[Audio] ACCOUNTING CONCEPTS. ACCOUNTING CONCEPTS.
[Audio] 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.
[Audio] WHY DO ACCOUNTING STANDARDS EXIST? To have a uniform financial statement as it serves various types of users. To reduce the possibilities of very large variations in financial reporting. For comparability purposes. To show a 'true and fair view' of an organization..
[Audio] FUNDAMENTAL QUALITATIVE CHARACTERISTICS FUNDAMENTAL QUALITATIVE CHARACTERISTICS RELEVANCE The information generated by an accounting system should impact the decision-making of someone perusing the information. The concept can involve the content of the information and/or its timeliness, both of which can impact decision making. FAITHFUL REPRESENTATION Financial statements must be produced which accurately reflect the condition of a business. For example, if a company reports in its balance sheet that it had $1,200,000 of accounts receivable as of the end of June, then that amount should indeed have been present on that date..
[Audio] ENHANCING QUALITATIVE CHARACTERISTICS.. Comparability Verifiability Timeliness Understandability.
[Audio] 1.COMPARABILITY the level of standardization of accounting information that allows the financial statements of multiple organizations to be compared to each other. is a fundamental requirement of financial reporting that is needed by the users of financial statements. suggests that the financial reports or statements must be prepared under the same accounting principles and methods each year..
[Audio] 2. VERIFIABILITY it should be possible for an organization's reported financial results to be reproduced by a third party, given the same facts and assumptions. the figures in the financial statement can be traced to accounting records such as invoices and other information used to prepare financial statements. helps to assure users that the financial statements are a true and fair representation of the underlying transactions If the information contained in the financial statements is not verifiable, the users would have no sound basis to place trust in the information..
[Audio] 3. TIMELINESS how quickly information is available to users of accounting information. the usefulness of financial information depends on the period in which information has been prepared. the older the information the less useful they are to the user of financial statements. for financial information to be reliable, it must be within the time frame which will benefit the decision of the user of financial statements. timeliness matters for accounting information because it competes with other information..
[Audio] 4. UNDERSTANDABILITY financial information should be presented so that a reader can easily comprehend it. It assumes a reasonable knowledge of business by the reader but does not require advanced business knowledge to gain a high level of comprehension..
[Audio] ACCOUNTING ASSUMPTIONS AND CONCEPTS Going concern Historical cost Economic entity Money measurement.
[Audio] 1. GOING CONCERN the assumption that an entity will remain in business for the foreseeable future. a company that is financially stable enough to meet its obligations and continue its business for the foreseeable future. also means a business can 'run profitable' for an indefinite period until the concern is stopped due to bankruptcy and its assets are gone for liquidation..
[Audio] 2. HISTORICAL COST a company or business must account for and record all assets at the original cost or purchase price on their statement of financial position. no adjustments are made to reflect fluctuations in the market or changes resulting from inflationary fluctuations..
[Audio] 3. ECONOMIC ENTITY a business entity's finances should be kept separate from those of the owner, partners, shareholders, or related businesses. means that you must maintain separate accounting records and bank accounts for each entity, and not intermix with them the assets and liabilities of its owners or business partners. Also, the records must specifically associate every business transaction with an entity.
[Audio] 4. MONEY MEASUREMENT a business should only record an accounting transaction if it can be expressed in terms of money i.e., the local currency monetary unit of measure. means that the focus of accounting transactions is on quantitative information, rather than on qualitative information..
[Audio] Tutorial Questions… 1. RM Express Bhd. has traditionally depreciated its furniture and equipment using the straight-line method. This year it has adopted the reducing balance method without advising its shareholders about the change. This is violating ___________ concept. 2. Last year, a manufacturing company purchased a shophouse at a cost of RM1 million. This year it is valued at RM2.5 million. However, the company continues to record in its book the value of the shophouse at RM1million. This is in line with ____________ concept. 3. Syarikat Melly Bhd. Is a registered public company dealing with housing development. The company took a bank loan worth RM5 million from Maybank repayable within 10 years. However, after a period of 12 years, this company fails to repay its loan. The bank has decided to confiscate all the personal properties of the shareholders. This is against the ____________ concept. 4. A supermarket owner sells all kinds of groceries. He records all the purchases and sales in the accounting books in terms of RM. This is in accordance with the __________ concept..