introduction to finnancial accounting

1. CHAPTER 2
INTRODUCTION TO CONCEPTS
AND
CONVENTION OF ACCOUNTING
Prepared by,
Adriana binti Shamsudin

2. Learning Outcome
At the end of this lecture, students should be
able to explain each concept and relates to the
business situation:
• Business Entity Concept
• Going Concern Concept
• Monetary Concept
• Accrual-based Accounting
• Comparability Concept
• Consistency Concept
• Neutrality Concept
• Materiality Concept

3. Overview of Chapter
8 Accounting
Concepts
Business
Entity
Concept
Going
Concern
Concept
Monetary
Concept
Accrual
Based
Accounting
Concept
Comparability
Concept
Consistency
Concept
Neutrality
Concept
Materiality
Concept

4. Business Entity Concept
• This concept implies that the business is separate and distinct
from its owner.
• For reporting purposes, a business unit is considered as a
separate unit from its owner. (owner and business are two
separate legal entity)
• Only accounting information that
relates to business transactions of
the entity will appear in financial
statements
• All the dealings or transactions of
the owners should not be mixed
with business dealings and
transactions

5. Going Concern Concept
• The financial statement of
an enterprise is prepared on
the assumption that the
business is a continuing
business
• Accountants will assume the business will
continue operating for the for-seeable future
and is not likely to be closed down in the near
future (will have a long life)

6. Monetary Concept
✶ Accounting information is expressed primarily in monetary
terms
✶ Requires the transactions to be recorded in the financial
statements using a currency (RM, USD, EURO, ETC). Currency
is depends on where the company operates
✶ Financial statements only provide information which can be
expressed in monetary terms
✶eg: customers paid RM1000 for services
provided. The RM1000 will be recorded as
revenue to Company. However, the good
quality of the service provided will not appear
in financial statements

7. Accrual-based
Accounting Concept
• Business uses cash and
credit basis transactions.
• Recognise revenue even
though not received the
cash
• Subtracting expenses
regardless paid or not

8. Comparability Concept
A company’s financial statements must be
prepared in such a way that comparable
●to other similar company
●Past years
●Industrial average

9. Consistency Concept
• Accountants use the same accounting methods and
procedures from period to period
• Once particular method is chosen, it should be used
consistently in subsequent periods.
• eg: inventory system, depreciation method
• Comparability assured

10. Neutrality Concept
• Information in financial statements should be
free from bias to be reliable.
• Management should not manipulate
accounting record according to their interest.

11. Materiality Concept
● Accountants perform strictly proper accounting only for
items that are significant to the company’s financial
statement
● The amount is considered material if it has significant effect
upon the reported income or financial position of the
business
*information is significant when it would cause someone to change decision.

12. THANK YOU