Concepts and Conventions of Accounting
Accounting Concepts are the assumptions on the basis of which financial statements of a business are prepared. The word
concept means idea or notion. Concepts are the basic assumptions and
conditions on which accounting principles are formed.
1. GOING CONCERN
·
Business continue to operate in
the foreseeable future.
·
Business will have a long life,
and will last long enough to fulfill their objectives and commitments.
2. HISTORICAL
COST
·
Only the costs paid to acquire an asset are
relevant & should be the only costs to be shown in the a/c.
·
The current mkt/liquidation values of productive
assets are not relevant.
·
Price agreed frm the result of bargained
transactions.
·
H.C will be use/record until the asset is sold
because fixed asset acquired to assist in production & not to be resold.
·
Ex: We disclose the fixed assets value as a
historical cost in the Balance Sheet and not any other values.
3. ENTITY
•
Assumes that a business is separate and distinct
from its owner and from every other owner
•
The items recorded in a business’s book are
limited to transactions affecting the business only.
•
The records and reports should not include
either the transactions or assets of another business of its owner or owners
4. MONEY MEASUREMENT
(Measurability Concept)
·
Only transactions and events that are
capable of being measured in monetary terms are recognized in the financial
statements.
·
To assist the users in gaining a better
understanding of the financial performance and position of the entity.
5. MATERIALITY
•
Transaction is considered to be material if it
significantly affects the reported net income of the business.
•
The amount is considered as material if it has a
significant effect towards income/financial position of a company.
•
Ex:new motor vehicle must be depreciated over
its useful life as its cost is material.
•
But,paper clips cost is not material;thus it
should not be depreciate.
6. PRUDENCE
•
Bussiness usually face with risk of uncertainty.
•
To ensure that financial statements are neutral;
gain & losses are neither overstated nor understated.
•
Ex: Accountant will make sure that all losses
are recorded in books but profit/gains won’t be anticipated before recorded.
7. MATCHING
•
By matching concept, net profit is determined
by; costs incurred are (-) from revenues earned in the same accounting period.
•
The problems of matching are:
•
To recognize the revenues whether received in
cash or not.
•
To subtract the expenses incurred in earning
these revenue; whether these expenses have been paid or not.
8. CONSISTENCY
•
Several acceptable acctg methods were applied in
many cases of acctg.
•
Buss.must choose 1 acctg method & this
should be consistently applied for the subsequent periods.
•
This concept is to ensure the acctg reports are
comparable frm period to period.
•
If any changes made,it must be disclosed in
footnote/other explanatory note to financial statements.
9. DUALITY
•
Every transactions has a double/dual effect on
the position of a buss.as recorded in the a/c.
•
There’re 2 aspects of accounting;
•
Assets of the buss.
•
Claims
•
Those 2 aspects are always equal to each other.
10. ACCRUAL
•
The purpose is to ensure all income &
expenses will be recorded in appropriate statement at the appropriate time.
•
All income & expenses for particular
accounting period will be recorded in full; whether they’re really
received/paid by cash.
•
Revenue/profit earned and costs bear recognized
at time they take place, not at the time they’re actually paid for.
•
Those costs concerning a future period must be
c/f as prepayment.
Dr. Mohamad Azmi Nias Ahmad
10 September 2017
