ACCOUNTING

ASSUMPTIONS,
CONCEPTS
Slide
Prepared by
s

AND Alwi

Fatimah
CONVENTIONS

UiTM Johor

Learning
1.

Describe the purpose of some basic accounting

2.

concepts and
Explain
conventions.accounting concepts and

objectives
specific

conventions.

INTRODUCTION

Financial statements provide

information
making
accountingof a business for

decision

Different types of users will use

the

Banker : to grant loan

information
Creditors :for
to different
supply goods on
credit
to
purposes:
Debtors : the continuity of a
supply
business

ACCOUNTING
CONCEPTS
Business
Entity

Consiste
ncy

Monetar
y Unit

Comparabi
lity

Materiali
ty

Going
Concern

Neutralit
y

Accrual
Basis

Time
Period

MONETARY UNIT

All
mustbe recorde in monetar
ASSUMPTION
transactions

units.
The

could be:

RM and sen
units

Pound

USD

Baht,
etc

MONETARY

ASSUMPTIO

Example:

UNIT
Rashidah has a

wedding boutique.
She took a pair of
wedding dress for
her own wedding.
The cost of the

dress is RM1,000.
Thus, Rashidah

should

of

record the drawing

as

BUSINESS

Busines and
its owner are treate as
ENTITY
s

and

differen parties.
t

Haji

27

BUSINESS

them

ENTITY

Introducin capital at the beginning

Therefore,
any transaction
of
between
g

the

more capita into thebusines

business
must
be recorded.
l
Introduci
ng
Drawings
BUSINESS

$$$

OWNER

$$$
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BUSINESS

Example ENTITY

Haji Ismail manufactures and sells

:
traditional
salted fish called ikan pekasam. He began
his

for

business on 1 January 2012 with a capital

of
RM2,000. He brought more capital into the

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BUSINESS
Therefore

ENTITY
Beginning capital RM2,000 +

be

additional capital RM1,000

these transactions
recorded: must

BUSINESS
Drawings
RM300

OWNER

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BUSINESS ENTITY

The legal impacts on business

differen
on type of business
owners dependin
are
t

g
Sol
e

proprietorshi

s
Partnershi
p

.
Company

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BUSINES ENTIT
S

Sol
e
proprietorshi
p

Partnershi
p

There is no separate legal entity

between the business and sole
traders or partners.
Thus, if a sole proprietorship or
partnership is bankrupt, sole
traders or partners personal
assets may be used to settle the
debts of the business
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BUSINESS
ENTITY
There is a separate legal entity
between the company and
shareholders.
Company
Thus, if a company is bankrupt,
shareholders personal assets
may not be used to settle the
debts of the business

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GOING CONCERN

CONCEPT

to

All transactions are recorded with

the assumption that the business
will continue operate and is able
The status of going concern of a
will
to do so.
business

be stated in the financial statement.

A requirement for public

8

GOING

CONCEP

CONCERN

An oil and1:
gas firm
Example

in Nigeria is
by a Nigerian court from carrying out
operating
stopped
operations
in Nigeria. The firm is not a going concern in

(reference:
http://accountingexplained.c
Nigeria, because
it has to shut down.
om)
9

GOING CONCERN

CONCEPT

A nationalized
Example
2: refinery is in cash flows
problems
payments,
the refinery
a goin
concer
despit
but the government
of the
country
provided
is
a

poor
guarantee
financial
to the
position.
refinery to help it out with
all

10

GOING

CONCEP

CONCERN

A bank is 3:
in serious financial troubles and the
Example
government is not willing to bail it out. The
of Directors has passed resolution to
the
business The bankis not a goin concern
Board
a
liquidate
.
g
.

11

GOING CONCERN

CONCEPT

A merchandising
company has a
Example
4:

below 0.5. A creditor $1,000,000

ratio
demanded

current
The

payment which the company could not

grants the order. The company is no longer a
make.
concern
going
creditor requested the court to liquidate
.

12

TIME PERIOD
CONCEPT
The financial statements are
prepared for a certain period of
time
The length of the accounting
period depends on the
frequency of the information
required by the users.

33

TIME PERIOD
CONCEPT
Example:
if an enterprise chooses 31
March year as its year end, the
accounting period will start
from 1 April in the year and
ends on 31 March the
following year.

33

ACCRUAL

Business

BASIS

transactions

occur regardless
This is to

recorded when
they
or without

The point-of-sales credit

or credit
with
payments.
determine:
sale
for
When expenses are
purchase.
incurred

When revenues are

13

ACCRUAL BASIS

In other words, accrual basis

income
whenan
it is earned an expens
recognised
and

when
it is: incurred.
Earned
or

received

receivable

Incurred :
paid or

payable

$
$$
$$$
14

ACCRUAL
Example
1:

BASIS

Rokiah manufactures and sells salted eggs. Her

accounting period ends on 31 December
annually. She
purchased 50 kg salt on credit from Suhaila on 30
September 2012. Later she sold her salted eggs

on
Decide
the point-of-sales of the salt and salted
credit to Manan on 30 December 2012. Rokiah
eggs.
15

ACCRUA BASI
L

30/9/12

30/12/12

31/12/1

2/1/13

Purchased

Sold salted

Received

salts

eggs

Accounti

payment

on credit

on credit

ng

from Manan

year

(trade

ends

debtor) and
paid

Purchase

Sale

is

is

recognised

recognise

Suhaila
(trade
creditor)

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ACCRUAL

Example
Rokiah received
BASISan electricity bill for
2: December 2012
of RM54 on 28 December 2012. She was
also
informed that ASB would give a dividend
of 8.5% for
the year 2012 on 30 December 2012. She
Decide
had a whether
saving the electricity expense
and
dividend in her ASB account. The
of RM4,000
income
as an
and an income for
dividend
wasexpense
paid
the
out year
on 4 January 2013. She used her
ended
31 December
dividend
to settle 2012.

17

28/12/12

ACCRU

BASI

AL

30/12/12

Electricity

ASB

bill

dividend

receive

8.5%

31/12/12

4/1/13

Accounti

Received

ng

ASB

year

dividend

ends

and
settled

Recognised

Recognised

as

as

an

a revenue

electricity
bill

18

ACCRUAL

BASIS

Anotherbasis
conceptvs
is Cash
cash
Accrual

basis
basis
Records
are made
Contradict
to accrual to the actual
according
receipts
basis
Used in the
book
and payments
cash

$
$$

MATERIALITY CONCEPT

any
An information is material if it
may affect decision making of a
business.
It may be the significance of event
an

amount involved.
Based on ones
professional

the

or
judgement
.
23

MATERIALITY CONCEPT

It is important to decide whether an

event or an amount is a material
information or not.

Material amount: Financial statements

Material information: Notes of

accoun

the

24

MATERIALITY

CONCEPT

The government
of the country in which the
Example
1:
company operates in working on a new
legislation
which would seriously impair the company's
operations in future. Although there are no
figures

25

MATERIALIT CONCEP

Y
Example 2:

the executives

the

and

The remuneration

Example 3:
paid to
The accounting policies are
directorsbecause
is material.
material

they

help the users understand the figures.

(reference: http://accountingexplained.c
om)

26

NEUTRALITY

As information in the accounting

records is being used for decision
making, therefore it must free of
bias.
Such information presented as it is
is

without

being tampered

the sake of

for

management.

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NEUTRALIT

Example

1:

A company is facing serious

problems
Management may decide to window dress
liquidity
.
the
the company's current ratios in
to hide the
financial statements in a manner that
order
improves
gravity of the situation.
(Ref: http://accounting-simplified.c
om)

21

NEUTRALIT

Example
2:

Managers of a company are

bonus
the basis of reported profit. This might
provided
on
tempt
management to adopt accounting policies
that

result in higher profits rather than those

(Ref: http://accounting-simplified.c

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COMPARABILITY
Financial statement must be
comparable over time.
OR
Compa
ny A

Comparable with competitor in

the same industry

Compa
ny B

In order for users

able to make
decision about the
trends and
performance of the
organization.
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COMPARABILITY

Example:

We can compare 20X2 financial statements of

ExxonMobil with its 20X1 financial statements to
know whether performance and position
improved or deteriorated.

33

COMPARABILITY
Example
We can compare the ExxonMobil financial
statements with that of BP if both are prepared in
accordance with same set of accounting
standards, such as IFRS or US GAAP, etc.

Compa
ny A

Compa
ny B
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CONSISTENCY
Accounting method once
adopted must be consistently
applied in future

To enable comparability
of accounting
information
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Example:

CONSISTENCY

Company A has been using

declining balance depreciationmethod for its IT
equipment.
According to consistency concept it should
continue to use declining balance depreciation
method in respect of its IT equipment in the
following periods.
If the company wants to change it to another
depreciation method, say for example the
straight line method, it must provide in its financial
report, the reason(s) for the change, the nature of
the change and the effects of the change on items
such as accumulated depreciation.

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