Topic 2 - Concepts and Conventions of Accounting

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