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ACC106 : INTRODUCTION TO

FINANCIAL ACCOUNTING

ACCOUNTING ASSUMPTIONS,
CONCEPTS AND
CONVENTIONS

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Learning objectives
Describe the purpose of some basic

accounting concepts and conventions.


Explain specific accounting concepts and

conventions.

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INTRODUCTION
Financial statements provide accounting

information of a business for decision making.


Therefore, financial statements should be:
Objective
Comprehensive
Relevance
Reliable
Comparable

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Accounting Concepts

Business entity
Monetary
Going concern
Accrual- based accounting
Comparability
Consistency
Neutrality
Materiality
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(1) Business Entity


Business is separate and distinct from

its owner and from every other owner.

HJ ISMAIL????
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EXAMPLE
Wan Tan withdrew RM15000 from

his business account to settle the


rental for his residence. These rental
were charged against the business
profits.
Thus, Wan Tan is violate the
business entity concept that says
business and personal transaction
should be recorded at a separate
account.
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Activity
Which of the following concept distinguishes and

separates the business from the owner?


a.
Dual concept
b.
Cost concept
c.
Business entity concept
d.
Accrual concept

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(2) Money measurement/ Monetary


concept
Transactions should be recorded in the

currency of the country in which the reports


are prepared.
E.g: Australia - Australian dollars.
E.g: Malaysia Ringgit Malaysia (RM)

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MONETARY UNIT ASSUMPTION


Aminah has a wedding boutique.

She took a pair of wedding dress for


her own wedding. The cost of the
dress is RM1,000.
Thus, Aminah should record the

drawing as RM1,000 and not a pair


of wedding dress only.

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Activity
_____ assumes that the ringgit

(dollar) is the measuring stick used to


report on financial statement.
a. Prudence concept
b. Monetary concept
c. Materiality concept
d. Duality concept
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(3) Going concern


Assume that business will continue to

operate in the foreseeable future, using


its assets to carry on its operations.
In other words, the concept assumes
that the business will have a long life to
fulfill their objectives and
commitments.
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Example 1

An oil and gas firm operating in Nigeria is

stopped by a Nigerian court from carrying out


operations in Nigeria. The firm is not a going
concern in Nigeria, because it has to shut down.
(reference: http://accountingexplained.com)

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Example 2
A nationalized refinery is in cash flows problems but

the government of the country provided a guarantee


to the refinery to help it out with all payments, the
refinery is a going concern despite poor financial
position.

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Activity
The accounting assumption which states

that the business will continue to operate for


an indefinite period of time is:
a. Materiality
b. Time period
c.
Going concern
d. Business entity

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(4) Accrual concept


Expenses are recorded when it is

incurred NOT when it is PAID in cash


Revenues are recorded when it is
earned NOT when it is RECEIVED in
cash

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Example :
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 credit to Manan on
30 December 2012. Rokiah received payment from
Manan on 2 January 2013 and she later settled her
debt to Suhaila on the same day.
Decide the point-of-sales of the salt and salted eggs.

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Answer

30/9/12
Purchased
salts on credit

Purchase is
recognized for
the year ended
31 Dec 2012

30/12/12
Sold salted
eggs on
credit

31/12/12
Accounting
year ends

2/1/13
Received
payment from
Manan and
paid Suhaila

Sale is
recognized for
the year ended
31 Dec 2012
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Activity
Accrual basis of accounting means:

i.
ii.
iii.
iv.
v.

Assets are recognized when purchased


Revenues are recognized when earned
Revenues are recognized when cash is received
Expenses are recognized when incurred
Expenses are recognized when cash is paid
a.
All of the above
b.
i,ii and iv
c.
ii and iv
d.
iii and v
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(5) Comparability Concept


Reports should be comparable over time, and

between different companies through the use of


consistent accounting procedures.

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Example
Comparing 20X2 financial statements of

ExxonMobil with its 20X1 financial statements to


know whether performance and position improved
or deteriorated.
Comparing 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.

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(6) Consistency
Consistent use of basis or methods.
Once business has adopted the straight line

method of calculating depreciation, this method


should be used consistently.

Reasons:
General treatment of items does not differ from period to
period
To avoid misleading interpretation of accounting
information
Erroneous comparisons of result of one period to another

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Example
Which of the following refers to the accounting

treatment of like items within each accounting


period and from one period to the next.
a.
Accruals
b.
Going concern
c.
Consistency
d.
Prudence

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(7) Neutrality Concept


As information in the accounting records is being

used for decision making, therefore it must free of


bias.
Such information is presented as it is without being

tampered for the sake of management.

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Example
A company is facing serious liquidity problems.

Management may decide to window dress the


financial statements in a manner that improves the
company's current ratios in order to hide the gravity
of the situation.
(Ref: http://accounting-simplified.com)

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(8) Materiality concept


Use to differentiate between fixed assets

and expenses
If a transaction is considered material and
significantly affects the reported net income
of business, it should be recorded as fixed
assets otherwise it should be treated as
expenses
Purchase of motor van and stationeries
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Activity
Luxor Bhd. purchased a calculator that

cost RM18. The accountant immediately


write off the amount to the income
statement. The concept applied by Luxor
Bhd. company is:
a. Cost concept
b. Prudence concept
c.
Going concern concept
d. Materiality concept
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CONCLUSION
As financial statements are used in decision making,

therefore they must be objective, comprehensive,


relevance, reliable and comparable.
Therefore, sound decision makings can be made by

the users.

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