounting period of a company may coincide with the fiscal year. A
company can determine a timeframe for internal reporting, like three or six
months, or prepare monthly financial reports to analyse their cash flow
positions.
➢ The management can determine a convenient accounting period for
internal reporting, but the reporting for investor, government and tax
purposes is typically for the period of one year.
 5. PERIODICITY CONCEPT

Example:

For external reporting purpose, a statement of

profit or loss is prepared for the period from 1
January 2022 to 31 December 2022.
 6. MATCHING CONCEPT

➢ Matching principle is an accounting principle for recording

revenues and expenses.
➢ It requires that a business records expenses alongside
revenues earned.
➢ Ideally, they both fall within the same period of time for the
clearest tracking.
➢ This principle recognizes that businesses must incur expenses
to earn revenues.
 6. MATCHING CONCEPT

Example:

Happy Enterprise acquired a machine that has an

estimated useful life of 10 years. It should charge
or allocate the cost of the machine to depreciation
expense for 10 years.
 7. DUAL ASPECT CONCEPT

➢ Dual aspect concept states that every transaction affects two

accounts of a business.
➢ A business then records both aspects to enable accurate
accounting.
➢ Every financial transaction has a credit or debit or a giver or
receiver aspect.
➢ If an accounting process does not represent both, it may lead
to faults in the final accounting record.
➢ The dual aspect concept is the foundation of the double-entry
system of bookkeeping.
 7. DUAL ASPECT CONCEPT

Example:

Maxim Enterprise acquired a machine worth RM5,000 for cash.

The machine account is debited and cash account is credited.
The same amount RM5,000 will be recorded in both accounts.

Dr Machine account RM5,000

Cr Cash account RM5,000
 8. REALISATION CONCEPT

➢ Also known as revenue realization or revenue recognition

concept.
➢ Under this concept, a seller records potential revenue from a
transaction, regardless of whether they have or have not
received proceeds.
➢ The ownership of a product transfers from a buyer to a seller
during a sale.
➢ A seller recognises the transaction by creating a receivable
against the buyer's name in their ledger.
➢ An accountant creates another entry when they receive the
due amount in the future.
 8. REALISATION CONCEPT

Example:

On 1 January 2022, Cahaya Enterprise received an order worth

RM10,000 to supply goods to a customer. During the year,
Cahaya Enterprise delivered the goods worth RM7,500. The
customer paid RM5,000 for the goods delivered.

Cahaya Enterprise should record its revenue when its realized.

Thus, the revenue to be recorded is RM7,500 regardless of the
payment received from the customer.

Sales is not yet made when an order is received. Instead a sale

occurs only upon delivery of goods or services rendered.
 REFERENCES

1. https://www.indeed.com/career-advice/career-
development/what-is-accounting-assumption
2. Financial Accounting for Non-Accounting Students, Fatimah
Abd Rauf, Amla Abu, Radziah Mahmud; 7th Edition, McGraw
Hill.
3. https://www.masb.org.my/pages.php?id=25