Program Matrikulasi Satu Tahun Perakaunan

Topic 2:
Basic Accounting Concepts
The Contents

GAAP

The Accounting Principles

The Accounting Equation

Double entry system

2.1 Generally Accepted
Accounting Principles
Objective :
- The different opinions between the Accountants
can be solved by referring the recognised set of
standards known as Generally Accepted
Accounting Principles (GAAP)

Definition :
- It covers convention, concept, regulations,
procedure and the guidelines standards.
- The report must be recorded in the Financial
Statements and it must be completed and easy
to understand in order to make a comparison.

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2.2 The Accounting Concepts

❖The History Cost

❖The Monetary measurement
❖The Economic Entity
❖The Going Concern
❖The Consistency
❖The Accounting Period

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2.2 The Accounting Concepts

❖Materiality
❖Revenue Recognition
❖Expense Recognition
❖ Full disclosure
❖Objectivity
❖Fair value measurement
1.The Historical Cost
- The price of an asset on the balance sheet is based on
its nominal or original cost when acquired by the
company.

Example:
The company purchases a car from supplier with a
cost price RM20,000 at 21 August 2014. The market
value increases up to RM25,000 on the next day.
How much is the cost should be recorded by the
company? Why?

Answer :
The value should be recorded as RM20,000 because
the cost is a reliable measure.
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2. The Monetary Measurement
Business transactions or events can be measured and
expressed in terms of monetary units and the
monetary units are stable and dependable.

Example:
A transaction occured in a business but the value
cannot be determined.

Answer :
The transaction can not be recorded unless the
monetary value determined.

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3. The Economic Entity
● Business should always separately record the
transactions of a business and its owners.
Otherwise, there is a considerable risk that the
transactions of the two will become intermingled.

Example:
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.

Answer:
The company does not comply the separate
entity concept . The purchase should be
recorded as drawing 8 because the transactions
are personal matter.
4. Going Concern Concept
• A company or other entity will be able to continue
operating for a period of time that is sufficient to carry out
its commitments, obligations, objectives, and so on.

Example:
The company 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.

Answer :
Suggestion rejected. The suggestion does not comply
the going concern concept. The vehicle should be
recorded as the value of RM20,000 and must be
depreciated for 10 years.
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5. Consistency Concept
• Once the company adopt an accounting principle or method,
continue to follow it consistently in future accounting periods.
Only change an accounting principle or method if the new
version in some way improves reported financial results.

Example:
The company uses straight line method in depreciating
the fixed asset of the company. The company decides to
change to declining balances method for the next
financial statement.

Answer:
It does not comply the consistency concept because the
method should remain the same every year.

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6. Accounting Period Concept
• the span of time covered by a set of financial statements.
This period defines the time range over which business
transactions are accumulated into financial statements, and
is needed by investors so that they can compare the results
of successive time periods.

Example:
A company has established at 1 January 2018. The
business closes account every 12 months at 31
December every year. Explain the concept involved.

Answer :
The company comply accounting period concept where
the business and account divided into 12 months.

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7. Materiality Concept
• All material items must be properly reported in financial
statements. An item is considered material if its inclusion
or omission significantly impacts the decision of the
users of financial statements.

Example:
A company purchases a calculator at cost RM20 and it
will depreciate for 5 years over its useful life. Give your
opinion.

Answer:
The cost of calculator considered as immaterial amount
due to the value and impact to the business. Therefore,
the cost of the calculator must be recorded as expenses
rather than as an asset.

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8. Revenue Recognition
• Revenue will be recognised when:
• there is a change of ownership/title.
• buyers are willing to pay.
• the stability of the currency.
• Buyers are able to pay.

• Example:
Azmal is an pottery entrepreneur. He has received 100
orders of porcelain vase on January 1, 2018 and has
received a payment of RM1,000. The orders was sent on
January 15, 2018. When the sales revenue should be
recognised? Give your opinion.

• Answer:
En. Azmal need to recognise sales revenue of RM1,000
on 15 January 2018 because the ownership of the
merchandise changed on the date.
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9. Expense Recognition
• Expenses should be recognized in the same
period as the revenues to which they relate.

• Example:
Puan Tina has recorded expenses of RM2,000
for utility expenses in December 2017, but the
payment will only be made in January 2018.

Explanation:
• Puan Tina comply the concept of expense
recognition. Expenses should be recorded in
the period the expenses occurred.

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10. Full Disclosure
• Company must provide the necessary information so that
people who are accustomed to reading financial
information can make informed decisions concerning the
company.

• Example:
Farida business has made changes in stock valuation
method used. The company did not disclose the
information in the financial statements for the accounting
period.

• Answer:
The company does not comply the concept of full
disclosure. The changes must be disclosed in financial
statement. 15
 11. Objectivity
• Financial statements of an organization be based on solid
evidence.

• Example:
KZB Company is only issued a receipt for cash
transactions, but no document for the return of goods
sales transactions. Give your opinion.

• Answer:
The company does not comply the concept of
objectivity for the return of goods sales transaction.

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12. Fair Value
• Uses current market values as the basis for
recognizing certain assets and liabilities.

• Fair value is the estimated price at which an

asset can be sold or a liability settled in an
orderly transaction to a third party under
current market condition
2.3 Accounting Equation

ASSETS = LIABILITIES + OWNER’S

EQUITY

ASSETS = LIABILITIES + (CAPITAL +

REVENUE - EXPENSES -
DRAWING)
Assets
❖ Wealth / resources owned by the business.
❖ Assets are divided into two: -
1. Non-current Assets
▪ Assets that have a life of more than one
year.
▪ Divided into three: -
i. Tangible/fixed assets - can be seen
physically.
Example: buildings, vehicles,
equipment
ii. Intangible assets – can not be seen
physically.
Example: - Trademarks, patents, copyrights
iii. Long-term investments - fixed deposits for
more than a year,
19 the purchase of bonds
2. Current assets
▪ Exist in one accounting period and can be
converted into cash within a year.
▪ Example: - Inventory, Accounts Receivable,
Cash, Bank etc.

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Liability

❖ Debt/ business obligation to be paid by

business entity to another party.

❖ Liabilities divided into 2 types: -

1. Non-current liabilities (> 1 year)
▪ Debt to be settled within a period
exceeding one year.
▪ Example: - Long-term loans, mortgage,
note payable

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2. Current liabilities (<1 year)

▪ Debt due in less than a year.

▪ Example: - Accounts payable,

expense payables, unearned
revenue.

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Owner’s Equity

Owner’s claims on the business. They

include:
❖ Capital invested by the owner into the
business.
❖ The net profit result of the business
activities.

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The elements involved in
owners' equity:
❖ Capital
▪ Consists of assets in the business by the
owners.
▪ It will add the owner's equity.
❖ Drawing
▪ Owner issuing asset (cash or
merchandise) for personal use.
▪ The effect will reduce the value of owners'
equity.
❖ Profit
▪ Expenditure
❑ The effect will reduce the owner's
equity.
▪ Income
❑ The effect will increase
24 the owner's
Revenues
All income from the sale of goods / services
based on the concept of revenue recognition.

2 types of revenue: -
❑ Operating revenue
Example: - Sales, service revenue

❑ Non operating revenue

Example: - Interest income, rental income,
gains on sales of fixed assets

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Expenses
The money spent or cost incurred in an entity's
efforts to generate revenue.

2 type of expenses:
• Operating expenses
Example:- Utilities , sales commissions,
delivery expense
• Non operating expenses
Example:- property taxes on the
administrative office building

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Analyse the effect s of business
transactions on accounting equation

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.
Analysis of transactions

EXAMPLE 1
Start the new business with cash RM 1,000.

ASSET = LIABILITY + EQUITY

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

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

ASSET = LIABILITY + EQUITY

Cash Drawings
- RM 100 -RM 100

Decrease of Decrease of
asset EFFECT equity
 ANALYSIS OF TRANSACTIONS

EXAMPLE 3
Received RM 3,000 cash from Maybank for
business loan.

ASSET = LIABILITY + EQUITY

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

Increase of Increase of
assets liability EFFECT
 ANALYSIS OF TRANSACTIONS

CONTOH 4
The business pays loan RM 100 with cash.

ASSET = LIABILITY + EQUITY

Cash Loan
- RM 100 - RM 100

Decrease of Decrease of
asset liability EFFECT
 ANALYSIS OF TRANSACTIONS
CONTOH 5
Business performs a service for YY Agency in
credit RM 2,000.

ASSET = LIABILITY + EQUITY

Accounts EARNS THE

Recevibles REVENUE
+ RM 2,000 + RM2,000

Increase of Increase of
asset EFFECT Equity
 ANALYSIS OF TRANSACTIONS

Example 6
Business pays RM 290 for utilities expenses.

ASSET LIABILITY + EQUITY

=
Utilities
Cash expenses
- RM 290 - RM290

Decrease of Equity
Decrease of (Increase of
asset EFFECT Expenses )
2.4 Double- Entry System

Every business transaction will involve two

accounts (or more).

For example, when a company borrows

money from its bank, the company's Cash
account will increase and its liability account
Loans Payable will increase.

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 Double- Entry systems
DEBIT = The left side of the account
CREDIT = The right side of the account

The following T-accounts :

Title of account
DEBIT CREDIT

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 Rules of Debit and Credit
Account Record DR/CR Baki
Normal

ASSET ↑ DEBIT
DEBIT
EXPENSES
DRAWINGS ↓ CREDIT

LIABILITY ↑ CREDIT CREDIT

EQUITY
REVENUE ↓ DEBIT 36
REFERENCES :

1. Weygand, Keiso and Kimmel. (2016).

Accounting Principles. River Street,
Hoboken : John Wiley and Sons Inc.