Accounting Concepts and Convention

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Accounting Concepts and Convention ?????????
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• ReferencesChapter 12 (p. 235)
• ?????12? (p. 250)

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A Objectivity (???) and Subjectivity (???)

• Objectivity is enhanced by using methods that are
  generally agreed.
• Generally agreed method is not used, it is
  regarded as subjective.

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B Concepts and Convention

• Concept is an idea or abstract principle which
  relates to a particular view of a subject.
• Convention refers to the ways of thinking and
  behaving that are believed to be normal and right
  by most people in a particular field

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C Basic Accounting Concepts

• Business entity concept
• Dual aspect concept
• Money measurement concept
• Historical cost concepts
• Going concern concept
• Concept of stable monetary measures
• Realisation concept
• Accrual concept
• Matching

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Business Entity Concept (??????)

• Business entity concept only concerns the
  transactions which affect the firm but not the
  owners personal transactions.
• e.g. The motor vehicle owned by the proprietor do
  not record in the books of the company.

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2 Dual Aspect Concept (????)

• Dual aspect concept states that there are two
  aspects of accounting, i.e. the assets of a
  business and the liabilities and / or capital of
  the business.

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3 Money Measurement Concept ????????

• Money measurement concept concerns only with
  transactions measurable in units of money, on
  which general agreement can also be obtained.
• e.g. quality of management, morale of the
  workforce

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4. Historical Cost Concept????

• Historical cost concept states that assets are
  normally shown at their original costs of
  acquisition.
• E.g. A motor vehicles (Fixed asset) was recorded
  at the cost when acquired.

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Going Concern Concept??????

• Going concern concept states that a business is
  assumed to continue to operate in the foreseeable
  future.
• E.g. The assets are recorded at their original
  cost rather than their current market values in
  the book, even the business is operating at a
  loss for years.

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6 Concept of stable monetary measures??????

• The concept of stable monetary measures assumes
  that the value or purchasing power of money is
  constant ignoring the effects of inflation or
  deflation.
• E.g. Two motor vehicles were bought in 2001 and
  2008, the purchasing power were different in two
  years. But under the concept of stable monetary
  measures, the values of two motor vehicles allows
  to record without any adjustment.

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7 Realisation concept ????

• Realisation concept specifies the point of time
  at which revenue should be recognised and
  recorded in the book. It usually refers to the
  point of time when
• Goods or services are passed to the customers,
  and
• The customers incur liability to pay.

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8 Accrual Concept ????

• Accrual concept states that revenues and expenses
  are recognised in the profit and loss account for
  the period in which they have been earned or
  incurred, not when they are received.
• Under this concepts, accruals and prepayments are
  arouse.

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9 Matching Concept

• Matching concept sates that revenue should be
  linked with its relevant expense or cost in the
  same period.
• Commission is the relevant expenses of Sales.
  (Commission is matched with Sales.)
• Depreciation of motor vehicle is matched with the
  time.

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D Accounting Convention

• Materiality / Conservatism
• Prudence
• Principle of Consistency

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1 Materiality ????

• Materiality concept is used to judge what sorts
  of transactions or items are significant and
  their classification in the financial statements.
  
• e.g. A box of paperclips can be used for several
  years. It will not be recorded as fixed assets,
  because of its immaterial value.

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Prudence / Conservatism????

• Prudence concept ensures that the net assets and
  profits of a business are not overstated.
• Thus, revenues should not be anticipated
  Expenses should be anticipated.

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3 Principle of Consistency ???

• Consistency is to keep using the same accounting
  method on similar items, except for special
  cases.
• e.g. A company depreciates the machinery by using
  reducing balance method. The proprietor want to
  overstate the profit by changing the depreciation
  method. This violates the principle of
  consistency.