Chapter 1

GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
AND CONCEPTS

References
Frank Wood Business accounting 1, Chapter

10
Course Manual, Chapter 1

Learning Outcome
1. Understand and apply the key accounting

principles and characteristics.

2. Explain the important of maintaining
Financial Records.
3. Understand the regulatory framework.

Learning Outcome 1
Understand and apply the key
accounting principles and
characteristics.

The key accounting principles and

characteristics
Aids accountants in their role as

interpreters and communicators

of relevant information

Acts

as a foundation for the

specific principles and standards
needed by the profession

Financial Statement
Concepts
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1.Business Entity
Concept
Each entity has its own books,

records, and financial

statements that are separate
from owners
No mingling of personal and
business assets and liabilities
or income and expenses

Example
On 30 April, Sean paid deposit for his sons new
car using company cheque.
According to the business entity concept, all

transactions recorded must be transactions for the

business ONLY.
The car is belong to his son (personal transaction)
and cannot be treated as business transaction.
Therefore, the company will record the amount
paid as withdrawal by owner, separately in
drawings account.

2. Going Concern
Assumption

that the business will

continue functioning in the foreseeable
future. This can affect the valuation of
many assets because if the business
closes, assets might have to be disposed
of at their scrap values.

Justifies use of historical cost

Example
P&C Sdn. Bhd. Year ends every 31 December and it will
assume to be still continuously operating in the future.
On 31 Dec 20x4, Co. recorded its land at RM800,000 which is

the same amount as it bought 5 years ago although the

current value of that land has increased to RM950,000.
According to the going concern concept, the business is

assumed to have an indefinite life.

Due to this, the co will ignore the lands current value

(RM950,000) but will record it at the original price (RM800,00).

With the assumption that the asset (land) will be utilized by the

business in its normal operations as the co. will still continuously

be operating and not to be sold/liquidated/shut down/closed.

3. Historical Cost
Record assets at cost paid to

acquire them
Continue to value assets at

historical cost
This practice is based on the

assumption that the business is a

going concern and is not likely to
be liquidated/closed/shut down.

Example
P&C Sdn. Bhd.s year ends every 31
December. On 31 Dec 2014, Co. recorded its
land at RM100,000 which is the same amount
as it bought 5 years ago although the current
value of that land has increased to RM350,000.
According to the historical cost concept, the

current value of the asset (land) is not relevant

because it is deemed to be a going concern .

Due to this, the co will record the land value at

the original price (RM100,00) regardless the

current value of the land (RM350,000).

4. Consistency
Financial statements should be drawn up

using the same approaches each year.

If, for example, the way an amount is

measured is altered, then profits could be

affected or manipulated.

Example
Zippi Sdn. Bhd. has been using Straight line
method for its IT equipment. The company continue
to use this depreciation method in respect of its IT
equipment in the following periods.
According to the consistency concepts, the same

accounting method should be applied in each

accounting period when preparing financial reports.
Therefore, Zippi Sdn. Bhd. Has been applying this
concept and will consistently maintain that
accounting period for its life.

5. Accruals
Income

and expenses should be

matched on a time basis, not just
when cash is received or paid.

Rules:
Revenue
(goods

reported when earned

sold or services performed)

Expense

reported when incurred

(used)

Cash

receipts/payment irrelevant

Example
TH Manufacturing Sdn. Bhd. received its
utility bills on 28/12/2014 and paid on 5/1/15.
The company record as soon as it receives the

bill on 28/12/15 and not when they are paid,

because the service has already been used.
The company ignored the date when the

payment will be made.

Exercise:
TH Manufacturing Sdn. Bhd. received RM120,000 as annual
rental fees from the tenant of its building on 1 May 2014.

Therefore, it is for 1 May 2014 30 April 2015 rental fees. The

companys year ends on December every year.

RM 120,000
1/5/14

31/12/14

30/4/15

RM 120,000 X 8/12= RM80,000

RM 120,000 X 4/12= RM40,000

 In 2014s annual reports, the co. will report RM80,000

as rental revenue for 2014(May-Dec @ 8 months)

the remaining balance RM40,000 which is for
2015(Jan-Apr @ 4 months) will be reported as
advanced rental revenue ( Unearned rental revenue).
-

According to the accrual concepts, revenue will be reported

when it is earned. Cash is not relevant.
Therefore, the co. cannot record RM120,000 as its rental
revenue for 2014 because some from the revenue belongs to
2015 even though cash is received in 2014.
Only rental revenue for May-Dec 2014 has been earned and
allowed to be reported in 2014s annual reports. The
remaining rental revenue is not earned and will reported as
unearned rental revenue.

6. Double Entry
Every transaction has matching Debit and

Credit entries in the bookkeeping system.

Example:
A single Payment for say Advertising will do
two things.
1) it will increase the Advertising expense; and
2) it will decrease the money in a bank
account (or from petty cash)

Example:
A single Receipt forsaySales
Revenue/Income will do two things.
1) it will increase the Sales Revenue account
(record of income earn); and
2) it will increase the money in a bank
account (or actual cashifnot deposited)

7. Materiality
An item is material if its misstatement could

alter the economic decisions of user of the

financial statements.
Immaterial items do not have to be

disclosed indeed too much information can

be confusing.
The assessment of what is material is a

matter of professional judgment.

Example

A box of paper clips which consist of 100 pieces clips

was bought at RM3 and it will be used up over a period

of time. The box of the paper clips is an asset as long as
nobody uses it. The cost should be incurred when
someone uses a paper clip.
It is possible to record this as an asset and expense

every time someone used it.

But, the price of paper clip is so small that is not
worth recording it in this manner.

Example:
Malaysia government is going to
increase Tax rate to 50% for foreign
company. Although there are no
figures involved but the impact is so
large that disclosure is imminent.

8. Money measurement
The money measurement concept
requires that accounting information is
traditionally only concerned with facts
that:
(a) Can be measured in monetary units.
(b) Most people will agree to the
monetary value of the transaction.

On Dec 15, co. is hiring a new account

assistant and agreed to pay her a salary of

RM2,500 a month.
Accounting data?

Record
-because it can be
measured in monetary
terms (RM)

non accounting data?

Dont need to
record
-because it cant
be measured in
monetary
terms (RM)

9.Objectivity
Any accounting information reported

must always have objective verifiable

evidence.
Objective verifiable evidence?
The evidence that a business
transaction has taken place and the
details pertaining to that
transaction are contained in source
documents.

The accountant recorded the furniture purchased

by company based on the information(amount,

date, supplier name, etc) written on the invoice.
e.g. receipts, invoices, cheques, and vouchers.

According to the objectivity concept, there must

always be objective verifiable evidence.

The transaction recorded by the accountant can
be considered as objective verifiable evidence.
This is due to the report is based on the
information obtained from the invoice which is the
proof for the transaction.

10.Accounting Period
The life of a business is divided into units of
equal length for the purpose of preparing
financial reports.
The period may be;
a month ( 1 Jan 31 Jan, 1 Feb 28 Feb)
a half-year ( 1 July- 31 Dec, 1 Jan 30 June,

1 Nov- 30 Apr, 1 May- 31 Oct)

a full year (1 Jan-31 Dec, 1 July-30 June, 1 Mar-28
Feb)
or any other length of time
depending on the volume and nature of the
business.

Purpose: to enable comparisons and analysis of

the businesss financial position over a period of

time.

Tab Corporations year ends every 31

December (1 Jan 31 Dec)

E.g.; 1 Jan 2014- 31 Dec 2014
Transactions occurred within this period
will be recorded and reported in 2014s
accounting reports.
If there is a transaction that do not fall
within this period(before 2014 or after
2014) but has been recorded, that
transaction must be adjusted.

11. Prudence
Also known as conservative
Due to uncertainty of future events, cautious

accounting practices are observed so that;

income statement & assets are not overstated

expenses & liabilities are not understated.

The accountant will try;

not to anticipate income
but to provide for all possible losses.

Daisy Sdn. Bhd. has allocated 2% of trade

debtors balance for the provision for doubtful

debt due to uncertainty about some of its
debtors ability to settle their debts.
According to the prudence/conservatism concepts, a

company cannot report overstated income and assets

and understated expenses and liability.
Therefore, Daisy Sdn. Bhd. might be facing some debtors
who cannot settled their debts and has allocated 2% for
the provision for doubtful debt.
As a result, it has reported this doubtful debt as an
expense which will reduce its income so that they do not
overstate income and understate the expenses.

12. Matching
Revenue earned during an accounting period

has to be matched with the expenses

associated with earning that revenue.
Sales made
(earned)
during
1/1/x4
31/12/x4

Matched

Bills incurred
during 1/1/x4
31/12/x4

At the end of the year, sales earned by Johnny

Sdn. Bhd. is RM25,000. During the year, the

co. has incurred RM15,000 for several
expenses in order to generate revenue for the
business. Therefore, the reported profit by the
company is RM10,000.
According to the matching concepts, revenue

earned must be matched with the expenses

incurred to generate that revenue.
The profit reported by the company shown that
the company has adopted matching concepts
when it matched(deduct) expenses incurred
(RM15,000) with the revenue earned(RM25,000).

Accounting Concepts
Business Entity

Consistency

Going Concern

Accrual

Money Measurement

Matching Principle

Historical Cost

Materiality

Accounting Period

Double Entry

Objectivity

Prudence

Questions:
1. Valuing land at original cost is an application
of which concept?
a. Prudence
b. Consistency
c. Historical cost
d. Money measurement

2. Which of the following statements is not true?

The going concern concept can be ignored if
______.
a. business closure is in the near future
b. the business is likely to fail in the forthcoming
accounting period
c. parts of the business are likely to face closure
d. similar firms also have chosen to ignore the
concept

3. Including private costs incurred in

running a car as business costs would violate
the concept of:
a. Historical cost
b. Going concern
c. Consistency
d. Business entity

4. Combining the activities of the owner and

Millirs Sdn Bhd would violate the
a. Cost principle.
b. Business entity.
C. monetary unit assumption.
d. Consistency principle.

Learning Outcome 2

Explain the important of

maintaining Financial
Records.

Maintaining Financial Records

Accounting information helps users to make

better financial decisions.

Users of financial information may be both

internal and external to the organization.

Internal and External

Users of Accounting
Information
Employee
Shareholder/
Owners

Creditors

Regulatory
Authorities
Investor

Manager
Tax Authority

Labour
Union

Decisions Made with

Financial Information
Invest??

Add new
product line??

Borrow $$??

Build new plant??

Extend credit $$??

Loan $$??

Sell stocks or bonds?

Start new business??

Internal User

Manager

Shareholder/
Owners

Employee

Owner/ Shareholder
To decide whether to expand, continue or close

down the business.

To buy, remain or sell out the shares.

Example question asked by Owner:

Should I close down the business if it
has been suffering losses for the past
3 years?
How much dividend can I get by
the end of this year?

Manager
To make decision on the operation of a

firm

Example question asked by

Manager:
Is it possible to change the
operation from labour intensive
to machinery intensive?

Employees
To determine ability to pay salaries and

other employment benefits, job security

and career prospects.

Example question asked by

employees:
How much bonus can I get by
the end of the year?

Investor Creditors

External User
Tax
Labour
Government
Authority
Union

Taxing authorities

To administer and enforce Tax rules on

companies.

Example question asked by

Taxing authorities:
How much tax to charge a
business?

Government
To administer and enforce compnay rules on
companies.

Example question
asked by Government:
Does the business follow the
business act?

Investor
To evaluate what income they can expect

from their investment.

Example question asked by Investor:

Is a company earning
satisfactory income?

Labor unions
Definition
an organization of workers formed for the

purpose of advancing its members' interests in

respect to wages, benefits, and working
conditions

Bargains with the employer on behalf of union

members (employee) and negotiates labor

contracts with employers.

Example question asked by labour

unions:
Are the labourers' wages too low?

Creditor / Bankers
To

determine borrowers ability to meet

scheduled payments by evaluating borrowers
financial position and prediction of future
operations.

Example question asked by Creditors/

Bankers:
Can the companies afford to
repay the loan?

Questions: Who is the user?

1. Can the company afford to give the
employees a pay rise?

2. Did the company earn a satisfactory income?

3. Do we need to borrow in the near future?

Questions: Who is the user?

4. Is cash sufficient to pay dividends to the
stockholders?

5. What price for our product will maximize net

income?

6. Will the company be able to pay its short-term

debts?

Learning Outcome 3
Understand the regulatory
framework.

Generally Accepted
Accounting Principles
The various methods, rules,

practices and other procedures

that have evolved over time that
regulates the preparation of
financial statements

National laws

 Local accounting standards

Malaysian Financial Reporting Standards

(MFRSs)
The MFRSs listed in the table are official

pronouncements
issued
by
the
MASB.MFRSsare issued by the MASB in
respect of its application in Malaysia.

International
Accounting Standards
International Accounting

Standards Board was created in

2001
IAS was govern by IASB

(International Accounting
Standard Board)

Control
Support

Issue

International Accounting standards

committee foundation (IASCF)
Accounting bodies from Australia, Canada,

France, Germany, Japan, Mexico, Netherlands,

UK and US.
Set global Accounting Standard.
Selects, Overseas and Funds for :
SAC
IFRIC
IASB

Standard Advisory Council (SAC)

Inform IASB which sectors need new

accounting standards.
Advise IASB on setting and updating

accounting standard.

International Financial Reporting

Interpretation Committee (IFRIC)
Helping IASB to :
Issue Interpretation
Liaising with local authority to reduce the
differences between local and international
standard.
Guidance on application of the standard.

International Accounting
Standard s Board (IASB)
Responsible to prepare accounting standard.
Developing New IFRS.
Review IFRS.

International Financial Reporting

Standards (IFRS)
Promote Uniformity of Accounting standard.
IFRS 1-8
IAS 1-41

3 Learning Outcome
1. Accounting Concepts
2. Maintaining Financial record

3. Regulatory framework.

Next Week
Bring all your business document.
Example Receipt, Delivery notes, Invoices.

End of Chapter 1