ACCOUNTING ASSUMPTIONS, CONCEPTS AND CONVENTIONS

1. ENTITY CONCEPT

Economic entity (the business) is separate entity from other organizations or individuals (their owner / shareholder)

The owner private activities / properties should not be mix up with the business activities / properties (this is to avoid confusion and ease evaluating the business performance separately from personal matter

2. GOING CONCERN CONCEPT

Under this concept, the accounting records are prepared and recorded with the assumption that there is no signs of a business entity will cease (stop) their operation. And the business will operate in the foreseeable future.

3. HISTORICAL COST CONCEPT

Assets acquired / purchased must be recorded in the account based on the original purchase price. (do not record based on the current market value)

4. PERIODICITY CONCEPT

For accounting purposes, every businesses needs to have their own accounting period (accounting year ended)

Accounting year ended is not necessary the same with calendar year ended – e.g. 31st July, 2009.

There are 12 months in each accounting year.

5. MONETARY CONCEPT

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In accounting, the unit of measure commonly used is the currency. No other measure can be used for accounting record except for common currency

For example, an officer which does not perform or late for his work cannot be taken into accounting record as it cannot be measure in term of currency.

A business transaction, such as a purchase of fax machine for RM500 can be taken into accounts record.

6. CONSISTENCY CONCEPT

It is base on this concept, it requires a business to maintain the same method which have been practice before to be in line with this consistency concept

For example, if straight line method had been utilized for depreciation, in the fore coming year the same method should be adopted.

7. MATERIALITY CONCEPT

It is generally items which are of insignificant value do not make an impact in making a decision unlike those which are significant in value

For example, an expense at year end which had not been taken up amounting to RM1000 to a small business is more material as compare to a multimillion company.

8. ACCRUAL

Accrual concept states that all expenses and charges need to be taken into account accordingly to when it incurred, regardless with or without payment or receipt is made.

9. DOUBLE ENTRY CONCEPT @ DUALITY

The duality concept says that there are two aspects of accounting. One represented by the assets of the business and

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the other by the claims against them. According to this concept, these two aspects are always equal to

each other. That is:

ASSETS = LIABILITIES + OWNER’S EQUITY

The method of recording the transactions for the dual concept is called the double entry.

This concept explains that every transaction will involve two entries, that is a Debit and Credit entry.

10. OBJECTIVITY CONCEPT

This concept requires that the accounting records and reports be based upon objective evidence.

In transactions between a buyer and seller, both try to get the best price. Only the final agreed upon amount is objective enough for accounting purposes; and for this evidence such as receipts and invoices will be used.

11. NEUTRALITY

As information in the accounting records is being used for decision making, therefore it must free of bias.

Such information is presented as it is without being tampered for the sake of management.

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