accounting mis'concept'ion

tmorrow got account test
and
i
really2
dont like those 'accounting concept' stuffs
sangat x best~

my only intention now is that
i want to post them here!


Accounting Concept

1. Going Concern

DEFINITION
This concept assumes that the business entity will continue in business in the foreseeable future. Therefore, the financial statement should be prepared based on the same assumption. As the intention is not to close its business, the company should not value their assets at amount realizable on a liquidation sale. It is necessary to understand that the Board of Directors of a company needs to make all necessary assessment of the enterprise’s ability to continue as a going concern. Uncertainties ongoing concern should be disclosed and if the enterprise’s financial statements are not prepared on a going concern, its needs to disclose all the facts and the basis and reason. If not, this non- disclosure is the same as fraud with the intention to deceive the investors and other outsiders.

EXAMPLE
XYZ Company has bought a generator costs $50 000. The company would assume that its business will continue for the next ten years, so a depreciation of $8 000 per annum will be charged to the profit and loss statement. At the end of the first year, the value of the generator would be $42 000.

2. Accounting Period

DEFINITION
A fixed equal period of time ascertained to report the financial performance of an enterprise. If this fixed equal period of time is not ascertained, the business based on the going concern concept can last a quite a long period of time which will render the analysis of the financial statement impractical. Normally, these fixed equal periods may be of any length of time but periods of one year in length are the most commonly used. We can say that accounting period is a convenient way of dividing up the life of the business into smaller units of time to enable investors and other users of the financial statement to assess the financial performance. The normal twelve months accounting period is also to coincide with the taxation period (twelve months).

EXAMPLE
Mr. Wonder will prepare the financial report annually at the end of the year in order to analyze how well the performance of the business has performed. This will help him to avoid a misleading impression, thus help him to improve the operation of the business.

3. Historical Concept

DEFINITION
All transactions are recorded at the original value and adjustments are not made for inflation. This is because, current year value is subjective.
While historical cost is criticised for its inaccuracy, it remains in use in most accounting systems due to its simplicity, ease of use and verifiability. Various corrections to historical cost are used, many of which require the use of management judgment and may be difficult to verify. The trend in most accounting standards is a move to more accurate reflection of the market value, although the historical cost principle remains in use, particularly for assets of little importance.

EXAMPLE
To start a business, Fatimah bought a delivery van at the price of $40 000. However, the next year, she found out that the market price of the van increases to $ 45 000.According to historical cost concept, in this case, she still recorded original price, $ 40 000 in the financial statement.

4. Realisation

DEFINITION
Revenue is recognized when goods or services have been delivered regardless of when the cash for these is received. Realisation occurs when a sale is made to a customer. The basic rule is that revenue is created at the moment a sale is made, and not when the account is later settled by cheque or by cash. Therefore, profit can be taken to the profit and loss account on sales made, even though the money has not been collected.

EXAMPLE
TCO Cleaning Company has already completed its service for ONTO College for $200. TCO will recognise the $200 as soon as its work is done. It does not matter whether the customer pays the $200 immediately on later.

5. Monetary Unit

DEFINITION
This means that accountant will consider only things that have value and can be expressed in monetary terms. Only quantitative information is recorded in the accounting which includes figures from financial reports, number of employees in the company, and the amount written on a cheque.

EXAMPLE
The accountant in ABC Company will only consider things like the number of products sold, the cost of the products sold, and the discount allowed on the sold products for the accounting statements. Informations such as the effect of their products to environment, state of the country economy, or even the owner’s personal values are not important for them.

6. Accrual Accounting

DEFINITION
Accrual accounting states that accountant measures profit on the basis of revenue earned and expenses incurred during the period. The basic is that revenue should be recognised (i.e. included in the Profit & Loss Account) in the period in which they are earned, not necessarily when they are received in cash. In the same way, expenses are recognised according to the period to which they are incurred, and not when they are paid.

EXAMPLE
An example (revenue earned case), a sale made to a customer on credit just before the year-end would be included in that year's Profit & Loss Account, even though the cash may not be received until the following year.
Another example (expenses incurred case) is that the electricity bill not paid of YYY Business by the year-end would still be charged in their year's Profit & Loss Account even the fact is that they have not paid it yet.

7. Consistency

DEFINITION
There must be a consistent application of accounting policies, both within an accounting period and from one period to the next and accountant have to make full disclosure when they change their procedures. Without consistency we cannot have comparability; and without comparability, financial reporting is rather meaningless. Therefore, with consistency, comparisons of performance can be made over time by applying the same accounting techniques.

EXAMPLE
Company FFF uses production units method to calculate depreciation for its delivery van; it cannot change the method to calculate depreciation, to either diminishing balance or straight line method without reasonable reason. If the company really needs to change its practice, the change must be clearly stated.

8. Materiality

DEFINITION
Materiality concept states that omissions or misstatements of items are material if they could influence the economic decisions of users of the financial statements. For big company, $100 is just a small value and not considered as material, but for a small company like a restaurant, it is important and considered as material. Financial information that is considered important to the statement users will be recorded and reported separately.

EXAMPLE
Mr. Big owns a computer company. He then buys a telephone costs $100 for his business. The telephone is being expensed immediately instead of recording it as an asset and depreciating it over its useful life because the value of the telephone is too small to be justified as fixed asset.

9. Prudence

DEFINITION
Prudence concept states that losses would be allowed for when it they are expected to occur, but gains would only be recognised if certain to happen. This means that accountant tends to understate profit and assets, however, liabilities and expenses will be overstated. In addition, provision should be made for all known liabilities. Thus, a conservative approach is adopted in determining profits.

EXAMPLE
There are many companies creating provision for doubtful debts. A company is said to be prudent if they acknowledge that a portion of their receivables are likely uncollectable. It is unrealistic to assume that all debts will be paid without issues or problem in the real business world.

10. Reliability

DEFINITION
In reliability concept, accountant should present reliable information to statement users. For this, all informations should not be misleading, be free from bias and undue error, complete, and capable of being verified.

EXAMPLE
In the case of potential investors which would like to invest their money into company, such companies have to provide trustworthy, accurate, consistent, and confirmable information for those potential investors. This is to make sure that they will be able to make right decisions based on the reliable data.

Comments

hasanahbaekXD said…
nana gile hebat ko..sure soklan exam hrtu ko leh jawab ngan gemilang kan??isk3..alangkah bagusnye klu ak view page ko b4 amek exam hrtu isk3...=(
aah gemilang lg terbilang la aku nye acc rtu~ haha
weh cuak nye nak dpt result...
izzahmohammad said…
huhu aku pun benci benda alah ni.. alhamdulillah dah setahun tak payah belajar n hafal benda ni.. haha tak penah nak faham T_T
kan jahhh =_=' aku pon x nak lagi terlibat dgn accounting mounting semua nni huuu, x berani.

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