L02 - Accounting Concepts

CHAPTER 2
ACCOUNTING CONCEPTS AND

CONVENTIONS
2
INTRODUCTION
 Accounting concepts are derived and
developed over years from business
customs and accounting practices
 As guides in the preparation and

presentation of financial statements
3
WHY ACCOUNTING STANDARDS EXIST?
 To have a uniform financial
statements as it serve various types
of users.
 To reduce the possibilities of very
large variations in financial reporting.
 For comparability purposes.
 To show ‘true and fair view’ of an
organisation. 4
ACCOUNTING CONCEPTS
Historical
Consistency
Cost
Duality
Periodicity
Going
Economic
Concern
Entity Accounting
Concepts
Neutrality
Monetary
Prudence/
Materiality
Conservatism
Accrual Comparability
 ENTITY CONCEPT
 The business is regarded as an entity or a unit by itself.
 This
entity is exists as an entity that is separate from its
owner.
 The business can own assets, can have liabilities or enter

into transactions.
 The financial statements of Ali Enterprise report
only the economic activities of the business and
do not included economic activities of Ali, the
owner.
 GOING CONCERN
 Thebusiness is always assumed to be a going concern,

that is to operate for an indefinite period of time.
 Thebusiness is therefore not expected to be closed in a

short period of time.
 MONEY MEASUREMENT
 The accounting information only involved the

transactions or facts that can be measured in a monetary
value.
 Thisis to get a standard measurement to make

comparison between the financial position of the
businesses.
 HISTORICAL COST
 Alltransactions of a business are recorded at the original

cost at the time the purchase was made.
 The cost is constant in the accounting records and the

changes of time will not influence the original cost.
 CONSISTENCY
 Accounting methods used to determine income and valuation of assets must

be consistently applied
 An accounting policy or method, once adopted should be consistently
followed in subsequent periods to allow comparison to be made
 Change is only made under strict circumstances
 The straight line method used to depreciate an asset should be

used from one period to another
 Comparability
 Consistency helps to achieve comparability
Accrual
Revenue is recognised when it is earned and not when

the money has been received.
Expenses is recognised when it is incurred and not

when the money has been paid.
 NEUTRALITY
 Financial statements are NOT prepared in a way to

favour groups of users (managements, owners, creditors,
etc) over other groups.
 The information is prepared to be helpful to all

 MATERIALITY
 The accounting treatment of an item depends on its impact on

the firm’s performance and financial position
 An amount is considered material if it has a
significant effect upon the income or the
financial position of a business
 Trivial matters are to be disregarded and all important matters
are to be disclosed
 The same item may be material to one firm but
immaterial to another
 The cost of an eraser is recorded as an expense rather
than an asset
 CONSERVATISM (PRUDENCE)
 In times of uncertainty,
 Revenues and assets should not be overstated
 Expenses and liabilities should not be understated
 Potential losses as a result of a lawsuit against the

firm must be reported and accounted as an expense
 Potential gains when asset value increases are not
reported until it is actually sold and gain is realized

Periodicity
It implies that the business activities can be divided into regular time period. For
reporting purposes, financial statements are normally prepared on yearly basis.
 DUALITY
 Every transaction has a double (dual) effect on the position

of the business as recorded in the accounts.
 This concept is the foundation of the double-entry
bookkeeping system
 When an asset (car) is bought, another asset (cash or bank)
is decreased

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CHAPTER 2

ACCOUNTING CONCEPTS AND

 As guides in the preparation and

 The business is regarded as an entity or a unit by itself.

 The business can own assets, can have liabilities or enter

 Thebusiness is always assumed to be a going concern,

 Thebusiness is therefore not expected to be closed in a

 The accounting information only involved the

 Thisis to get a standard measurement to make

 Alltransactions of a business are recorded at the original

 The cost is constant in the accounting records and the

 Accounting methods used to determine income and valuation of assets must

 The straight line method used to depreciate an asset should be

Revenue is recognised when it is earned and not when

Expenses is recognised when it is incurred and not

 Financial statements are NOT prepared in a way to

 The information is prepared to be helpful to all

 The accounting treatment of an item depends on its impact on

 Potential losses as a result of a lawsuit against the

reported until it is actually sold and gain is realized

 Every transaction has a double (dual) effect on the position

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