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Chapter 2 Accounting Principles & Concepts

This document discusses key accounting principles and concepts. It explains the separate entity concept, going concern assumption, monetary unit concept, periodicity, historical cost, consistency, accrual, realization, dual aspect, materiality, and prudence concepts. The objectives are to ensure objectivity and agreement on financial reporting treatment according to established guidelines.

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Mas Ayu
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308 views10 pages

Chapter 2 Accounting Principles & Concepts

This document discusses key accounting principles and concepts. It explains the separate entity concept, going concern assumption, monetary unit concept, periodicity, historical cost, consistency, accrual, realization, dual aspect, materiality, and prudence concepts. The objectives are to ensure objectivity and agreement on financial reporting treatment according to established guidelines.

Uploaded by

Mas Ayu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Chapter 2

Accounting Principles
/ Concepts

Learning objectives
At the end of this chapter, you
should be able to:
State and explain various
accounting principles or concepts

Introduction
Bookkeeping follow a system
called the double entry system.
Certain guidelines or rules must
be followed before produce final
accounts.
This is to ensure objectivity and
that everyone agrees to the said
treatment.

BASIC ACCOUNTING
CONCEPTS
a) Separate/Business Entity Concept
Assumes that a business is separate
and distinct from its owner and from
every other owner
The items recorded in a businesss
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

BASIC ACCOUNTING
CONCEPTS (contd)
b) Going Concern
Assumes that the business is a going
concern that will continue to operate
in the foreseeable future.
Concept assumes that the business
will have a long life, that it will last
long enough to fulfill their objectives
and commitments.

BASIC ACCOUNTING
CONCEPTS (contd)
c) Money measurement

Assumes that the purchasing power or


the unit of measure used in accounting
i.e. $ or RM does not change.
Money is common denominator, and
monetary unit provides an appropriate
basis for accounting measurement and
analysis.
Monetary unit is the most effective
means of expressing to interested parties
changes in capital, and exchanges of
goods and services.

BASIC ACCOUNTING
CONCEPTS (contd)
d)

Periodicity/Accounting Period
Assumption implies that the economic
activities of a business can be divided into
arbitrary time periods, namely, monthly,
quarterly or yearly.
Financial statements must indicate the
period of the account.
e) Historical cost
Assets and services plus any resulting
liabilities be taken into the accounting
records at cost.
Cost is used since it is definite and
determinable that accountants can provide
objective and verifiable data in their reports.

BASIC ACCOUNTING
CONCEPTS (contd)
f)

Consistency

Concepts deals with the consistent use of


accounting basis for methods.
For example once a business has adopted
the straight line method, this method should
be used both within one accounting period
and from one accounting period to another.

g) Accrual or matching

Expenses for the accounting period incurred


must be recorded irrespective of whether
they have been paid or not, while, revenues
for the accounting period must be recorded
when they are earned irrespective of
whether money has been received or not.

BASIC ACCOUNTING
CONCEPTS (contd)

h) Realisation
Profit is considered earned or realised
at the time when goods or services are
passed to the customer and not when
the order for the goods or services is
received.
i) Dual effect
Also known as double entry concept.
For every transaction, two aspects of
accounting is involved, one
represented by assets and the other by
the claim against the asset. ( A=OE+L)

BASIC ACCOUNTING
CONCEPTS (contd)

Materiality
Transaction is considered to be
material if it significantly affects the
reported net income of the business.
k) Prudence/Conservatism
Business are surrounded with many
uncertainties. If, because of the
uncertainties, it is difficult to record
the transactions one should opt to
record them in such a manner the
assets and income are not overstated,
and expenses and losses are not
understated.
j)

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