Introduction to concepts and conventions of

Accounting

ACC406 - INTERMEDIATE
FINANCIAL ACCOUNTING
AND REPORTING
Learning outcome
 At the end of this lesson, students will be able to:
 Describe the purpose of basic accounting concepts
and conventions
 Explain specific accounting concepts and
conventions
 Cite some examples which illustrate the use of some
accounting concepts and conventions
Introduction
 The accountant uses a number of accounting
concepts and conventions as guides to accounting
practice
 These concepts and conventions have been derived
and developed over the years from trade or
business customs and general accounting practices
Entity concept
 The business is considered to be a complete unit or entity
which is different from its owners, creditors, employers,
customers and other persons
 The business can owns assets, can have liabilities, enter
into transactions and so on…..
 Business affairs are treated as being separate from non-
business activities of its owner(s).
 Any personal assets of the owner are not recorded in
financial statement of the business.
Going concern concept
 The business enterprise is assumed to have an
indefinite life unless there is evidence it is going to
be liquidated in the near future.
 The implication is that when a business is formed, it
is assumed to last forever.
 The business will continue to operate for the
foreseeable future.
Historical cost concept
 The assets are normally shown at cost price and
not the current market value.
 For example, if a land were purchased by a
business at a cost of RM1 million a 5 years ago
and a recent valuation showed the asset to be
with RM2 million. The balance sheet will report
at original cost and not current market value.
Duality concept
 Every transactions will involve two entries (dual)
that is debit and credit entry.
 There are 2 aspects of accounting, one represented
by the assets of the business and the other by the
claims against them.
Form as basis of the accounting equation.
Assets = Capital+Liabilities
Periodicity concept
 Financial statements are prepared at regular intervals
of one year.
 One accounting period normally cover one year(12
months).
 For example, if business start operation on 1.1.2008,
the accounting period will end at 31.12.2008.
Money measurement concept

 Accounting information can be measured in

monetary units in term of RM and most people
will agree to the monetary value of the
transaction.
Consistency concept
 Thebusiness applied a method for the
accounting treatment of an item, it will enter all
similar items that follow in exactly the same
way.

 Forexample, if business adopt SLM for

depreciation of fixed asset for year 2008, it
should be consistently applied.
Accrual concepts
 Revenue is recognized and recorded as earned as
soon as goods are sold even though payment has
not yet been received.

 Expensesare considered as incurred even though

payment for the expenses has not been made.

 They are not reported as money as received or

paid.
Prudence /conservatism concept
 Accountant will take figure that will understate
rather than overstate the profit
 Provide anticipated loss before it is incurred
(provision)

 Example:
Closing stocks are always valued at the lower of cost or
market value so that the profits are not overstated
during the current period
Matching concept
 States that costs(expenses) incurred during the
accounting period can be identified with its
corresponding revenues.
 For example revenues from the sales of product A in
year X, matched with all the costs incurred in earning
the revenues.
Realisation concept
Revenue or profit is realised or recognised in the
period in which the sale is made
Materiality concept
 An amount is material when it changes the users
judgment about the financial statement of an entity.
 Depend on size and types of the business.
 For example, if profit of a firms is understated by
RM1,000 its immaterial if the firms profit for the
year is RM100 million, but if the profit of the same
firm is only RM5,000 then understating the profit
by RM1,000 is material because it represent 20%.
recap
Identify the accounting concepts that are being
followed in each practices:
1. Azizi set up a business assuming that her
business will always be operating in a foreseeable
future.
2. Aliya recognised and recorded sales as earned as
soon as goods are sold even though payment has
not yet been received.
3. The depreciation for a building is recorded but the depreciation
recap
for a pen is not provided due to its smaller value
4. Mini has made a provision for doubtful debts on his debtors’
amount that he assumes can not be collected
5. Ayu bought a ceiling fan for her business use valued RM300 in
the year 2001 and the same amount will be shown in her business’
balance sheet in year 2003